Goldman Prepares a More Aggressive Defense
The Washington Post has obtained confidential documents prepared by Goldman's senior management. They detail a set of defenses against SEC charges that Goldman committed fraud in its marketing of a mortgage-backed derivatives deal called Abacus.
The Post reports: "The Goldman paper describes debates among top executives in 2006 and 2007 over whether the firm should make investment decisions based on the belief that the mortgage market would continue to prosper. The document details meetings and emails that ultimately resulted in a decision to reduce the company's exposure to the mortgage market, especially subprime loans, by making new investments that would pay off if housing prices fell."
The paper adds "The document also reprises Goldman's frequent explanation that it was not investing its own money in financial transactions to make a trading profit but to help investors who wanted to do a deal and could not easily find someone else to trade with. That role, commonly played by investment banks, is known as being a market maker. "
The Post didn't attach that file of the documents to its article.
Trying to Prevent Client Defections
The case has taken several turns as the media and legal experts try to make out what Goldman's next moves will be. The SEC has said almost nothing about its plans for the case. It has been criticized because the vote to charge Goldman was along party lines as Democratic commissioners voted three to two against their Republican counterparts. But it's difficult to see how this would sway a court decision.
Goldman has reached out to employees and clients. The Financial Times reported that CEO Blankfein had a series of calls with major customers in which he vigorously rejected the SEC complaints. The charges state: "GS&Co marketing materials for ABACUS 2007-AC1 – including the term sheet, flip book and offering memorandum for the CDO – all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC ("ACA"), a third-party with experience analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. ("Paulson"), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process."
The interesting thing about the Goldman public relations retaliation against the SEC is that it will almost certainly have no effect on a court -- but may save it from clients defection for now. Still, if the case against the investment bank goes badly, the delay in defections will only be temporary.