Overview
Goldman Sachs employee and co-defendant, Fabrice Tourre, continues to deny all allegations of wrongdoing made by the US Securities and Exchange Commission (SEC) relating to the sale of the infamous Abacus CDO.
Goldman Sachs structured Abacus 2007-AC1, a synthetic CDO product, and sold it to a number of investors, including German bank IKB Deutsche Industriebank and Dutch bank ABN Amro. Within a matter of months, investors lost millions on the purchase.
So what? Millions of individual and institutional investors lose money every day in the financial markets.
The Issue
Complicating the issue is the fact that Paulson & Co. helped select the underlying assets (mortgages) for the CDO and went short, or bet against it. This means that even as purchasers of the CDO lost money, Paulson & Co. profited to the tune of $1 billion. The SEC claims that the nature of Paulson’s role was never disclosed by Goldman Sachs, who was paid millions to structure the CDO.
Should Goldman have had to explicitly disclose this to investors of the CDO?
Arguments for Goldman Sachs
- Both sides of the party were sophisticated investors. It should not have mattered whether another party was long or short on the CDO.
- Just because another party is short on an investment does not mean that they will be right. In this case, they just happened to be.
Arguments against Goldman Sachs
- Because clients rely on Goldman for advice, it is Goldman’s duty to provide sound professional advice with regards to all promoted investment products. As such, if Goldman promotes an investment product for a customer to buy, a client should be able to infer that Goldman believes the product to be a good investment.
- It is Goldman’s duty to provide transparency with regards to all promoted investment products.
In Fabrice’s testimony last week, he argued that neither he nor Goldman Sachs had a “duty to disclose any allegedly omitted information” in the marketing and sale of the CDO. However, Goldman did recently agree to pay a $550M settlement, stating that it was a “mistake” to state that the loans contained in the CDO had been selected by a third party without mentioning the role of Paulson & Co. The SEC would beg to differ.
Click below to watch Fabrice Tourre’s original testimony in April 2010
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