British taxpayer sucker in alleged Goldman fraud (update x8)

by David Steven | Apr 16, 2010 | Economics and development, North America, UK

A great spot from Reuters’ Peter Thal Larsen. According to the SEC’s complaint against Goldman Sachs, Royal Bank of Scotland took the bulk of the losses  when Goldman’s Abacus CDOs went toxic (Felix Salmon has a good summary of the case here):

In late 2007, ABN was acquired by a consortium of banks that included the Royal Bank of Scotland (“RBS”). On or about August 7, 2008, RBS unwound ABN’s super senior position in ABACUS 2007-AC1 by paying GS&Co $840,909,090.  Most of this money was subsequently paid by GS&Co to Paulson.

RBS was bailed out by the taxpayer in October 2008 – making the British taxpayer the mug in Goldman’s alleged fraud.

Update: Here’s how Goldman vice-president, Fabrice Tourre, saw things:

More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!

By my rough reckoning, fabulous Fab cost every UK taxpayer 20 quid or so…

Update II: At the heart of the accusation against Goldman is that John Paulson’s hedge fund persuaded the great vampire squid to base its CDOs on lots of super-crappy mortgage bonds, allowing Paulson to bet against the US housing market. Much of RBS’s money ended up in Paulson’s pocket.

What is especially delicious about this is that Paulson then made another killing betting against RBS’s shares:

New York-based Paulson, who made more than $3bn by betting against the US housing market, now appears to be profiting from positions placed on the assumption that bank shares would tumble in the aftermath of the market chaos caused by the demise of the sub-prime mortgage industry.

His hedge fund, Paulson & Co, was one of the few to trade through the ban imposed on short-selling by the Financial Services Authority in September to protect the rescue takeover of HBOS by Lloyds TSB. On the basis of the disclosures that his company has made since then, the Guardian estimates Paulson is likely to have made a profit of £100m – and possibly more – after making around 240p on each of the RBS shares he sold.

Update III: Probably not the best timing for Republicans to signal they’re going to filibuster the US financial regulation bill.

Update IV: Who was the underwriter for RBS’s rights issue in Spring 2008 when its ill-advised acquisition of ABN Amro was beginning to drag the bank down? Goldman Sachs. (It was largely shut out of the October bailout, though. Not hard to work out why.)

Update V: From The Big Short:

Paulson was… in some ways, a Wall Street outsider. “I called Goldman Sachs to ask them about Paulson,” said one rich man whom Paulson had solicited for funds in mid-2006. “They told me he was a third-rate hedge fund guy who didn’t know what he was talking about.”

And of course, Goldman was betting on CDOs itself, not just passing them onto Paulson and other investors who believed a crash was coming:

Goldman was in the position of selling bonds to its customers [the suckers: ABN, AIG etc] created by its own traders, so they might bet against them…Today, Goldman Sachs is, to put it mildly, unhelpful when asked to explain what it did, and this lack of transparency extends to its own shareholders.

“If a team of forensic accountants went over Goldman’s books, they’d be shocked at just how good Goldman is at hiding things,” says one former AIG FP employee, who helped to unravel the mess, and who was intimate with his Goldman counterparts.”

Surely, there will be more charges from the SEC once it gets its teeth into the business Goldman did with AIG. I reckon this is only an amuse bouche to pave the way for a much bigger onslaught on the bank.

Update VI: Republicans double down and try to tie Goldman to the Democrat plan to regulate Wall Street:

“These are very serious charges against a key supporter of President Obama’s bill to create a permanent Wall Street bailout fund,” [House Minority Leader John] Boehner said Friday in the statement. “Despite President Obama’s rhetoric, his permanent bailout bill gives Goldman Sachs and other big Wall Street banks a permanent, taxpayer-funded safety net by designating them ‘too big to fail.’  Just whose side is President Obama on?”

Update VII: Finally, word from the FSA. And Gordon Brown wants a public enquiry:

I’m shocked at this moral bankruptcy, this is probably one of the worst cases I have seen.
It makes me absolutely determined we are going to have a new global constitution for the banking system,” he said.

I cannot allow this to continue, everything I find out convinces me we have to go in deeper and I believe I’m the man to deal with these problems of the banks. I want a special investigation done into what has happened at Goldman Sachs.

Germany is considering legal action too.

Update VIII: Convicted white collar criminal, Sam Antar (read his story), has some fascinating insights…