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Bank Deals Similar to Goldman Sach’s Gone Awry

Other Major Banks Participated, Too?

By Marian Wang, ProPublica – April 16, 2010 1:36 pm EDT

As you may have heard, or read on this ME-P, Goldman Sachs is being sued for fraud [1] by the Securities and Exchange Commission [2] for allegedly misleading investors about a deal that Goldman helped structure and sell. In the civil suit, the SEC specifically faulted Goldman for failing to disclose that a hedge fund was helping create the investment while betting big the deal would fail.

According to the SEC, Goldman Sachs knew about the hedge fund’s bets, knew it played a significant role in choosing the assets in the portfolio, and yet did not tell investors about it. (Goldman Sachs has called the SEC’s accusations “completely unfounded in law and fact.” And in another more detailed statement [3], it said it “did not structure a portfolio that was designed to lose money.”) 

[picapp align=”none” wrap=”false” link=”term=Goldman+Sachs&iid=8541566″ src=”0/4/f/8/The_Goldman_Sachs_7d6f.jpg?adImageId=12513388&imageId=8541566″ width=”380″ height=”568″ /]

In ProPublica

As we reported at ProPublica last week, many other major investment banks were doing a similar thing [4].

Investment banks including JPMorgan Chase [5], Merrill Lynch [6] (now part of Bank of America), Citigroup, Deutsche Bank and UBS also created CDOs that a hedge fund named Magnetar was both helping create and betting would fail. Those investment banks marketed and sold the CDOs to investors without disclosing Magnetar’s role or the hedge fund’s interests.

Here is a list of the banks that were involved [7] in Magnetar deals, along with links to many of the prospectuses on the deals, which skip over Magnetar’s role. In all, investment banks created at least 30 CDOs with Magnetar, worth roughly $40 billion overall. Goldman’s 25 Abacus CDOs — one of which is the basis of the SEC’s lawsuit — amounted to $10.9 billion [8].

One reporter Jake Bernstein explained the investment banks’ disclosure failures on Chicago Public Radio’s This American Life [9]:

On the Magnetar Hedge Fund

The role of Magnetar, both as equity investor and in their bets against the very CDOs they helped create were not disclosed in any way to investors in the written documents about the deals. Not the marketing materials, not the prospectuses, not in the hundreds of pages that an investor could get to see information about the deal was it disclosed that it was in fact Magnetar who’d helped create the deal, and who’d bet against.

That is, of course, along the lines of what the SEC is suing Goldman Sachs for now. The SEC’s suit also says CDOs like the ones Goldman built “contributed to the recent financial crisis by magnifying losses associated with the downturn in the United States housing market.”

Notably, the SEC did not sue the hedge fund [10] involved in Goldman’s Abacus deals — Paulson & Co. — or its manager, John Paulson. Instead, it’s going after Goldman. And as we pointed out in our reporting, there’s no evidence that what Magentar did was illegal [11].


We’ve called the major banks involved in Magnetar CDO deals to see if they were concerned about similar lawsuits. Thus far, Bank of America, Citigroup, Deutsche, Wells Fargo (which bought Wachovia) and UBS have responded and have all declined our requests for comment. Here is Magnetar’s response [12] to our original reporting.


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10 Responses

  1. Oh No … Not Others Too?

    Accusations that venerated investment bankers at Goldman Sachs defrauded customers who bought risky subprime mortgages have only just begun to reverberate through the financial world.


    Now are other banks implicated, too?



  2. Warren Buffett Takes $1 Billion Hit As SEC Charges Goldman Sachs

    He can’t be happy now that the SEC is charging Goldman with fraud.




  3. Charges Aside – What About Goldman’s Nondisclosure of a Potential Lawsuit?

    In a recent conference call, Goldman Sachs’ co-general counsel Greg Palm said the firm was “somewhat surprised” by the SEC’s civil suit last week, since “no one had told us in advance.”

    Typically, when the SEC files a lawsuit, it gives companies advance notice, so they can either settle the case quickly or brace themselves for a PR hit. In this case, the SEC didn’t give Goldman the courtesy.

    Link: http://www.propublica.org/ion/blog/item/charges-aside-was-goldmans-non-disclosure-of-potential-lawsuit-material

    Source: ProPublica


  4. Sar-Box and Warren Buffet

    We usually don’t associate Warren Buffet with whistleblowers, in part because we assume the Oracle of Omaha’s integrity extends across his empire.

    But, he has unfortunately just been embroiled in another saga that features a former executive at Forest River, an RV manufacturer that was bought by Berkshire Hathaway for $800 million, who fancies himself a whistleblower.


    Poor Warren has been taking the hits recently, hasn’t he!



  5. Goldman Sachs Points to Magnetar Trades in Its Defense
    by Marian Wang, ProPublica – April 19, 2010 4:16 pm EDT


    Last week, when news broke of the SEC’s lawsuit against Goldman Sachs—in which the bank was accused of failing disclose to investors that a hedge fund had helped stock a Goldman CDO and then bet against it—we pointed out that what Goldman did is quite similar to what other major investment banks seem to have done [1] with the hedge fund Magnetar. (Goldman denies [2] that its investments were built to fail. Magnetar also denies [3] it was betting against CDOs it helped create.)

    As it turns out, Goldman Sachs itself beat us to pointing out those similarities.
    In documents [4] Goldman submitted [5] to the SEC in September 2009, after the regulator officially notified Goldman of possible civil charges, the investment bank argued that other investment banks also hadn’t fully disclosed [5] to CDO investors the involvement of third-party hedge funds, namely Magnetar.

    In a section entitled, “Market Practice Did Not Entail Disclosure of a Short Investor’s Participation,” Goldman pinpointed non-disclosure by other investment banks [5] in several Magnetar CDO deals, including Auriga and Norma.

    Here’s what Goldman wrote about Merrill’s disclosures in the Auriga deal:

    Goldman Sachs understands that the Initial Preferred Securityholder was Magnetar Capital LLC (“Magnetar”), but this information is not disclosed in the offering circular. Goldman Sachs does not know the extent to which Magnetar played a role in the selection of the Auriga portfolio, and this too is not disclosed in the offering circular. In fact, other than listing 18 pages of “eligibility criteria” (id. at 143-161), which state in general terms what the portfolio may contain, the Auriga offering circular does not mention the contents of the portfolio at all.

    Goldman also made the same point about Merrill’s failure to disclose Magnetar’s role in creating Norma, a deal we’ve written about [6]. (The Wall Street Journal also had a detailed piece [7] on Norma, in 2007.) From Goldman’s letter to the SEC:

    The Norma CDO, which also was an actively managed transaction underwritten by Merrill Lynch & Co., contained disclosures that were materially similar to those used in Auriga. (Norma Offering Circular at 56, 67.) We understand that Magnetar was the “Initial Preference Shareholder”6 for the Norma transaction, but this information is not disclosed in the offering circular. Similarly, we do not know whether Magnetar played a role in the selection of the Norma portfolio, and this too is not disclosed in the offering circular.

    Goldman has consistently maintained that not disclosing a hedge fund’s bets against a CDO was “normal business practice [2],” and has cited other examples of nondisclosure to buttress its point. It remains to be seen whether this defense will work—or whether the SEC will simply go after the others as well.

    Source: http://www.propublica.org/ion/blog/item/sec-rebuked-for-regulatory-failure-with-lehman-brothers
    Source: http://www.propublica.org/ion/podcast/item/bernstein-and-eisinger-on-the-magnetar-trade


  6. Crucial investor not targeted in Goldman suit


    John Paulson is in the spotlight after making billions betting on subprime products.



  7. Did you know that the CEO of Goldman Sachs and other executives from several Wall Street powerhouses will be coming before Congress 10 days after the government accused the firm of fraud?


    But … is this too little … too late?



  8. Did you here about Goodman-Sachs?

    Goldman shares plunge this weekend on gossip of a possible criminal probe.


    The brokerage, already facing civil charges, could also face criminal counts.
    Well, what do you think about that?



  9. Of Course … He Does

    Warren Buffett just launched a forceful defense of Berkshire Hathaway Inc’s $5 billion investment in Goldman Sachs Group Inc and the investment bank’s embattled chief executive, Lloyd Blankfein.




  10. A Federal Regulator Is Probing Wells Fargo’s Mortgage Practices

    A consumer watchdog agency is following up on ProPublica’s reports that the scandal-ridden bank improperly charged fees to customers from Los Angeles to Oregon. Meanwhile, the bank is conducting its own inquiry.




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