By Pam Martens: July 16, 2013
There are two parties to the alleged crime of Fabrice Tourre who are not facing a jury trial this week in the Southern District of New York: Goldman Sachs and John Paulson.
The alleged crime involves a deal called ABACUS which was designed to fail with the knowledge of Goldman and Paulson and Tourre — but sold to investors as a worthy investment.
Goldman Sachs earlier this morning reported second quarter profits of $1.93 billion. It paid the government a fine of $550 million for the ABACUS deal back in July 2010, without admitting or denying guilt, and went on about its business of minting money.
Paulson was never charged officially by the government but he was named in the Securities and Exchange Commission’s outline of the crime. Thanks to New York University, where he serves as a Trustee, Paulson is actually being held up as an exemplary figure of finance. According to NYU’s Stern School of Business alumni magazine of Spring/Summer 2010, “the School has named the first floor lobby of Tisch Hall and the School’s auditorium in his honor. These spaces are prominent locations for hosting business and policy conferences as well as serve as central community hubs for students and returning alumni.”
The trial is all over the media today with Paulson’s name prominently mentioned. One can only wonder what message this is sending to the impressionable young minds at NYU.
On April 16, 2010, when the Securities and Exchange Commission brought its charges against Goldman and Tourre, this is what it had to say about Paulson’s involvement in the infamous 2007 ABACUS deal:
“The SEC alleges that one of the world’s largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.”
The SEC complaint goes on: “…after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS [Residential Mortgage Backed Securities] portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.’s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.”
According to the SEC’s complaint, Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By October 2007, 83 percent of the bonds in the portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded. The SEC estimated that investors lost more than $1 billion in the deal. It’s estimated that Paulson made $1 billion.
One of the lawyers representing Tourre in his lonely trial is Pamela Chepiga from the London derivatives powerhouse Allen & Overy — the law firm that signed off on the Structured Investment Vehicles (SIVs) that crashed Citigroup and made it a ward of the taxpayer. (Allen & Overy has also listed Goldman Sachs as a significant client in the past.)
Elizabeth Collett, a lawyer at Allen & Overy during the early days of Wall Street’s crisis in 2007, describes the firm’s involvement as follows on their web site:
“In the early Autumn of 2007 the US Treasury called in a number of the biggest US investment banks and asked them to come up with a solution to the problem. Citibank, the largest of them, and the market leader in terms of managing SIVs, took on the challenge. Given A&O’s wealth of experience in advising on SIVs and, in particular, as Citibank’s English counsel on all the SIVs managed by them, we were the natural choice to advise and were therefore the first to be instructed…
“What came out of Citibank’s proposals, developed with our advice, was the Master Liquidity Enhancement Conduit (MLEC or, as the press dubbed it, the ‘Super-SIV’). I was the lead associate in the A&O team, working with five partners and a number of other associates. I was involved at every stage including co-ordinating the A&O team, drafting parts of the term sheet, participating in conference calls to brainstorm the structure, reviewing and commenting on transaction documents and preparing draft agreements. Over the following two months the media coverage of the transaction gathered momentum (unsurprisingly since it was intended as a $100 billion solution to the SIV crisis) until there were almost daily reports on its progress in the Financial Times and the Wall Street Journal. It was fascinating to be working on such a high profile and politically sensitive transaction, and the media attention highlighted the fact that Allen & Overy is at the very forefront of the legal world in capital markets.”
The $100 billion Super-SIV didn’t fly. Instead the U.S. taxpayer was involuntarily tapped for $700 billion in the Troubled Asset Relief Program (TARP). Allen & Overy, you can be sure, was paid for their work any way.
Rounding out the corporate-esque courtroom is Judge Katherine B. Forrest. Through some magical feat by Senator Charles (Chuck) Schumer, Forrest escaped the fate of so many other nominations by President Obama to the Federal bench – the very important Federal bench in the Southern District of New York which hears almost all of the important Wall Street cases.
Instead of having her nomination stalled for years by Republicans, Forrest simply sailed through her confirmation hearing. Forrest hails from the powerful corporate law firm, Cravath, Swaine & Moore LLP where she represented large corporations in commercial litigation for 20 years.
In October 2010, Forrest left Cravath to join the U.S. Deparment of Justice. After a mere seven months of moving through the revolving door of Cravath to the U.S. Justice Department, on the recommendation of Senator Schumer, President Obama nominated Forrest for a lifetime appointment to sit as a judge in the Southern District of New York. The U.S. Senate confirmed Forrest in a voice vote on October 13, 2011.
Cravath has two other former colleagues sitting on the Federal bench in Manhattan: Deborah Batts, also in the Southern District of New York, and John Gleeson, in the Eastern District. Earlier this month, Gleeson signed off on a deferred prosecution agreement brought by the U.S. Department of Justice against HSBC for engaging in money laundering for Mexican and Colombian drug cartels.