By Pam Martens and Russ Martens: February 16, 2016
If you are not yet sufficiently repulsed by the billionaire class in New York City riding roughshod over the most basic rules of ethical conduct, consider what just happened at AIG – the too-big-to-fail insurance company that was bailed out by the taxpayer during the 2008 crisis to the eventual tune of a $182 billion commitment, while its Board had the gall to pay multi-million dollar bonuses to its disgraced executives. AIG also used its bailout money to make multi-billion dollar backdoor payments to Goldman Sachs and other Wall Street banks for credit default swap bets they had made, which AIG had insured, on dodgy subprime mortgage products.
AIG’s Board of Directors just appointed hedge fund titan, John Paulson of Paulson & Company, to its Board – despite the fact that he is named in a SEC complaint as a willful participant in the disgraceful Goldman Sachs deal that was designed to rip off investors while financially lining the pockets of Paulson and Goldman Sachs. While Paulson was not charged by the SEC, its complaint made clear he played a key role and profited greatly to the detriment of misled investors.
Adding to the outrage of this AIG Board appointment, not one major newspaper that we could find thought it was relevant to mention Paulson’s past transgressions in reporting on his Board appointment.
The SEC had this to say about Paulson’s ethics in its April 16, 2010 announcement of charges against Goldman Sachs in the now 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.”
In other words, Paulson wanted mortgages included in the deal that were prone to default so that his short bets would pay off. The SEC complaint notes further:
“…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.”
The SEC complaint says that 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 while Paulson profited by approximately the same amount.
Goldman Sachs quickly settled the matter three months later by paying $550 million and promising to, laughably, “reform its business practices.”
Exactly why the SEC didn’t extract a penalty or charge Paulson has never been made clear. A young salesman at Goldman Sachs, Fabrice Tourre, was the only person to stand trial in the matter. Tourre was found liable and agreed to pay $825,000 in fines.
Wall Street On Parade previously reported on another noxious outrage involving Paulson. While Paulson’s involvement in the ABACUS deal was splashing about in the press, NYU’s Stern School of Business announced that it had received a $20 million donation from Paulson and would name “the first floor lobby of Tisch Hall and the School’s auditorium in his honor,” noting further that those areas “are prominent locations for hosting business and policy conferences as well as serve as central community hubs for students and returning alumni.”
In other words, NYU wants to be sure John Paulson is held up as a model business leader that its students should seek to emulate.
When presidential candidate Senator Bernie Sanders tells surging crowds around the country that the business model of Wall Street is fraud, he ain’t just whistling Dixie.