I just realized something that changes my opinion about the SEC’s Goldman lawsuit. The case revolves around a synthetic commercialized debt obligation (CDO). These investors (a German bank and a small mortgage insurance company) weren’t buying actual mortgage securities. They were agreeing to assume the risk of insuring mortgage bonds in exchange for annual insurance premiums. Therefore, they had to have known some other investor – whether it was Paulson or another hedge fund – wanted to buy insurance on these mortgages. Said another way, unless someone wanted to short these mortgages and was willing to pay the insurance premiums to do it, no financial instrument could have existed for the bank and the insurance company to buy.
Thus, the case will likely come down to whether or not the fact that Paulson & Co was the buyer of the credit default swap was material information. My bet is it wasn’t. And even if the court decides it was, plenty of evidence suggests at least one of the CDO buyers knew Paulson was paying for the insurance: John Paulson’s former mortgage analyst, Paolo Pellegrini, says he told ACA Management Paulson intended to short the mortgages.
The more I learn about the Goldman lawsuit, the more interesting it becomes. I couldn’t believe the SEC would actually take on Goldman or any of the big banks. The banks are the SEC’s patrons. The SEC’s real purpose in life is to protect the banks (not you and me). Now, it seems clear to me suing Goldman about this issue – a case involving a synthetic CDO that the regulator will probably lose – is simply raising a red herring. Left unexamined is the much larger issue: the extraordinary amount of fraud in mortgage underwriting between 2004 and 2007.
In these deals, Goldman bought mortgages it knew (or should have known) would default, packaged them into securities, and bought insurance on them from AIG. That caused AIG’s collapse and the subsequent $200 billion government bailout. My bet is you’ll never see any investigation into these deals or any investigation into the huge number of Fannie and Freddie securitized mortgages that have defaulted, costing U.S. taxpayers $400 billion, so far.
Porter Stansberry
Baltimore, Maryland
April 21, 2010
The suit also directs attention to the issue of allowing free trade on insurance instruments. The unregulated derivatives market is the equivalent of allowing other people to buy fire insurance on your house, then allow them to trade the value of that insurance policy on an open market…arson is predictable, as is recurring market collapse.
The unregulated derivatives market is set up to be a high stakes casino in which the players have the ability to take down legitimate businesses with their gaming, and that is exactly what they do.
Hawaii law requires a signed seller’s disclosure form that addresses all such issues. A person can be held criminally liable for fraud if they lie on this form.
SherriannPederson about 14 years ago
OR maybe ‘transparency’ is actually ‘deception’ or ‘fraud’, depending on the issue!
WarBush about 14 years ago
^^You mean legalized fraud.
cfimeiatpap about 14 years ago
More details about the phony Goldman lawsuit…
I just realized something that changes my opinion about the SEC’s Goldman lawsuit. The case revolves around a synthetic commercialized debt obligation (CDO). These investors (a German bank and a small mortgage insurance company) weren’t buying actual mortgage securities. They were agreeing to assume the risk of insuring mortgage bonds in exchange for annual insurance premiums. Therefore, they had to have known some other investor – whether it was Paulson or another hedge fund – wanted to buy insurance on these mortgages. Said another way, unless someone wanted to short these mortgages and was willing to pay the insurance premiums to do it, no financial instrument could have existed for the bank and the insurance company to buy.
Thus, the case will likely come down to whether or not the fact that Paulson & Co was the buyer of the credit default swap was material information. My bet is it wasn’t. And even if the court decides it was, plenty of evidence suggests at least one of the CDO buyers knew Paulson was paying for the insurance: John Paulson’s former mortgage analyst, Paolo Pellegrini, says he told ACA Management Paulson intended to short the mortgages.
The more I learn about the Goldman lawsuit, the more interesting it becomes. I couldn’t believe the SEC would actually take on Goldman or any of the big banks. The banks are the SEC’s patrons. The SEC’s real purpose in life is to protect the banks (not you and me). Now, it seems clear to me suing Goldman about this issue – a case involving a synthetic CDO that the regulator will probably lose – is simply raising a red herring. Left unexamined is the much larger issue: the extraordinary amount of fraud in mortgage underwriting between 2004 and 2007.
In these deals, Goldman bought mortgages it knew (or should have known) would default, packaged them into securities, and bought insurance on them from AIG. That caused AIG’s collapse and the subsequent $200 billion government bailout. My bet is you’ll never see any investigation into these deals or any investigation into the huge number of Fannie and Freddie securitized mortgages that have defaulted, costing U.S. taxpayers $400 billion, so far.
Porter Stansberry Baltimore, Maryland April 21, 2010
vhammon about 14 years ago
The suit also directs attention to the issue of allowing free trade on insurance instruments. The unregulated derivatives market is the equivalent of allowing other people to buy fire insurance on your house, then allow them to trade the value of that insurance policy on an open market…arson is predictable, as is recurring market collapse.
The unregulated derivatives market is set up to be a high stakes casino in which the players have the ability to take down legitimate businesses with their gaming, and that is exactly what they do.
vhammon about 14 years ago
Hawaii law requires a signed seller’s disclosure form that addresses all such issues. A person can be held criminally liable for fraud if they lie on this form.