Posted on 27 April 2010.
Borrower Bailout?: Goldman Sachs Conveyor Belt
- If you have a GSAMP securitized loan you might want to pay particular attention here. In fact, if you ever had a securitized loan of any kind you should be very interested.
- Hudson Mezzanine: The use of the word “mezzanine” is like the use of the word “Trust.” There is no mezzanine and there is no trust in the legal sense. It is merely meant to convey the fact that a conduit was being used to front multiple transactions — any one of which could be later moved around because the reference to the conduit entity does not specifically incorporate the exhibits to the conduit.
- The real legal issue here is who owns the profit from these deals? The profit is derived from insurance. The cost of insurance was funded from the securitized chain starting with the sale of securities to investors for money that was pooled.
- That pool was used in part to fund mortgages and insurance bets that those mortgages would fail. 93% of the sub-prime mortgages rated Triple AAA got marked down to junk level even if they did not fail, and insurance paid off because of the markdown. That means money was paid based upon loans executed by borrowers, whether they were or are default or not.
- If enough of the pool consisted of sub-prime mortgages, the the entire pool was marked down and insurance paid off. So whether you have a sub-prime mortgage or a conventional mortgage, whether you are up to date or in default, there is HIGH PROBABILITY that a payment has been made from insurance which should be allocated to your loan, whether foreclosed or not.
- The rest of the proceeds of investments by investors went as fees and profits to middlemen. If you accept the notion that the entire securitization chain was a single transaction in which fraud was the principal ingredient on both ends (homeowners and ivnestors), then BOTH the homeowner borrowers and the investors have a claim to that money.
- Homeowners have a claim for undisclosed compensation under the Truth in Lending Act and Investors have a claim under the Securities laws. (That is where these investor lawsuits and settlements come from).
- What nobody has done YET is file a claim for borrowers. The probable reason for this is that the securities transactions giving rise to these profits seem remote from the loan transaction. But if they arose BECAUSE of the execution of the loan documents by the borrower, then lending laws apply, along with REG Z from the Federal reserve. The payoff to borrowers is huge, potentially involving treble damages, interest, court costs and attorney fees.
- Under common law fraud and just plain common sense, there is no legal basis for allowing the perpetrator of a fraud to keep the benefits arising out of the the fraud. So who gets the money?
April 26, 2010
Mortgage Deals Under Scrutiny as Goldman Faces Senators
WASHINGTON — The legal storm buffeting Goldman Sachs continued to rage Tuesday just ahead of what is expected to be a contentious Senate hearing at which bank executives plan to defend their actions during the housing crisis.
Senate investigators on Monday claimed that Goldman Sachs had devised not one but a series of complex deals to profit from the collapse of the home mortgage market. The claims suggested for the first time that the inquiries into Goldman were stretching beyond the sole mortgage deal singled out by the Securities and Exchange Commission. The S.E.C. has accused Goldman of defrauding investors in that single transaction, Abacus 2007-AC1, have thrust the bank into a legal whirlwind.
The stage for Tuesday’s hearing was set with a flurry of new documents from the panel, the Permanent Senate Subcommittee on Investigations. That was preceded by a press briefing in Washington, where the accusations against Goldman have transformed the politics of financial reform.
In the midst of this storm, Lloyd C. Blankfein, Goldman’s chairman and chief executive, plans to sound a conciliatory note on Tuesday.
In a statement prepared for the hearing and released on Monday, Mr. Blankfein said the news 10 days ago that the S.E.C. had filed a civil fraud suit against Goldman had shaken the bank’s employees.
“It was one of the worst days of my professional life, as I know it was for every person at our firm,” Mr. Blankfein said. “We have been a client-centered firm for 140 years, and if our clients believe that we don’t deserve their trust we cannot survive.”
Mr. Blankfein will also testify that Goldman did not have a substantial, consistent short position in the mortgage market.
But at the press briefing in Washington, Carl Levin, the Democrat of Michigan who heads the Senate committee, insisted that Goldman had bet against its clients repeatedly. He held up a binder the size of two breadboxes that he said contained copies of e-mail messages and other documents that showed Goldman had put its own interests first.
“The evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients,” Mr. Levin said.
Mr. Levin’s investigative staff released a summary of those documents, which are to be released in full on Tuesday. The summary included information on Abacus as well as new details about other complex mortgage deals.
On a page titled “The Goldman Sachs Conveyor Belt,” the subcommittee described five other transactions beyond the Abacus investment.
One, called Hudson Mezzanine, was put together in the fall of 2006 expressly as a way to create more short positions for Goldman, the subcommittee claims. The $2 billion deal was one of the first for which Goldman sales staff began to face dubious clients, according to former Goldman employees.
“Here we are selling this, but we think the market is going the other way,” a former Goldman salesman told The New York Times in December.
Hudson, like Goldman’s 25 Abacus deals, was a synthetic collateralized debt obligation, which is a bundle of insurance contracts on mortgage bonds. Like other banks, Goldman turned to synthetic C.D.O.’s to allow it to complete deals faster than the sort of mortgage securities that required actual mortgage bonds. These deals also created a new avenue for Goldman and some of its hedge fund clients to make negative bets on housing.
Goldman also had an unusual and powerful role in the Hudson deal that the Senate committee did not highlight: According to Hudson marketing documents, which were reviewed on Monday by The Times, Goldman was also the liquidation agent in the deal, which is the party that took it apart when it hit trouble.
The Senate subcommittee also studied two deals from early 2007 called Anderson Mezzanine 2007-1 and Timberwolf I. In total, these two deals were worth $1.3 billion, and Goldman held about $380 million of the negative bets associated with the two deals.
The subcommittee pointed to these deals as examples of how Goldman put its own interests ahead of clients. Mr. Levin read from several Goldman documents on Monday to underscore the point, including one in October 2007 that said, “Real bad feeling across European sales about some of the trades we did with clients. The damage this has done to our franchise is very significant.”
As the mortgage market collapsed, Goldman turned its back on clients who came knocking with older Goldman-issued bonds they had bought. One example was a series of mortgage bonds known as Gsamp.
“I said ‘no’ to clients who demanded that GS should ‘support the Gsamp’ program as clients tried to gain leverage over us,” a mortgage trader, Michael Swenson, wrote in his self-evaluation at the end of 2007. “Those were unpopular decisions but they saved the firm hundreds of millions of dollars.”
The Gsamp program was also involved in a dispute in the summer of 2007 that Goldman had with a client, Peleton Partners, a hedge fund founded by former Goldman workers that has since collapsed because of mortgage losses.
According to court documents reviewed by The Times on Monday, in June 2007, Goldman refused to accept a Gsamp bond from Peleton in a dispute over the securities that backed up a mortgage security called Broadwick. A Peleton partner was pointed in his response after Goldman refused the Gsamp bond.
“We do appreciate the unintended irony,” wrote Peter Howard, a partner at Peleton, in an e-mail message about the Gsamp bond.
Bank of America ended up suing Goldman over the Broadwick deal. The parties are awaiting a written ruling in that suit. Broadwick was one of a dozen or so so-called hybrid C.D.O.’s that Goldman created in 2006 and 2007. Such investments were made up of both mortgage bonds and insurance contracts on mortgage bonds.
While such hybrids have received little attention, one mortgage researcher, Gary Kopff of Everest Management, has pointed to a dozen other Goldman C.D.O.’s, including Broadwick, that were mixes of mortgage bonds and insurance policies. Those deals — with names like Fortius I and Altius I — may have been another method for Goldman to obtain negative bets on housing.
“It was like an insurance policy that Goldman stuck in the middle of the sandwich with all the other subprime bonds,” Mr. Kopff said. “And it was an insurance policy designed to protect them.”