How Goldman Bet In The Casino

On April 16, 2010 the Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs and Fabrice Tourre, an employee of Goldman, in federal district court.  The SEC charged Goldman and Tourre with fraud when it marketed and sold a Collateralized Mortgage Obligation, CDO, named ABACUS2007-AC-1.  ABACUS was composed of sub prime residential mortgage-backed securities. 

Having been a member and market maker at the American Stock Exchange, I have witnessed first hand insider trading in Motel 6 (I was almost inadvertently a participant in this insider trading case many years ago); money laundering, stock manipulation; the Mafia penetration of stock frauds at the Amex; etc.  But the government only prosecuted the unprotected, such as some of the participants in Motel 6, and not prominent individuals and firms. 

I am very familiar with the insider trading scandal of Motel 6 because I represented Frost & Sullivan, the firm behind the insider trading scandal of Motel 6, at the Amex.  And you can trust me that insider traders, especially Amex member firms, never believed that they would be uncovered.

Very few individuals are ever prosecuted- let alone a firm with the dominance of Goldman Sachs.

But there is one section of the Securities and Exchange Commission filing against Goldman Sachs that shows that Goldman Sachs may be brought down by hubris, like the participant in some Greek tragedy.

In paragraph 61 the SEC begins an explication of the role of ABN AMRO Bank N.V., which was later taken over by Bank of Scotland, which the British government subsequently took over.  That demonstrates the role of falling dominoes in this sub prime mortgage crisis.

Simply put, ACA Capital insured sold protection or insurance on $909 million of ABACUS.  ACA was unaware that Goldman had created this destined-to-fail product, ABACUS, with John Paulson, who was the purchaser of this insurance via Goldman Sachs.

But it is not this simple.  Goldman is involved even more deeply.  This $909 million insurance transaction was intermediated by ABN AMRO.  This meant that through a series of Credit Default Swaps between ABN and Goldman and then between ABN and ACA, the original insurer, ABN assumed the credit risk if ABACUS folded.

With hindsight we now know that ABACUS collapsed.  The next question is:  What does that mean for ABN and Goldman?
The SEC complaint states that on or about August 7, 2008, RBS unwound ABN’s position in ABACUS by paying Goldman Sachs $840,909,090- accurate down to the last $90.  Most of this money was subsequently paid to Paulson, who had sold ABACUS short.

The important words in the SEC complaint are:  “Most of this money was subsequently paid by GS&Co to Paulson.”  Those words are important because if Goldman Sachs received any of the $840,909,090 from ABN, then it could be said that Goldman shorted itself shorted the CDO, ABACUS, which it created.

That may be prima facie evidence that Goldman not only created ABACUS so that it would fail- but directly profited from the failure by betting in the casino, known as Wall Street, that it would fail.

That is equivalent to trading on the basis of inside information- just as my former business associates did in Motel 6.

For the information of the public:  The SEC limited the scope of the investigation into Motel 6 so that no member of the Amex, except for Jeff Green, would be indicted for trading Motel 6- even though I was present when Amex members and owners of Amex member firms received inside information in Motel 6.