I suspect I just missed this before, but . . .
Remember the outrage following the New York Federal Reserve’s decision to cover 100 percent of the credit default swaps claims against AIG. Well, now it appears that payout may have been for the same types of Goldman Sachs initiated securities over which Goldman is now being sued by the Securities and Exchange Commission.
From the continuing fine reporting by the Times’ Louise Story and Gretchen Morgenson we get a very helpful chart of the scheme and more clarity on how it worked.
Goldman used ACA Management as the respectable front for the alleged scam, telling potential investors that ACA Management was a disinterested independent entity compiling the mortgage-based securities that would be placed in one of the numerous Abacus investments. Meanwhile, SEC alleges, Mr. Taurre, a Goldman VP, knew that hedge fund manager John Paulson was not only helping select likely-to-fail securities for that investment, but also planning to bet against them because he believed the mortgage bonds on which the investment was based would fail. The investors betting the same securities would be fine weren’t told about this conflict.
Goldman structured the Abacus portfolios with a sharp eye on the credit ratings assigned to the mortgage bonds contained in them, the S.E.C. said. In the Abacus deal cited in the S.E.C. complaint, Mr. Paulson pinpointed those mortgage bonds that he believed carried higher ratings than the underlying loans deserved.
Goldman placed insurance on those bonds — called credit-default swaps — inside Abacus, allowing Mr. Paulson to bet against the bonds while clients on the other side of the trade wagered that they would make money.
But when Goldman sold shares in Abacus to investors, the bank and Mr. Tourre disclosed only the ratings of those bonds and did not disclose that Mr. Paulson was on the other side, betting those ratings were wrong. . . .
But that wasn’t the only Abacus investment that might have been structured this way:
In seven of Goldman’s Abacus deals, the bank went to the American International Group for insurance on the bonds. Those deals have led to billions of dollars in losses at A.I.G., which received a $180 billion taxpayer rescue. The Abacus deal in the S.E.C. complaint was not one of them.
That deal was managed by ACA Management, a part of ACA Capital Holdings, which changed its name in 2008 to Manifold Capital.
So, shouldn’t we be asking whether AIG was used in the same way that ACA Management was used? Were the Credit Default Swaps for which AIG was on the hook — and which taxpayers would eventually pay off at 100 percent — also influenced by Goldman directly or through John Paulson or other hedge funds intending to create investments that, while sanctioned by AIG, were bound to fail and make the secret creators rich?
Officials at NYFed testified earlier at the Financial Crisis Inquiry Commission and before Congress about the 100 percent payout, but that was before we knew the latest details on the alleged Goldman fraud. Maybe it’s time to haul these folks back and ask whether they were also duped by Goldman, AIG or others.
More fraud stuff:
Yves Smith: Rabobank Merrill Committed Similar Fraud to Goldman with a Magnetar-sponsored CDO
Simon Johnson, Our Pecora Moment
NYT/Story and Morgenson: For Goldman a Bet’s Stakes Keep Growning