Fabulous Fab's Backup Band: Goldman Bigshots Approved Abacus Deal

While Goldman Sachs has been trying to contain damage from the lawsuit over its highly questionable Abacus securities, it's already becoming clear that approval of the Abacus deal went far beyond company scapegoat Fabrice "Fabulous Fab" Tourre.

The Wall Street Journal's Kate Kelly explains how Goldman's Mortgage Capital Committee, a team consisting of "roughly a dozen senior executives," quickly approved the issuing of Abacus mortgage-backed securities -- instruments that Goldman had good reason to believe would decline in value, and that were packaged with input from an outside short seller:

The SEC complaint doesn't name any of the members of the mortgage committee at the time. But it alleges that a memorandum by the committee the day it approved the deal shows it had full knowledge of [hedge fund manager and MBS short seller John] Paulson's role in selecting the deal's investments. The March 12, 2007, memo by the committee said: "Goldman is effectively working an order for Paulson to buy protection on specific layers of the [deal's] capital structure."

A few points:

The deal Paulson brought to Goldman was apparently so shady that even the late Bear Stearns -- home to gunslinging traders, hysterical middle managers and a pot-smoking CEO -- had already passed on it.

The apparently large number of unnamed Goldman employees willing to talk to Kelly may indicate that chief executive Lloyd Blankfein's effort to rally the troops to jump in with the team for the big win may not be having the desired effect. (It also suggests that Fabulous Fab, who is wiling away his exile in London, may still have some friends in New York.)

Goldman argues in its defense that the firm also lost money on Abacus. Mish Shedlock says this is unlikely to be true. In any event it's immaterial to the Securities and Exchange Commission's lawsuit.

Since I got some noses out of joint the other day by saying you "had to be in a coma" in 2007 not to realize the MBS market was headed over the waterfall, I'd like to note that Goldman appears to have had trouble finding suckers for Abacus:

Goldman invested the money only because sales of the deal didn't play out as planned, forcing Goldman to step up with its own money, people familiar with the matter say.

Henry Blodget says Goldman Sachs is wise to isolate Tourre, and that the SEC's case against him is stronger than its case against the firm as a whole. That may change as more of the story emerges.

Comments

[Libertymike]

Happy 4/20! Everybody enjoy and partake.

[Pro Libertate]

Strange that this day should fall on Adolf Hitler's birthday. Typical libertarian marketing at work ?

[Forbes]

Well, Henry Blodgett would know something about being on the receiving end of the SEC...and committting a fraud...or at least settling those allegations.

[Anon.]

What part of Caveat fucking Emptor do people here not understand?

Fraud would be misrepresenting what assets are in the structured product. Since when was there a requirement to disclose the selection process?

Think about it. If Paulson had hired Goldman to identify the best possible portfolio of mortgage securities available and assemble them into a structured product it could buy, would anyone expect Goldman to disclose the selection process to the sellers?

Why is it any different that Paulson hired Goldman to find the highest risk portfolio of mortgage securities available and assemble them into a structured product it could short?

It's the buyers' responsibility to know what they're buying. If they're too lazy or stupid to do that, I have no sympathy for them.

Disclosure... I work as an institutional investment manager. My job is to not lose pensioners' money on asinine investments like these. And no, I never believe anything investment bankers say about anything they're trying to sell, without checking for myself.

[OMG]

Actually, 10b5 fraud is not as simple as "misrepresenting what assets are in the structured product". Any statement (or omission) in connection with the purchase or sale of a security that would be material to the investment decision could be fraud. I assume that the fact that the co-designer of the security specifically intended to short the security would be material.

Just a thought.

[Steve Nash Equilibrium]

The fraud is that Goldman told investors the securities were chosen by an independent analyst when in fact they were chosen by Paulson with the intention to create an investment product he could short.

[shrike]

Goldman will win, of course.

The Bircher/Ron Paul/Goldbugs will lose again, of course.

The "Libertarian" idiots will remain confused again. The Yield Curve will make for a nice 4-year gain for us in the Capital Faith Department.

Con gold-bugs are about to suffer on the next bump in the FFR.

[OMG]

I must be a "Libertarian" Idiot, because I am very confused after reading your comment.

[shrike]

Check out Stigler and a http://en.wikipedia.org/wiki/George_Stigler

Corps have won - like Roberts and Alito have lined up.

[Rewrite]

Reason girl is smiling! Which one of you gets the credit?

[Tom M]

Nice stroy. I posted it on my Fabulous FAb "from fall guy to freedom" facebook fan page.

[R C Dean]

The government is a long, long way from proving its case.

Everyone who bought this knew that there was someone taking the other side of the deal. The deal doesn't happen otherwise.

Everyone who deals in these securities knows they are structured so that every piece of the deal can be sold. It is common practice to structure specific pieces of these deals for specific buyers. This:

The March 12, 2007, memo by the committee said: "Goldman is effectively working an order for Paulson to buy protection on specific layers of the [deal's] capital structure."

and this:

I assume that the fact that the co-designer of the security specifically intended to short the security would be material.

are routine.

Absent a specific and outright lie by Goldman about this deal, its going to be very hard to show a material omission, given the nature of the product and the sophisticated investors involved. This:

The fraud is that Goldman told investors the securities were chosen by an independent analyst

is not necessarily a lie, even if Paulson participated in building the mortgage pool, as long as an independent analyst was also involved.

This:

I'd like to note that Goldman appears to have had trouble finding suckers for Abacus:

Goldman invested the money only because sales of the deal didn't play out as planned, forcing Goldman to step up with its own money, people familiar with the matter say.

Has to be understood in context. 2007 is when the real estate bubble popped. When this deal was being put together, it probably looked pretty viable. When it finally came to market, the market had moved. It is not at all unusual for investment banks to buy a piece of what they are underwriting. That's why they are called "investment" banks, you know.

There's a lot we don't know, but by now you would think Reason writers would be a little more skeptical of politically convenient prosecutions approved on a straight party-line vote.