Who is Winning the Race to the Bonus Bottom? Goldman, Morgan Stanley?

Wall Street ended last year promising to rein in excessive bonuses. So are the big firms living up to their promises in the first quarter of 2010?

Morgan Stanley, whose CEO James Gorman has expressly vowed to bring down the firm’s compensation levels, reported this morning that its comp ratio fell to 49% from 68% a year ago.

Morgan’s comp level remains the highest among the three largest, marquee investment banks that includes Goldman Sachs Group and J.P. Morgan Chase. But, Morgan’s still elevated comp ratio, which measures salaries, bonuses and benefits as a percentage of total revenue, may be a little easier to stomach for shareholders since Morgan Stanley swung to a first quarter profit of $1.85 billion from the year-earlier loss of $17 billion.

Overall Morgan’s comp doubled to $4.4 billion in the first quarter, as the firm beefed up its hiring of traders and financial advisers, through its joint venture with Citigroup’s legacy Smith Barney brokerage. But its revenue increased thanks to a trading boom, helping to lower the comp ratio.

Goldman and J.P. Morgan, meantime, are vying for the last place in the comp charts. Goldman’s first quarter comp ratio was 43% of net revenue for the first quarter of 2010, down from a 50% ratio a year ago. Goldman’s first-quarter ratio is significantly higher than the 35.8% ratio that it ended 2009 with–-the lowest in the firm’s high-paying history. Goldman cautions that its first quarter comp levels are no indication of where its actual bonuses will end up at the end of 2010.

J.P. Morgan takes the cake, though. The comp ratio in its investment banking division (which is best comparable to Goldman and Morgan Stanley) was 35% in the first quarter, which is down from 39% a year ago.

Update: A Morgan Stanley spokesman points out that a more apt comparison between Morgan Stanley and JP Morgan is to compare the 41% comp ratio in Morgan Stanley’s Institutional Securities group — which includes advisory and trading — with JP Morgan’s 35% comp ratio in its investment bank.

The real question is whether this restraint will be enough to satisfy regulators eager for political points scored at Wall Street’s expense. Will Washington use the latest comp levels to declare victory, or will it ask for more?


Deals of the Day: Paulson Faces Goldman Fallout

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

Goldman v. SEC

The fallout: John Paulson has gone on the offensive to reassure investors that his hedge-fund firm will emerge unscathed from the case against Goldman Sachs. [WSJ]
Related: Politicians in the U.K. and Germany are starting to call on their governments to cut ties with Goldman, which has long been one of the top financial advisers to European policy makers. [WSJ]
Related: Goldman has de-registered Fabrice Tourre with the U.K.’s main financial regulator. [WSJ]
Related: Rep. Darrell Issa and other Republican lawmakers are questioning the timing of the SECs fraud charges against Goldman. [WashWire]
Related: The gestalt behind the SEC case is that short selling is bad. [WSJ Opinion]

Mergers & Acquisitions

CyberSource: Visa has agreed to pay $2 billion for CyberSource, a provider of electronic-payment security services to online merchants. Visa will pay $26 a share using cash on hand, a 34% premium to CyberSource’s closing price Tuesday. [WSJ]

Airline M&A: Was United’s talk with US Airways just a “stalking horse” to bring the other Continental-United together. [Philadelphia Inquirer]

Relying on Burkle: Financial backers of the Weinsteins— not the brothers themselves— would own Miramax Films under terms being discussed to buy the studio from Walt Disney Co. [WSJ]

Google-ITA: The Internet giant is in talks to acquire ITA Software. [Bloomberg]

CKE Restaurants: The owner of the Hardee’s and Carl’s Jr. hamburger chains deemed a rival $694 million bid from an unidentified party superior to its previously announced deal to be acquired by Thomas H. Lee Partners. [Reuters]

Financial Institutions

Morgan Stanley: The Wall Street firm swung to a profit of $1.85 billion for the first quarter, easily beating estimates. Revenue more than tripled to $9.08 billion due to the Morgan Stanley Smith Barney joint venture. [WSJ]

The failings of Lehman: Lawmakers charged that the undoing of Lehman Brothers at the height of the financial crisis was caused by “deceptive” company executives and disengaged regulators, a case both parties used as fodder in the increasingly charged debate over crafting new financial regulation. [WSJ]

Wells Fargo: The bank’s first-quarter earnings fell 16% as credit-loss provisions rose, but the giant bank said credit “has turned the corner.” [WSJ]

Financial Regulation

Leverage: The SEC is considering new rules that would prevent large banks from masking risks by temporarily lowering their debt levels before quarterly reports. [WSJ]

They still want Wall Street’s cash…: Lawmakers in both parties have held dozens of fund-raisers on Wall Street, offering the industry access to members of Congress who are fashioning new regulations for financial markets. [WSJ]

Antitrust Guidelines: U.S. antitrust regulators on Tuesday unveiled new guidelines explaining how they scrutinize proposed mergers between competitors, in a move that could make it easier for them successfully block deals in court. [WSJ]

Buyside

Political donations: The biggest hedge-fund donors funneled their donations primarily to Democrats. [ABC News]

Debt burden: Many hotel chains are finding it tough to restructure and reduce complicated debt burdens inherited during the buyout boom. [WSJ]

Companies & Industries

Government Motors: GM’s CEO will personally foot the bill for a chartered flight to Washington, D.C. [WSJ]

Chrysler: Chrysler lost nearly $4 billion since exiting bankruptcy last year, but the company reported a first-quarter operating profit this year and increased its cash reserves. [WSJ]


Goldman and Citigroup Hire New Trading Executives

Trading revenues powered Wall Street earnings again this quarter, which helps explain why banks continue to pluck traders away from competitors.

Goldman Sachs in recent days hired Bank of America Merrill Lynch currency trading executive Pankaj Jhamb to handle its Latin American bond and currency trading, people familiar with the matter said. Mr. Jhamb, who resigned last week from BofA Merrill, will help fill the vacancy left by David Jasper, the emerging market trading head at Goldman that left for hedge fund Moore Capital earlier this year.

That move comes as Goldman tries to get back to business after Friday’s bombshell civil lawsuit by the Securities and Exchange Commission, which accused the powerful investment bank of fraud in its marketing of a complex mortgage portfolio in 2007. Goldman is fighting the allegations, which it calls “unfounded.” Mr. Jhamb is expected to start in June after taking the customary “gardening” leave in between jobs. He’s expected to report to Goldman bond and currency trading executive Ashok Varadhan.

Meanwhile, Citigroup has hired Morgan Stanley’s co-head of high yield trading Christopher Yanney. Wall Street high-yield, or junk, bond sales have been brisk of late, so high-yield trading desks might see heightened opportunity.

Mr. Yanney, who previously had worked at firms including Barclays Capital and Goldman, is expected to start at Citigroup in coming months, people familiar with his move say. Morgan high-yield co-head Thomas Pernetti continues to run the desk at Morgan under credit trading chief Michael Heaney. Morgan, which reports earnings Wednesday, has been in hiring mode recently, adding 350 sales and trading officials and reorganizing its bond trading efforts.


Three Great Global Dividend Stocks

Filed under: , , , ,

As Wall Street gyrates around in the wake of the Goldman Sachs (GS) fraud allegations, investors are starting to feel the old doubts and fears creep up again. After surging over 70% from the March 2009 lows, the market appears to be stalling at least in the short term.

One place low-risk investors can take refuge is low-risk dividend stocks in reliable industries - like health care giant Abbot Laboratories (ABT) with its 3.4% yield, or in energy giant Exxon Mobil (XOM) with its 2.5% yield. Those nice payouts ensure that you'll see some returns on your investment even if things stay rocky on Wall Street. And since dividend stocks added $6.4 billion to payouts in the first quarter, the cuts we saw during the recession appear to have been reversed by many stocks.

Continue reading Three Great Global Dividend Stocks

Three Great Global Dividend Stocks originally appeared on BloggingStocks on Tue, 20 Apr 2010 14:50:00 EST. Please see our terms for use of feeds.

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Live Blogging the Dick Fuld’s Lehman Testimony

Dick Fuld isn’t backing down.

The former Lehman Brothers chief is to testify today before a House Financial Services committee that he didn’t know about the bankrupt securities firm’s accounting tactic known internally as Repo 105.

The device, which has become exhibit A of Lehman’s risky and less-than-forthcoming behavior, was allegedly used to reduce the size of the company’s balance sheet at quarter ends.

He also is expected to hammer Lehman’s regulators, including the SEC, for being aware of every potential problem at the firm, but not speaking up if they had any concerns. Fuld, according to a copy of his prepared testimony, also has harsh words for bankruptcy court examiner Anto Valukas, who he accused of unfairly vilifying Lehman in a scathing report last month.

Also scheduled to testify is Matthew Lee, a former senior vice president at Lehman who said he warned his superiors about accounting issues at the firm, and then lost his job.

Deal Journal is live blogging the Lehman testimony.

3:22 pm | by Michael Corkery

Let the battle begin.  Fuld enters the hearing room and passes near Valukas, the Lehman bankruptcy examiner. The two men don't appear to acknolwedge each other, according to Dow Jones reporter Michael Crittenden who is at the hearing.

Fuld begins his statement  saying Valukas "distorted" what happened at Lehman and villified its employees.

3:27 pm | by Michael Corkery

Fuld has one unscripted conclusion to his opening statement. He removes his glasses and pauses before saying: "Given all that has been said, I would like to add that I am aware that one day we had a firm and the next day we did not and a lot of people got hurt with that and I have to live with that. "

3:28 pm | by Michael Corkery

Thomas Cruikshank, former Lehman board member, said Lehman's bankruptcy was the darkest day of his professional carreer....but he hastens to add that while he feels bad, the examiner says there's "no colorable claims" against board members.

3:32 pm | by Michael Corkery

Cruikshank said there was sufficent risk management in place. Specifically, the firm's auditors Ernst & Young never raised any concerns about major problems.

3:35 pm | by Michael Corkery

William Black, former litigation director at Federal Home Loan Bank who is now a professor, says Lehman's problems were caused by "fraud" -- related to the firm's "liar loan" business.

3:37 pm | by Michael Corkery

Black: The SEC sent two people to oversee Lehman. We sent 50 people to oversee the Federal Home Loan Bank of San Francisco.


Live Blogging Dick Fuld’s Lehman Testimony

Dick Fuld isn’t backing down.

The former Lehman Brothers chief is to testify today before a House Financial Services committee that he didn’t know about the bankrupt securities firm’s accounting tactic known internally as Repo 105.

The device, which has become exhibit A of Lehman’s risky and less-than-forthcoming behavior, was allegedly used to reduce the size of the company’s balance sheet at quarter ends.

He also is expected to hammer Lehman’s regulators, including the SEC, for being aware of every potential problem at the firm, but not speaking up if they had any concerns. Fuld, according to a copy of his prepared testimony, also has harsh words for bankruptcy court examiner Anton Valukas, who he accused of unfairly vilifying Lehman in a scathing report last month.

Also scheduled to testify is Matthew Lee, a former senior vice president at Lehman who said he warned his superiors about accounting issues at the firm, and then lost his job.

Deal Journal is live blogging the Lehman testimony.

3:22 pm | by Michael Corkery

Let the battle begin.  Fuld enters the hearing room and passes near Valukas, the Lehman bankruptcy examiner. The two men don't appear to acknolwedge each other, according to Dow Jones reporter Michael Crittenden who is at the hearing.

Fuld begins his statement  saying Valukas "distorted" what happened at Lehman and villified its employees.

3:27 pm | by Michael Corkery

Fuld has one unscripted conclusion to his opening statement. He removes his glasses and pauses before saying: "Given all that has been said, I would like to add that I am aware that one day we had a firm and the next day we did not and a lot of people got hurt with that and I have to live with that. "

3:28 pm | by Michael Corkery

Thomas Cruikshank, former Lehman board member, said Lehman's bankruptcy was the darkest day of his professional carreer....but he hastens to add that while he feels bad, the examiner says there's "no colorable claims" against board members.

3:32 pm | by Michael Corkery

Cruikshank said there was sufficent risk management in place. Specifically, the firm's auditors Ernst & Young never raised any concerns about major problems.

3:35 pm | by Michael Corkery

William Black, former litigation director at Federal Home Loan Bank who is now a professor, says Lehman's problems were caused by "fraud" -- related to the firm's "liar loan" business.

3:37 pm | by Michael Corkery

Black: The SEC sent two people to oversee Lehman. We sent 50 people to oversee the Federal Home Loan Bank of San Francisco.

3:44 pm | by Michael Corkery

Black is finally done talking about fraud and widespread negligence....Matthew Lee,  a senior vice president at Lehman who says he was let go from the firm after he raised concerns about the firms accounts, is testifying. He calls himself a "professional whistleblower," who began his auditing career in 1977 when he joined the predessesor firm of Arthur Anderson.

3:48 pm | by Michael Corkery

Lee is speaking in a rambling tone about his career at Lehman and then comes to a letter he sent on May 16 expressing his concerns to his overseers and a few days later, someone "pulled me out of a meeting and fired me on the spot." Lee becomes overcome with emotion and has to take a sip of water.

3:50 pm | by Michael Corkery

Rep. Paul Kanjorksi says having heard Black and Lee speak he wishes he had provided "baseball bats" to the witnesses....then he asks Fuld point blank, what caused the demise of Lehman Brothers

 

3:51 pm | by Michael Corkery

Fuld goes back in history to 1994 when Lehman went public....

Kanjorksi interjects..."What happened, can you say succicently."

3:52 pm | by Michael Corkery

Kanjorksi is still not getting the answer he wants....."What happened...I don't want an advertisement"

3:55 pm | by Michael Corkery

Fuld says he met with Federal Reserve official repeatedly in the weeks leading up to the collapse and no one ever raised concerns about our ability to survive.

3:58 pm | by Michael Corkery

Kanjorksi: "Were you forced to go down....Did the Federal Government force Lehman to go down."

Fuld starts to answer, but then Kanjorski tells him they are out of time. Fuld says he'd like to finish his answer. But Kanjorski won't let him. (Great, politicians asking questions to which they aren't interested in hearing the answers)

4:07 pm | by Michael Corkery

Barney Frank has just arrived. He begins with an attack on Alan Greenspan. Fed could have defalted housing bubble by tightening subprime lending standards.

4:09 pm | by Michael Corkery

Frank asks Lee: When you raised these issues what response did you get.

Lee: From within Lehman, "annoyance"

 

4:15 pm | by Michael Corkery

Fuld is asked whether Valukas was correct in saying that Lehman didn't include some of its riskiest assets, such as commercial real estate, in its internal stress tests. Fuld said that was the case until the end of 2007. (Note: By that point, it was too late. Lehman had already loaded up on toxic investments)

 

 

 

 

4:15 pm | by Michael Corkery

Fuld says he doesn't know what Lehman's former chief operating officer Bart McDade meant when he said that Repo 105 is "another drug we are on."

4:18 pm | by Michael Corkery

Fuld is asked why didn't you know about Repo 105. Were your employees hiding it from you?

Fuld says: "There was no hiding....on any given day, Lehman traded 50 to 100 billion dollars of government securities a day, which were highly liquid. There is no reason why I would have known about these Repo 105 transactions becuae there was nothing inherently wrong with them. I was focused on less liquid assets: commerical real estate, residential mortgage, leveraged loans. I was focused on what could impact our capital. Government securities do not impact our capital.

4:20 pm | by Michael Corkery

Dennis Moore: Wasn't it important that you are covering up leverage with these end of quarter transaction?

Fuld: $50 billion is a lot, but I must say to you that focus of the less liquid asset whether or balance sheet is up or down $50 billion was not my focus.

4:22 pm | by Michael Corkery

Moore: Mistake were made, right?

Fuld: Yes, mistakes were make about the market.

4:25 pm | by MIchael Corkery

Rep. Ed Royce, a California Republican, asks Fuld were you working under assumption that Lehman would be bailed out?

Fuld: No, sir, I was not.

Royce: So these bailouts dont' create a moral hazard

Fuld shakes his head.

4:31 pm | by Michael Corkery

Here we go. It wouldn't be a Congressional hearing without mentioning Fannie and Freddie.  Rep. Brad Miller asks did Fannie Mae and Freddie Mac have anything to do with Lehman's failure.

Fuld says the administraiton wanted all institution to "extend themselves" to help people achieve the "American dream."  But says essentialy, no ---- Fannie and Freddie did not contribute to Lehman's failure.

4:38 pm | by MIchael Corkery

Cruikshank pipes up for the first time since his opening statement, saying there were "no corporate governance issues" at Lehman.  (Note: What do you expect him to say? Cruikshank started out saying proudly that the examiner's report said there were no "colorable" failings on the part of the board.)

4:42 pm | by Michael Corkery

Black says that he considers Repo 105 a "felony." That is a strong word, professor.

4:51 pm | by Michael Corkery

This Just In. Fuld declares: "We were risk adverse."

Rep. Charlie Wilson whispers: "How can you say that."

Fuld: "I know I walked right into that."

Fuld: Our commercial real estate investments were conservative, but they were victims of "terrible timing."

5:02 pm | by Michael Corkery

It just got personal. Fuld is asked why he decided to sell his home in Florida to his wife for $100. It was a decision that has been blown way out of proportion. Fuld said he sold it to her for that amount to "balance" the family finance. His wife, previous to the house sale, had been selling some of art work.

5:07 pm | by Michael Corkery

Deal Journal is signing off , for now.  Fuld was defiant to the end declaring that Lehman was conservatively capitalized and he had no personal knowledge of Repo 105.  The witnesses offered little insight on how regulators failed to catch problems at Lehman and how financial overhaul might improve as a result of the lessons learned from the Lehman bankruptcy.


Five New Things We Learned Today About SEC v. Goldman

Having sat through two conference calls with Goldman officials (one for the public and the other for the press) in the space of three hours, is there anything we know now about the Abacus CDO that we didn’t know before?

Here are five new takeaways.

1) In its call with reporters, Goldman offered a defense of why it didn’t disclose the SEC investigation of the Abacus to investors before the agency filed its lawsuit last Friday. “We did not think it was material,’’ said co-general counsel Greg Palm. “It’s one CDO, and we thought we had a good case,’’ refuting the SEC’s allegations.

Asked whether Goldman now thinks withholding information about the SEC probe was a mistake–given that, if nothing else, the loss of $12 billion in market value after the charges were announced show that investors thought it was material–Palm responded that “we incorporate anything that happens into our thinking” about how to do things in the future.

2) The case, for now, appears only civil in nature, not criminal; Goldman said it hasn’t been contacted by the Department of Justice.

3) We knew IKB, the German bank that bet long on Abacus, also had a role in selecting collateral for the CDO, just as Paulson, who was shorting the deal, did. But when pressed by reporters, Palm said IKB made only “a few suggestions” about what went into the deal and had signed off on ACA Capital collateral section “The fact [that IKB] made less suggestions than Paulson suggests they were happy with the portfolio,’’ Palm said.

4) Palm offered this new reasoning in Goldman’s defense: In the end, it didn’t matter whether long or short investors selected the Abacus collateral. Most of the mortgages in the pool “were crushed” by the subprime market collapse, even those selected by the longs — ACA and IKB.

5) CEO Lloyd Blankfein has no plans to address the case publicly, Palm said.


Deals of the Day: Paulson-Goldman CDO — One of the Worst Ever

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

SEC v. Goldman

What Did the Committee Know? The mortgage deal that set off controversy at Goldman Sachs was quickly approved by a group of senior executives in a routine meeting. That group has surfaced as an important participant in the SEC’s case. [WSJ]
Related: The SEC decided to sue Goldman over the objections of two Republican commissioners, suggesting an unusual split at the agency. [WSJ]
Related: For months, Goldman and the SECn had been involved in secret talks. And even after SEC lawyers had told Goldman in writing they were prepared to file a federal suit, the firm gave no ground, declining to ask for a settlement. [Washington Post]
Related: The mortgage deal at the center of the suit against Goldman Sachs also boasts another distinction: It was one of the worst-performing mortgage deals of the housing crisis. [WSJ]
Related: Goldman has a capital problem—a gaping deficit when it comes to political and public capital. [WSJ]
Related: One former hedge fund manager said that when he read the headline about Goldman Sachs being charged with fraud he thought, “It’s about time.” [Washington Post]
Related: Officials at Calpers said they were “disturbed” about the Goldman charges. [LA Times]
Related: John Paulson has held political fund-raising events in recent weeks for top politicians of both political parties. [WSJ]
Related: Intentionally or not, the SEC has already secured at least one victory in the court of media opinion. [WSJ Opinion]
Related: A collapse in trust lay at the heart of the financial crisis. Could The clash between Goldman and the SEC deal a new blow to trust? [WSJ]
Related: Congressman Mark Kirk, the Republican nominee for an open Senate seat in Illinois, said he will return contributions made by Goldman employees because the SEC is investigating the bank. [Bloomberg]

And in other Goldman news, the firm had earnings: Goldman Sachs’s profit jumped 91%, helped by its fixed income trading business. CEO Blankfein addressed recent controversy, saying only “we appreciate the support of our clients and shareholders.” [WSJ]

Financial Regulation

Reform: Democratic leaders scrambled to peel away the Republican votes they need to bring a Wall Street reform package to the Senate floor this week — an effort hampered by sharp partisan divisions. [Washington Post]

Mergers & Acquisitions

UAL: United Airlines is clawing its way back to financial health by improving on-time performance, cutting costs and boosting productivity. This work is making United a potentially a more attractive potential merger partner. [WSJ]

NAB-AXA: National Australia Bank said it is actively pursuing all options in its proposed takeover of AXA Asia Pacific after Australia’s competition regulator blocked the deal a day earlier over concerns that NAB referred to as ‘incorrect.’ [WSJ]

Financial Institutions

Mr. Fuld goes to Washington: Former Lehman CEO Richard S. Fuld Jr. plans to tell lawmakers that regulators knew everything that was going on inside Lehman “in real time” as it neared bankruptcy, an allegation that will pit him against others testifying. [WSJ]

Citi: Even a slight glimpse into black-box trading operations is fascinating. Take the blowout first-quarter results Citi reported for its investment bank, called Securities and Banking. [WSJ]

Buyside

Magnetar Capital: The hedge fund firm said it didn’t help banks create mortgage-linked investments “built to fail.” [Bloomberg]

Gerard Griffin: The hedge-fund manager is winding down his once $2.75 billion fund and joining GLG Partners, the London-based hedge-fund firm. [WSJ]

EMI-Terra Firma: Guy Hands plans to ask investors to put another $554 million into EMI. [FT.com]

Companies & Industries

Government Motors: GM now plans to repay $4.7 billion in U.S. government loans ahead of the company’s self-imposed June deadline. [WSJ]


Live Blogging Goldman’s First Quarter Conference Call

It’s not every day that a company invites the “public” to listen to a call that is usually geared toward analysts and investors.

But Goldman’s first quarter conference call this morning is no ordinary event. It comes only a few days after the venerable Wall Street firm was hit with fraud allegations by the Securities & Exchange Commission over its role in marketing a CDO in 2007.

Goldman, which has seen its stock plummet since the allegations were announced last Friday, is expected to address the issue this morning. The firm may have little choice, the focus of many of the questions is sure to be on the fall out from the SEC lawsuit, even as it reports that profits jumped 91% since a year ago.

One unknown is whether CEO Lloyd Blankfein will make an appearance this morning. He rarely, if ever, speaks publicly on these calls, leaving that task up to the company’s savvy, not-easily-rattled CFO, David Viniar.

Deal Journal is living blogging the call, which is expected to start at 8 a.m.

8:04 am | by Michael Corkery

The good news then the bad.  CFO Viniar is running through Goldman's results first and then will have the general counsel walk through the SEC complaint.

8:06 am | by Michael Corkery

Doesn't sound as if Blankfein is going to make an appearance

8:06 am | by MIchael Corkery

Investment Banking: Equity underwriting and M&A advisory fees are down from the fourth quarter. Only debt underwriting rose.  And I-banking backlog is flat.

8:07 am | by MIchael Corkery

Trading business: All revenues are up from a year ago despite lower volatility.

8:08 am | by Michael Corkery

Risk, as measured by Value at Risk, is down 11% from fourth quarter.

8:10 am | by MIchael Corkery

Compensation accural rate is the lowest ever, which reflects current strength of Goldman revenue and the political environment.

8:11 am | by Michael Corkery

It took a full ten minutes into the call, but he finally mentioned Goldman's goal to serve its clients' interest first.

8:12 am | by Michael Corkery

Greg Palm, general counsel is up: We are "disappointed" that SEC would bring the case in face of the info. we presented.

8:13 am | by MIchael Corkery

Palm: The process began in August 2008 when SEC asked for information, and we have been very cooperative.

8:15 am | by MIchael Corkery

For the third time in about 3 three minutes, Palm mentions how "professional" and sophisticated and experienced IKB and ACA were at CDO deals , suggesting they knew what they were doing.

8:16 am | by Michael Corkery

Palm: In selecting the portfolio of collateral, ACA reviewed all of the assets in the pool.  It had final say and used its own modeling to decide the collateral. It rejected more than half of the collateral suggested by Paulson.

8:17 am | by Michael Corkery

Palm: There is no evidence that ACA thought Paulson was taking an equity position in the deal.

8:18 am | by Michael Corkery

Palm: Goldman lost $100 million on the deal. (That estimate seems to be growing. Yesterday Goldman said it lost 90 million on the transaction)

8:19 am | by Michael Corkery

Now to questions....Glenn Schorr of UBS asks if Paulson wasn't misrepresented as being long on the deal, how were they introduced into the deal.

8:20 am | by Michael Corkery

Palm: I am sure we would have put them in contact with each other. There is no evidence introduced to us what it would involve....if the question is  "What was ACA thinking" I don't know.

8:23 am | by Michael Corkery

Schorr: Are there any wells notice outstanding?

8:24 am | by MIchael Corkery

Palm: We disclose anything that is material. We do not disclose every Wells notice (from the SEC) that we get. That would not make sense .

Schorr: Obviously, at the K, you didn't think this was material. (Schorr made some waves yesterday when he pushed Citigroup about whether it had any outstanding Wells notices. Citigroup stayed tight lipped.

8:28 am | by MIchael Corkery

One thing lost in all of the SEC news. Goldman has repurchased shares becoming one of the first big banks to do so in the wake of the financial crisis. Most firms have been hoarding capital.

8:29 am | by Michael Corkery

Palm: Why did we raise estimate of losses. We thought $100 million is a round number and it would sound better (chuckle, chuckle)

8:32 am | by Michael Corkery

Credit Suisse asks any client business has been impacted by the SEC complaint

Palm: No

8:35 am | by Michael Corkery

Palm: Timeline for dealing with the SEC lawsuit is unknown.

8:36 am | by Michael Corkery

Viniar: Our clients will support us as long as we provide the best service. As long as we continue to perform for our clients they will be happy for us.

8:39 am | by Michael Corkery

Roger Freeman of Barclays: How many CDO transactions has the SEC reviewed. Goldman did about 70 in 2006 and 2007?

8:39 am | by MIchael Corkery

Palm: There is one case that has been brought, that's all I can say.

8:44 am | by Michael Corkery

Mike Mayo of CLSA: In very simple terms,  Paulson was short the portfolio and selecting the portfolio, and Goldman didn't disclose that to ACA. Why would SEC be wrong?

8:44 am | by MIchael Corkery

Palm: Paulson selected some material, but ACA had final say on the collateral.

8:46 am | by Michael Corkery

Palm: Remember that whatever you invested in during this time period,  "you got crushed."  It didn't matter what you selected in terms of mortgages.

8:46 am | by Michael Corkery

Mayo: How common was it for a third party like Paulson to select the collateral for the CDO.

8:47 am | by Michael Corkery

Palm: This CDO was constructed and marketed in similar ways as transaction at the time.

8:51 am | by Michael Corkery

NOTE: That was the most interesting exchange so far. Palm essentially seems to be arguing that all mortgages were weak at the time so it didn't matter what collateral had been selected for the CDO, and whether it was selected by someone who was long or short on the housing market. The SEC argues that this is a judgement call that should have been left up to ACA decide. But it wasn't able to do so because Goldman didn't disclose Paulson's short bet on the CDO.

8:53 am | by Michael Corkery

Palm: No conversation with the Department of Justice on the Abacus CDO. (It remains a civil matter)

9:00 am | by Michael Corkery

Now to the quarter results: Viniar is asked what areas of its fixed income and commodities trading business are strongest. He says the strength was across the board. (Note: No one, neither analysts nor Viniar, seems to mention much of the firm's capital markets strength is due to extremely low interest rates thanks to government monetary policy)

9:04 am | by Michael Corkery

Palm: You can't do a synthetic trade unless both sides (both long and short) are amenable to what you are talking about.

9:05 am | by Michael Corkery

Trone: Why did Goldman take a position in the deal (super senior tranch)?

9:06 am | by Michael Corkery

Palm: We had skin in the game (which is something that regulators want more of) and we would not have put skin in the game if we thought there was something wrong with the deal.

9:10 am | by Michael Corkery

Back to the quarter, equity flows to asset management business is weak in the quarter, why?

9:10 am | by Michael Corkery

Viniar: That is happening across the industry as more investors put money into fixed income funds.

9:19 am | by Michael Corkery

That's a wrap. Palm and Viniar stayed on two essential messages: 1) That ACA and IKB (the long investors in the CDO) knew what they were doing because they'd done simliar deals in the past. 2) ACA knew Paulson was involved in selecting the collateral for the CDO.

The one thing Goldman didn't seem to answer as clearly was why ACA didn't know Paulson was shorting the CDO. Palm argued that Goldman made all appropriate disclosures and pointed out that in the end it didn't matter which mortgages went into the CDO because most loans, regardless of who chose them, eventually went bad.  Still, some analysts questioned why ACA wasn't told about this by Goldman, who was brokering the deal.


Evening Reading: Whatever Happened To Buffett’s Goldman Bet?

In defense of Goldman..sort of: Jeff Matthews is no Goldman apologist. After reading the complaint, he points out that at the heart of the SEC’s case is “the notion that IKB would not have proceeded with the transaction had Goldman not omitted Paulson’s name from the discussion” That leads Matthews to write: Who, exactly, is this IKB that, if we are to believe the complaint, had been led like a lamb to slaughter by Goldman Sachs at the behest of John Paulson? Well, IKB is short for IKB Deutsche Industriebank, and it was once a sleepy German industrial lender that, during the 2000s, made the plunge into sub-prime CDOs for the same reason so many of its peers did: it seemed like a good idea at the time. Indeed, so good an idea did it seem, that IKB boasted of its prowess in evaluating exactly the kind of garbage the SEC is now trying to claim Goldman Sachs misled it into buying.”

The key take away from Goldman v. SEC? James Surowiecki sums it up in one sentence: “Trusting Wall Street firms to act in their clients’ interests is a mug’s game.”

On Warren Buffett’s Goldman investment: Alice Schroeder writes over at Bloomberg: “At first it seemed that Berkshire had gotten a rich price for Buffett’s one-time imprimatur to help Goldman avert failure in a liquidity crunch. Since then, Buffett has been sitting in Omaha, Nebraska, cashing checks for $500 million a year. The preferred is an extremely expensive form of capital that is redeemable at Goldman’s option. It is costing Goldman $100 million to $200 million a year in extra dividends compared with the cost if it refinanced. Goldman can afford it, so why has it not paid this money back…Goldman values having Buffett’s reputation on call even more, as insurance.”

Our colleague David Weidner at MarketWatch chats with Lewis Black about the Tea-Party movement, taxes, bank bailouts and the iPad.


Is the Worst Over for Goldman Sachs Shares?

It looks for now like the bleeding has stopped. After plunging nearly 15% on Friday — one of their worst daily drops since the firm went public a decade ago — Goldman’s shares closed Monday slightly higher, up about 1.63% to $163.32.

Everett Collection

The trading volume was heavy again with about 54 million shares trading hands, about half the number of shares that were traded on Friday. Average daily volume for Goldman’s shares is about 12 million shares.

Analysts say the biggest impact from the SEC’s case against Goldman is likely to the firm’s reputation among clients and in Washington, where tougher financial regulation is being debated.

While the passage of such measures as capital and leverage requirements and trading restrictions has for the most part been priced into financial sector shares, the Goldman case has made passage of financial overhaul more likely.

“While already in motion, financial reform is even more likely & Return on Equity will be lower,’’ as a result, said analyst Glenn Schorr. Still, he added that “we don’t see massive changes to the business model or earnings power over the long term.”

Another potential problem for Goldman is legal costs. It’s not clear how much defending this particular case could cost, but if the SEC decided to live up to its pledge of investigating other CDO deals, including additional such deals at Goldman, the costs could add up. Consider that J.P. Morgan set aside $2.3 billion for mortgage-related litigation in the first quarter, according to Frederick Cannon, analyst Keefe, Bruyette & Woods, Inc.

As bad as Goldman’s shares have been rattled by the SEC complaint, such fears pale next to the problems that plagued the firm in the height of the financial crisis when its shares saw double-digit percentage drops on multiple days. Goldman’s largest daily percentage drop was on Jan. 20, 2009 when its shares fell 19% to $59.20, as investors worried about liquidity across the financial system, including at the usually stalwart Goldman.

And yet, through the turmoil, Goldman shares are still up 133% since the firm’s IPO in May 1999.


Tracking Bank Failures: Canada’s TD Claims Its Prize –Three Failed Banks

TD Bank Financial has sought a FDIC-assisted deal for more than a year.

Friday it finally got what it was seeking. TD gobbled up the operations of three failed banks in Florida — Riverside National Bank of Florida, First Federal Bank of North Florida, and AmericanFirst Bank. The banks have a combined $3.1 billion in deposits and $3.8 billion in assets.

The three banks were part of the eight institutions that regulators seized on Friday. So far this year regulators have shuttered 50 banks. In addition to the three in Florida, they shuttered two in Michigan and Massachusetts that represented the first failures of the year in those states. They also reported two failures in California, and one in Washington.

The largest of the TD deals was for Riverside National, which has 58 branches in Florida, and had assets of $3.42 billion and deposits of $2.76 billion at the end of 2009. AmericanFirst Bank, with three branches, had $90.5 million in assets and total deposits of $81.9 million at the end of 2009. First Federal, with eight branches, had assets of $393.3 million and total deposits of $324.2 million.

Last May, TD bid for BankUnited but TD’s best offer fell short. The move was part of TD’s effort to grow its U.S. business. According to the Globe and Mail, TD’s U.S. bank has more than $150-billion in assets, more than $70-billion in deposits, and as many locations in the U.S. as it does in Canada.

The FDIC estimated that the total cost of the eight bank failures to its deposit insurance fund would be $984.7 million.

Click on the image below to see the WSJ’s graphic tracking bank failures:

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Read Goldman’s Rebuttal To SEC’s Wells Notice

“There was nothing unusual or remarkable about the transaction or the portfolio of assets it referenced.”

That, essentially, is the crux of Goldman Sachs Group’s legal defense in the Abacus CDO case. In a series of documents submitted to the Securities & Exchange Commission in September 2009, Goldman argued that it made all the proper disclosures to investors about the make-up of the CDO.

To read Goldman’s response documents, click here and here.

Goldman also argued that the CDO’s losses, totaling about $1 billion, were the result of the overall upheaval in the subprime mortgage market, not because the collateral in Abacus was extremely risky. In fact, according to Goldman’s estimates, the average FICO score of the mortgage borrower in the pool was higher than the average FICO scores of similar deals. Likewise, the delinquency rate was only slightly higher on the loans in Abacus (46.2%) than the average delinquency rate on similar CDO deals (45.9%)

In other words: Move along regulators, journalists and investors, there is nothing to see here.

One fact that did stick out about Abacus: It took less than a month (0.8 month) after it was sold before the mortgages experienced write downs, whereas the “Average Time to Writedown” of similar deals was 1.7 months.


Meet the SEC’s Lead Goldman Investigator: He Plays the Ukelele

Deal Journal colleague Kara Scannell reports:

The SEC’s showdown with Goldman Sachs pits a team of four SEC attorneys against the deep pockets and heft of Wall Street’s preeminent white shoe firm.

Reid Muoio, a 10-year veteran of the SEC and deputy chief of the structured products unit, is heading the team honing in on Goldman and other investment bank who allegedly used misleading tactics to package and sell mortgage products.

Mr. Muoio is a Washington, D.C. native and son of a tax attorney. He joined the SEC after receiving his law degree from Yale University and spending a few years as an associate at Hughes Hubbard and Reed. He also plays the ukulele.

Mr. Muoio is known as smart and aggressive attorney, who some say is a good match against Goldman. He’s played a role in a number of high-profile cases, including the SEC and Justice Department’s $1.6 billion settlement with Siemens AG to resolve allegations the company bribed foreign government officials. He also was sent to India as the investigator to look into the alleged fraud at Saytam Computer Services Ltd (the SEC never sued the firm) and flew to Hong Kong as part of the insider trading investigation of former Dow Jones board member David Li. Mr. Li settled the case, without admitting or denying wrongdoing.

Mr. Muoio, 43, began focusing on the subprime space in early 2007 just as the early signs of weakening housing market were beginning to show. He and his group identified structured products as a potential area and publicly warned the defense bar that the agency was throwing resources to the space.

In January he was named deputy to the SEC’s structured products unit, run by another agency veteran Kenneth Lench. Jason Anthony and Jeff Leasure are also part of the team.


Goldman Voicemail Rallies Staff: “This is Lloyd,” Your Captain Speaking

They’ve been through this before.

That was the message that CEO Lloyd Blankfein left on a mass voice mail to Goldman employee on Sunday night, reports Joe Bel Bruno of Dow Jones Newswires.

“We have faced challenges before and our people have always responded through their skills, talent and focus on our clients,” Blankfein said. “We will do that now, and in the process, re-affirm everything that defines Goldman Sachs.”

Blankfein is right about on thing: Goldman has weathered crises in its 180 year history, from massive humiliating losses in the 1929 stock market crash to big bond losses in the 1990s that accelerated the firm’s push to go public.

Here’s a transcript of Blankfein’s voicemail that was reviewed by Dow Jones Newswires:

This is Lloyd on Sunday in New York.

Following my message to you on Friday, I wanted to update all of you and let you know that we have been taking all appropriate steps to defend the firm and its reputation.

As we prepare for the opening of markets around the world, I want to remind all of you of the fundamental values that have served Goldman Sachs throughout our history: teamwork, excellence, and service to our clients.

The extensive media coverage on the SEC’s complaint is certainly uncomfortable, but given the anger directed at financial services, not completely surprising.

Still, it is important to put the SEC’s action in context. The core of the SEC’s case is the allegation that one employee misled two professional investors by failing to disclose the role of another market participant in a transaction. Importantly, we had assumed risk in the deal and we lost money, just like the other two long investors.

I will repeat what you have heard me say many times in the past: Goldman Sachs has never condoned and would never condone inappropriate activity by any of our people. On the contrary, we would be the first to condemn it and take immediate and appropriate action. Our responsibility as a financial intermediary requires it and our commitment to integrity and the firm’s business principles demand it.

We will continue to keep you posted with information about this matter. Tonight we will be sending you a summary that you may share with your clients. In the meantime, be assured that our global team, including the Board of Directors and the Management Committee, is working diligently to address the complaint with the facts.

To that end, in the next few weeks, Goldman Sachs will have the opportunity to appear before Congress and discuss our role and participation in the mortgage market more broadly. We look forward to discussing our strong record of prudent risk management.

As you return to work on Monday morning, I ask that you maintain the level of focus on our clients that is at the heart of Goldman Sachs’ success over the past 140 years.

We have faced challenges before and our people have always responded through their skills, talent and focus on our clients. We will do that now, and in the process, re-affirm everything that defines Goldman Sachs.”


The Goldman Complaint: Where Exactly Is the Fraud?

Just when it looked like the global financial crisis was fading into the distance, Goldman Sachs Group was hit with civil fraud charges that seem to cut to heart of Wall Street’s role in the credit debacle.

The central issue in the SEC’s case is the question of whether Goldman was being honest with investors about how it marketed a CDO tied to mortgage securities in 2007, known as Abacus.

Here’s a break down on some of what is being written in the newspapers and on the blogs about some of the key issues raised in the Goldman case.

Critics may find many aspects of the Abacus CDO distasteful, but what exactly was the alleged fraud? NY Times columnist Paul Krugman writes this morning that fraud allegations in the financial crisis have previously been focused on predatory lending and misrepresenting of risk. He argues that the Goldman case presents a “third form of fraud”:

“….the S.E.C. is charging that Goldman created and marketed securities that were deliberately designed to fail, so that an important client could make money off that failure. That’s what I would call looting.”

But in reality, the only fraud the SEC is charging Goldman with is that it failed to disclose to investors Paulson & Co.’s role in helping to select the mortgage collateral backing the CDO that the hedge fund intended to be against. Goldman has said it made full disclosure to investors.

In light of the all the brouhaha, The Wall Street Journal’s editorial board says the alleged disclosure violation seems a little thin:

“After 18 months of investigation, the best the government can come up with is an allegation that Goldman misled some of the world’s most sophisticated investors about a single 2007 “synthetic” collateralized debt obligation (CDO)? Far from being the smoking gun of the financial crisis, this case looks more like a water pistol.”

So far the only individual charged in the case is a Goldman senior vice president, Fabrice Tourre, who was involved in creating the CDO and whose boastful email was cited in the SEC complaint. The New York Times reports that there were several top Goldman executives, including Lloyd Blankfein, who oversaw and were intimately involved in the unit that created the CDO, citing unnamed sources. The article raises the specter of whether other Goldman executives could be implicated in the case. A Goldman spokesman told the Times that Blankfein and other brass weren’t involved in the creation of Abacus.

Has Paulson & Co. gotten off too easily? The SEC says the hedge fund wasn’t charged in the case because Goldman was responsible for making all of the appropriate disclosures about the make up of the CDO, a point reiterated by Paulson. But the Baseline Scenario blog writes:

“John Paulson was not the trigger man–it was Goldman and its executives who withheld adverse material information from their customers. But if the entire scheme was Mr. Paulson’s idea–if he was in any legal sense the mastermind (obviously he was, but can you prove it beyond a reasonable doubt?)–then we are looking at potential conspiracy to commit fraud.”

We all know that Wall Street is rife with cozy relationships, but here’s one that hits home in the Goldman case.

Vicky Ward, of Vanity Fair, reports that the former head of the now-defunct ACA Capital, the Abacus CDO manager that the SEC alleges was defrauded by Goldman in the deal, is Alan S. Rosenman. He is married to Frances “Fran” R. Bermanzohn, who is a managing director and deputy general counsel at Goldman.


Goldman Responds Again to SEC Complaint

Goldman Sachs has released its third statement in response to the Securities & Exchange Commission’s civil fraud allegations.

While Goldman’s response on Friday included the boilerplate language of vowing to “vigorously” defend itself against the charges, its latest statement attempts to point out certain issues that the Wall Street firm claims the SEC failed to mention in its complaint. The SEC alleges that Goldman failed to properly disclose to investors in a 2007 CDO that the hedge fund Paulson & Co. selected the mortgage collateral for the CDO. At the time, Paulson was betting the CDO would lose value.

Here is the text of the release:

Overview:

On Friday, April 16, the US Securities and Exchange Commission brought a civil action against Goldman Sachs in relation to a single transaction in 2007 involving two professional institutional investors, IKB and ACA Capital Management (ACA). We believe the SEC’s allegations to be completely unfounded both in law and fact, and will vigorously contest this action.

The core of the SEC’s case is based on the view that one of our employees misled these two professional investors by failing to disclose the role of another market participant in the transaction, namely Paulson & Co., and that the employee thereby orchestrated the creation of materially defective offering materials for which the firm bears responsibility.

Goldman Sachs would never condone one of its employees misleading anyone, certainly not investors, counterparties or clients. We take our responsibilities as a financial intermediary very seriously and believe that integrity is at the heart of everything that we do.

Were there ever to emerge credible evidence that such behavior indeed occurred here, we would be the first to condemn it and to take all appropriate actions.

This particular transaction has been the subject of SEC examination and review for over eighteen months. Based on all that we have learned, we believe that the firm’s actions were entirely appropriate, and will take all steps necessary to defend the firm and its reputation by making the true facts known.

The SEC does not contend that the two professional institutional investors involved did not know what they were buying, or that the securities included in this privately placed transaction were in any way improper. These institutions were very experienced in the CDO market.

In this private transaction, Goldman Sachs essentially acted as an intermediary, helping to facilitate the investing objectives of two clients. Extensive disclosures as to each of the securities in the reference portfolio, similar to those required by the SEC in public transactions, were contained in the offering documents which provided all the information needed to understand and evaluate the portfolio.

In the process of selecting the reference portfolio, ACA Capital Management, who was both the portfolio selection agent and the overwhelmingly largest investor in the transaction ($951 million, with the other professional investor’s exposure being $150 million), evaluated every security in the reference portfolio using its own proprietary models and methods of analysis. ACA rejected numerous securities suggested by Paulson & Co., including more than half of its initial suggestions, and was paid a fee for its role as portfolio selection agent in analyzing and approving the underlying reference portfolio.

In summary, the SEC’s complaint is an issue of disclosure on a single transaction involving professional investors in a market in which they had extensive experience. Critical points missing from the SEC’s complaint include:

Goldman Sachs Lost Money on the Transaction. The firm lost more than $90 million arising from this transaction. Our fee was $15 million. We certainly did not wish to structure an investment that was designed to lose money.

Objective Disclosure Was Provided. The transaction at issue involved a static portfolio of securities, and was marketed solely to sophisticated financial institutions. IKB, a large German Bank and leading CDO market participant and ACA Capital Management, the two investors, were provided extensive information about those securities and knew the associated risks. Among the most sophisticated mortgage investors in the world, they understood that a synthetic CDO transaction requires a short interest for every corresponding long position.

Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SEC’s complaint in part accuses the firm of potential fraud because it didn’t disclose to one party of the transaction the identity of the party on the other side. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was to be a long investor.

ACA, the Largest Investor, Selected and Approved the Portfolio. The portfolio of mortgage backed securities was selected by an independent and experienced portfolio selection agent after a series of discussions, including with IKB and Paulson & Co. ACA had an obligation and, as by far the largest investor, every incentive to select appropriate securities.

In 2006, Paulson & Co. indicated its interest in positioning itself for a decline in housing prices. The firm structured a synthetic CDO through which Paulson could benefit from a decline in the value of the underlying reference securities. Those on the other side of the transaction, IKB and ACA Capital Management, the portfolio selection agent, could benefit from an increase in the value of the securities. ACA had a long established track record as a CDO manager. As of May 31, 2007, ACA was managing 26 outstanding CDOs with underlying portfolios consisting of $17.5 billion of assets.

IKB, ACA and Paulson all provided their input regarding the composition of the underlying securities. ACA ultimately and independently approved the selection of 90 Residential Mortgage Backed Securities (RMBS), which it stood behind as the portfolio selection agent and the largest investor in the transaction.

The offering documents for the transaction included every underlying reference mortgage security.

The offering documents for each of these RMBS in turn disclosed detailed information concerning the mortgages held by the trust that issued the RMBS.

Any investor losses resulted from the massive decline of the broader subprime mortgage market, not because of which particular securities ended up in the reference portfolio or how they were selected.

The transaction was not created as a way for Goldman Sachs to short the subprime market. To the contrary, Goldman Sachs retained a substantial long position in the transaction and lost money as a result.

Questions and Answers

Who were the investors in this transaction?
The investors in the transaction were ACA Capital Management, a well-recognized collateral manager and investor in CDOs, and IKB, then believed to be one of the most highly-sophisticated CDO investors in the world.

What is a synthetic CDO?
A synthetic CDO has characteristics much like that of a futures contract, requiring two counterparties to take different views on the forward direction of a market or particular financial product, one short and one long. A CDO is a debt security collateralized by debt obligations, including mortgage-backed securities in many instances. These securities are packaged and held by a special purpose vehicle (SPV), which issues notes that entitle their holders to payments derived from the underlying assets. In a synthetic CDO, the SPV does not own the portfolio of actual fixed income assets that govern the investors’ rights to payment, but rather enters into CDSs that reference the performance of a portfolio. The SPV does hold some separate collateral securities which it uses to meet its payment obligations.

What are the implications of this SEC action for the overall CDO market?
The SEC complaint is related to a single transaction in 2007 and involves a highly particularized set of alleged facts. It would not appear to have broad ramifications for the CDO market generally.

Who selected the securities that ended up in this particular portfolio?
ACA had the sole right and responsibility to select the portfolio and it in fact did so. As part of the process, ACA received input from other transaction participants. ACA had served as portfolio selection agent or collateral manager for numerous other transactions, and no doubt was accustomed to an interactive selection process. ACA used its own expertise and models in scrutinizing and approving the referenced securities. ACA subjected the securities proposed for inclusion in the portfolio to its own proprietary models and analysis.

What is the firm’s role in facilitating such transactions?
Goldman Sachs acts as a market intermediary through which its clients can take long or short positions on the reference securities. Goldman Sachs will often assume the opposite side of a client’s position to complete a transaction. As fully disclosed to investors in the offering materials in this transaction, the firm can then hold or sell that position to increase, reduce or eliminate its own exposures.

Did investors have adequate disclosure?

Extensive, objective disclosures were contained in the offering documents. Investors had all the information they needed to understand and evaluate the reference securities.

What was the role of ABN Amro / RBS in this transaction?
ABN intermediated a $909 million credit default swap referencing the portfolio between Goldman Sachs and ACA. ABN assumed the credit risk that ACA might not be able to pay if its obligations under the credit default swap came due. When the portfolio suffered writedowns, ACA ultimately was not able to pay the amount due on the credit default swap, and ABN made payment.


Deals of the Day: After Hitting Goldman, SEC Looks at Other Deals

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

Goldman, Goldman, Goldman

Who’s next? The SEC — after having hit Goldman with a civil fraud charge — is investigating whether other mortgage deals arranged by some of Wall Street’s biggest firms may have crossed the line into misleading investors. [WSJ]
Related: Goldman officials said were stunned by the bombshell civil fraud suit lodged against it Friday, with most having learned about it from news reports. [WSJ]
Related: Goldman is mobilizing for a counterattack against the U.S. government’s fraud accusations amid mounting concerns the firm could lose business to Wall Street rivals. [WSJ]
Related: What ACA knew and how it carried out both its roles—as an independent analyzer of the mortgage bonds’ risk and, in effect, as an investor via its insurance arm—are key issues in the SEC’s allegations and theory of the case. [WSJ]

Related: After helping Paulson & Co. score $20 billion with a bet against housing, Paolo Pellegrini is a key character in the lawsuit against Goldman Sachs. [WSJ]
Related: Was an SEC investigation into possible fraud at Goldman Sachs material to the Wall Street giant’s investors? The stock-market verdict on that score was pretty clear. [WSJ]
Related: Bank risk is back on the table. By suing none other than Goldman Sachs for fraud, the SEC has laid down a challenge to firms with large, often opaque trading operations. [WSJ]
Related: The media is reacting to the GOldman complaint as the Rosetta Stone that finally exposes the Wall Street perfidy and double-dealing behind the financial crisis. The WSJ’s editorial board’s reaction is different: Is that all there is? [WSJ]

Across the pond: The U.K. FSA is examining a $1 billionn lawsuit filed by its U.S. counterpart as the bank prepares to pay £3.5 billion in bonuses. [Times of London]
Related: Goldman is poised to reignite controversy over bankers’ bonuses by paying its staff more than £3.5 billion for just three months’ work. [Times of London]

Mergers & Acquisitions

Miramax: Weinstein Co. moved closer to acquiring Miramax Films from Disney, a deal that would carry emotional and financial resonance for Bob and Harvey Weinstein. [WSJ]
Related: Miramax and the Weinstein brothers have seen better days, and those days were when they were still together. [WSJ]

NAB-AXA: Australia’s competition regulator opposed National Australia Bank’s 13.29 billion Australian dollar (US$12.3 billion) plan to take over AXA Asia Pacific, a surprise decision that may pave the way for rival AMP Ltd. to renew its offer for the target. [WSJ]

Prudential-AIA: Regulators in South Korea and Vietnam are the only ones among those across Asia examining Prudential’s $35.5 billion bid for AIG’s Asian life-insurance business that are focusing on the antitrust implications. [WSJ]

Airline M&A: As talk of big mergers returns, the question is whether bigger is better. [NY Times]

Cornell: GEO Group agreed to buy rival prison operator Cornell Companies for about $385 million plus debt as demand strengthens in the private correctional and detention markets. [WSJ]

Macarthur Coal: Peabody Energy’s $3.8 billion bid for Macarthur Coal (MCC.AX) gained traction on Monday as one of two rival deals involving the Australian miner hit the skids. [Reuters]

Financial Institutions

Citigroup: The giant bank reported a first-quarter profit of $4.4 billion as trading revenue offset losses from failed loans. The banking giant said loan losses fell for the third consecutive quarter. [WSJ]

Countrywide: Federal criminal investigators looking into the collapse of Countrywide Financial have been calling witnesses before a grand jury, suggesting the case could be moving closer to a resolution. [WSJ]

Bhattal’s Goal — Keep Lehman Talent: Nomura’s Jasjit “Jesse” Bhattal aims to stem the defections of non-Japanese talent who joined with him from Lehman Brothers. But he sees continued losses before the situation stabilizes. [WSJ]

MUFG: A unit of Mitsubishi UFJ Financial Group, UnionBanCal Corp., has taken over failed Tamalpais Bank, based in northern California. [WSJ]

Capital Market

IPOs: Six initial public offerings are on tap this week, but there is no great expectation for any runaway performance from these deals. [WSJ]

People & Players

Nathaniel Rothschild: The former co-president of Atticus Capital and scion of the Rothschild banking dynasty is seeking to raise $1.15 billion for an investment vehicle aimed at making an acquisition in the mining sector. [WSJ]


SEC v. Goldman: Goldman Sachs’ Statement — The Second Take

The SEC charged Goldman Sachs and one of its vice presidents with defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages.

Goldman in its initial release said only that the charges were “completely unfounded in law and fact” and that it would “vigorously contest them and defend the firm and its reputation.”

That response was criticized in some quarters as weak. But by the late afternoon, Goldman had issued a stronger defense. Below is Goldman’s second news release responding to the charges:

***

NEW YORK–(BUSINESS WIRE)–April 16, 2010– The Goldman Sachs Group, Inc. (NYSE: GS) said today:

We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact.

We want to emphasize the following four critical points which were missing from the SEC’s complaint.

– Goldman Sachs Lost Money On The Transaction. Goldman Sachs, itself, lost more than $90 million. Our fee was $15 million. We were subject to losses and we did not structure a portfolio that was designed to lose money.

— Extensive Disclosure Was Provided. IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities. The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side.

— ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions. ACA had the largest exposure to the transaction, investing $951 million. It had an obligation and every incentive to select appropriate securities.

— Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SEC’s complaint accuses the firm of fraud because it didn’t disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa.

– Goldman Sachs never represented to ACA that Paulson was going to be a long investor.

Background

In 2006, Paulson & Co. indicated its interest in positioning itself for a decline in housing prices. The firm structured a synthetic CDO through which Paulson benefitted from a decline in the value of the underlying securities. Those on the other side of the transaction, IKB and ACA Capital Management, the portfolio selection agent, would benefit from an increase in the value of the securities. ACA had a long established track record as a CDO manager, having 26 separate transactions before the transaction. Goldman Sachs retained a significant residual long risk position in the transaction

IKB, ACA and Paulson all provided their input regarding the composition of the underlying securities. ACA ultimately and independently approved the selection of 90 Residential Mortgage Backed Securities, which it stood behind as the portfolio selection agent and the largest investor in the transaction.

The offering documents for the transaction included every underlying mortgage security. The offering documents for each of these RMBS in turn disclosed the various categories of information required by the SEC, including detailed information concerning the mortgages held by the trust that issued the RMBS.

Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities ended in the reference portfolio or how they were selected.

The transaction was not created as a way for Goldman Sachs to short the subprime market. To the contrary, Goldman Sachs’s substantial long position in the transaction lost money for the firm.

The Goldman Sachs Group, Inc. is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.


Before the Goldman-SEC Suit, There Was ‘The Greatest Trade Ever’

The SEC has charged Goldman Sachs Group with defrauding investors, alleging that Goldman let a big hedge fund fill a financial product with risky subprime mortgages and then failed to disclose that to the product’s buyers.

John Paulson was the hedge-manager and the charges concern his famous trade to short the U.S. housing market–a trade that netted him nearly $4 billion. Paulson wasn’t named in the complaint. The SEC complaint isn’t the first time the details of the trade have come out. The Wall Street Journal’s Gregory Zuckerman in his book, “The Greatest Trade Ever: The Behind-The-Scenes Story of How John Paulson Defied Wall Street and Made Financial History” (Random House/Broadway Business, Nov. 2009).

Below is excerpt from the book concerning the trade:

* * *

JOHN PAULSON, focused on creating a huge trade, soon took a controversial step that would lead to some resentment for his role in indirectly contributing to more toxic debt for investors.

Paulson and Pellegrini were eager to find ways to expand their wager against risky mortgages; accumulating it in the market sometimes proved a slow process. So they made appointments with bankers at Bear Stearns, Deutsche Bank, Goldman Sachs, and other firms to ask if they would create CDOs that Paulson & Co. could essentially bet against.

Greatest Trade

Paulson’s team would pick a hundred or so mortgage bonds for the CDOs, the bankers would keep some of the selections and replace others, and then the bankers would take the CDOs to ratings companies to be rated. Paulson would buy CDS insurance on the mortgage debt and the investment banks would find clients with bullish views on mortgages to take the other side of the trades. This way, Paulson could buy protection on $1 billion or so of mortgage debt in one fell swoop.

Paulson and his team were open with the banks they met with to propose the idea.

“We want to ramp it up,” Pellegrini told a group of Bear Stearns bankers, explaining his idea.

Paulson and Pellegrini believed the debt backing the CDOs would blow up. But Pellegrini argued to his boss that they should offer to buy the riskiest slices of these CDOs, the so-called equity pieces that would get hit first if problems resulted. These pieces had such high yields that
they could help pay the cost of buying protection on the rest of the CDOs, Pellegrini said, even though the equity slices likely would become worthless over time, as the debt backing the CDO fell in value. And if their analysis proved wrong and the CDOs held up, at least the equity investment would lead to profits, Pellegrini said.

“We’re willing to buy the equity if you allow us to short the rest,” Pellegrini told one banker.

To try to protect themselves, the Paulson team made sure at least one of the CDOs was a “triggerless” deal, or a CDO crafted to be more protective of these equity slices by making other pieces of the CDO more likely to take early hits. Paulson’s goal was to make the equity piece a bit safer, but this step made the other parts of the triggerless CDO even more dangerous for anyone with the gumption to buy them.

He and Paulson didn’t think there was anything wrong with working with various bankers to create more toxic investments. Paulson told his own clients what he was up to and they supported him, considering it an ingenious way to grow the trade by finding more debt to short. After all, those who would buy the pieces of any CDO likely would be hedge funds, banks, pension plans, or other sophisticated investors, not momand-pop investors. And if these investors didn’t purchase the newly created CDOs, they’d likely buy another similar product since there were more than $350 billion of CDOs at the time.

However, at least one banker smelled trouble and rejected the idea. Paulson didn’t come out and say it, but the banker suspected that Paulson would push for combustible mortgages and debt to go into any CDO, making it more likely that it would go up in flames. Some of those likely to buy the CDO slices were endowments and pension plans, not just deep-pocketed hedge funds, adding to the wariness.

Scott Eichel, a senior Bear Stearns trader, was among those at the in vestment bank who sat through a meeting with Paulson but later turned down the idea. He worried that Paulson would want especially ugly mortgages for the CDOs, like a bettor asking a football owner to bench a
star quarterback to improve the odds of his wager against the team. Either way, he felt it would look improper.

“On the one hand, we’d be selling the deals” to investors, without telling them that a bearish hedge fund was the impetus for the transaction, Eichel told a colleague; on the other, Bear Stearns would be helping Paulson wager against the deals.

“We had three meetings with John, we were working on a trade together,” says Eichel. “He had a bearish view and was very open about what he wanted to do, he was more up front than most of them.

“But it didn’t pass the ethics standards; it was a reputation issue, and it didn’t pass our moral compass. We didn’t think we should sell deals that someone was shorting on the other side,” Eichel says.

For his part, Paulson says that investment banks like Bear Stearns didn’t need to worry about including only risky debt for the CDOs because “it was a negotiation; we threw out some names, they threw out some names, but the bankers ultimately picked the collateral. We didn’t
create any securities, we never sold the securities to investors. . . . We always thought they were bad loans.”

Besides, every time he bought subprime-mortgage protection, someone had to be found to sell it to him, Paulson notes, so these big CDOs were no different.

Indeed, other bankers, including those at Deutsche Bank and Goldman Sachs, didn’t see anything wrong with Paulson’s request and agreed to work with his team. Paulson & Co. eventually bet against a handful of CDOs with a value of about $5 billion.

Paulson didn’t sell any of these products to investors. Some investors were even consulted as the mortgage debt was picked for the CDOs to make sure it would appeal to them. And these deals were among the easiest for an investor to analyze, if they so chose, because they were “unmanaged” CDOs, or those in which the collateral was chosen at the outset and not adjusted later on like other CDOs. It wasn’t his fault that others were willing to roll the dice.

A few other hedge funds also worked with banks to create CDOs of their own that these funds could short—so Paulson wasn’t doing anything new. Nor did Paulson’s moves create more troubled mortgages or saddle borrowers with additional losses—the deals were CDOs composed
of CDS contracts, rather than actual mortgage bonds.

“We provided the collateral” for the CDOs, Paulson acknowledges. “But the deals weren’t created for us, we just facilitated it; we proposed recent vintages of mortgages” to the banks.

But some investors later would complain that they wouldn’t have purchased the CDO investments had they known that some of the collateral behind them was chosen by Paulson and that he would be shorting it. Others argued that Paulson’s actions indirectly led to more dangerous CDO investments, resulting in billions of dollars of additional losses for those who owned the CDO slices when the market finally cratered.

In truth, Paulson and Pellegrini still were unsure if their growing trade would ever pan out.

They thought the CDOs and other risky mortgage debt would become worthless, Paulson says. “But we still didn’t know.”

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Later…

Paulson & Co. had bet against about $5 billion of CDOs and made more than $4 billion from these trades—including $500 million from a single transaction—according to the firm’s investors and an employee of the firm. One of the biggest losers, however, wasn’t any investor on the other side. It was the very bank that worked with Paulson on many of the deals: Deutsche Bank. The big bank had failed to sell all of the CDO deals it constructed at Paulson’s behest and was stuck with chunks of toxic mortgages, suffering about $500 million of losses from these customized transactions, according to a senior executive of the German bank.

These were some of Paulson & Co.’s largest scores.