Heads: Goldman Sachs Wins, Tails: We Lose

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How do you define integrity?

Guest commentary by Orange County Treasurer/Tax Collector Chriss Street. 

 Heads: Goldman Sachs Wins,
Tails: We Lose

“Orange County’s underwriter, Goldman Sachs, continues to perform like a magician. To counter fraud charges by the Securities and Exchange Commission that the firm intentionally sold bonds to customers that were on the verge of defaulting, Goldman responded with; “We are too dumb to be guilty of ripping off customers, because we too were stupid and lost money buying the same bonds!” Americans may enjoy being fooled by magicians (who) do card tricks, but very few enjoy betting money against a card shark. 

All good magicians use a distracting motion with one hand to mask attention away from what they are doing with their other hand. Goldman Sachs hoped to distract attention away from the bond deal they sold to customers who lost a $1 billion, by claiming they lost $90 million on the same deal. Unfortunately for the “Amazing Goldman Sachs” the bond marketing prospectus, deal book for Abacus 2007 AC-1, was leaked to the internet over the weekend. The prospectus demonstrates that Goldman was not designing mortgages bonds that might default in the future; they designed bonds that were already defaulting. 

The SEC’s job is to police the securities market, by making sure that investors are made fully aware of the attributes and risks of any particular investment through full disclosure by the issuer of the securities. As issuer of the securities, Goldman essentially wrote a sixty-six page document trumpeting how investors will be protected by having the benefit of an independent and credible third-party professional management team selecting the mortgages for the investment portfolio. But obfuscated within legalese and confusing math-laden formulas, Goldman reserved for itself the right to withhold insider information about its intentions by using “bait and switch” techniques to make money while its customers suffered the pain of loosing money. The Goldman prospectus on page nine states: 

“Goldman Sachs, may by virtue of its status as an underwriter, advisor or otherwise, may possess or have access to non-publicly available information relating to the Reference Obligations, the Reference Entities and/or the other obligations of the Reference Entities and has not undertaken and does not intend to disclose, such status or non-public information in connection with the Transaction. Accordingly, the presentation may not contain information that would be material to the evaluation of the merits and risk of purchasing the Notes.” 

Forty-seven pages later, the prospectus detailed a list of the ninety sub-prime mortgage pools supposedly selected to be in the investor portfolio. But it cleverly positioned smaller print in a footnote at the bottom of the pages states; 

“Goldman Sachs neither represents nor provides any assurances that the actual Reference Portfolio or the Closing Date of any future date will have the same characteristics as represented above.” 

Perhaps the SEC has seen the real portfolio, but none of the investors who lost $1 billion so far know exactly what mortgage pools went into the investment. Of the list of ninety Reference Obligation mortgage pools described in the prospectus, most did default over time. By now having the benefit of documentation about when those mortgages defaulted, it is clear that Goldman was guaranteed of defaults on the mortgages when they sold the bonds on April 27, 2007. Examples of investments with high percentages of foreclosures or already taken over by the lender at the time include; 

13% of J.P. Morgan Mortgage Acquisition Corp. 2006-FRE1 (JPMAC 20-06-FRE1) 

10% of Argent Securities Trust Series 2006-W1 

8% of Morgan Stanley Abs Capital I Inc. Trust 2006-WMC2 

8% of Structured Asset Investment Loan Trust 2006-04 

Goldman claims to have lost $90 million on these bonds, because they sliced up the risk of holding the mortgages in such that they were at “risk” for the first 7% of loss on the mortgages in the portfolio. I have no doubt that Goldman lost money on these specific bonds. But I also have every confidence that the firm protected themselves from loss by buying credit default swap insurance from AIG. At the end of the day, Goldman won and the clients lost. 

America loves a winner, but they hate a cheat. As leaks on the internet continue to pull back the curtain and out deceitful actions, perhaps it is time to pull back the Orange Curtain to learn why the County of Orange has been paying the big bucks to hire financial advisors who do not even have an office here. Is it just magical that Orange Country’s financial advisors over the last few years have been Bear Stears, Lehman Brothers and Goldman Sachs???” 

Chriss W. Street
Orange County Treasurer”

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