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Senate panel called Goldman trader before SEC suit
WASHINGTON |
WASHINGTON (Reuters) - A Senate investigations panel looking into Goldman Sachs' role in the financial crisis subpoenaed the investment bank as early as June 30, 2009, long before securities regulators sued it for fraud, according to a congressional aide.
The aide also said that the panel notified Goldman on April 5, eleven days before the action by the Securities and Exchange Commission, about who would be called as witnesses, including trader Fabrice Tourre, the only Goldman executive named as a defendant in the SEC lawsuit.
The SEC has accused Goldman and Tourre of not giving investors "vital information" about a debt security created with input from Paulson & Co, a major hedge fund, which then shorted the security.
Tourre, a 31-year-old Frenchman, was a bond trader for Goldman. He is now on paid leave in London.
There was some speculation that Tourre was called as a witness to the Senate Permanent Subcommittee on Investigations after the SEC filed its suit. The fact that he was called before then suggests the Senate panel had some of the same information that led the SEC to file its action.
Tourre's name appears on some of the emails obtained by the subcommittee during its investigation of the role played by credit raters in the financial crisis, the subject of a subcommittee hearing Friday.
The SEC's April 16 complaint included emails in which Tourre appeared to exult in the products he was creating.
"The whole building is about to collapse anytime now," he wrote to a friend. "Only potential survivor, the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created without understanding all of the implications of those monstrosities!!"
The SEC advised Goldman at least seven months ago that it was considering bringing charges against the bank. Goldman has said the SEC suit is unfounded in law and fact.
The Senate subcommittee is examining the role of Goldman and other investment banks in the securitization of mortgage products and the development, marketing and trading of products such as collateralized debt obligations (CDOs).
The panel on April 27 will take testimony from Tourre, as well as from Goldman Chief Executive Lloyd Blankfein, Chief Financial Officer David Viniar and Chief Risk Officer Craig Broderick.
Also scheduled to testify are the two Goldman traders credited with netting the company large profits during the subprime mortgage crisis -- Michael Swenson and Joshua Birnbaum. Birnbaum is no longer with the company.
Their bets against mortgage-related products in 2007 helped the investment bank weather the financial meltdown better than some of their peers such as Bear Stearns and Lehman Brothers, which did not survive the crisis.
(Reporting by Dan Margolies; Editing by Tim Dobbyn)
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Company A sells 10 mortgages to customers with an average built in interest rate of say 10%. Company A which now is collecting from customers monthly annuities on principals and interests of 10%. Company A does not want the annuities; therefore it sells the 10 mortgages to company B as a package. In doing so Company A has accepted to collect cash today from Company B but in doing so accepts a discount on the interest therefore company A now accepts say 7.5% interest instead of the 10% interest original interest.
Analysis
(1) Because company A has no long term interest of keeping the mortgages it is not concerned about the ability of the customer (who ultimately have to pay)to pay keep up with the payments over time.
(2)Company A knows that it is going to sell the individual mortgages as a pooled product therefore it squeezes as much from the customer in higher interest rates and principals (the higher the market value of the underlying asset – the house, relative to its true cost, the more attractive for company A when it tries to sell the pooled mortgages to company B.
Company B is not concerned about the quality of the individual mortgages making up the pooled investment product(CDO)because it, company B looks on the CDO as one product and not a set of discrete mortgages.
Company B needs to edge its bet against the cash it pays out to company A for the annuities it expect to collect. Therefore it takes out insurance from Company C.
Company C does not care about either the individual mortgages or the CDO, rather it looks on the ability of company C to make the fee payments for the insurance.
Some problems
In order for this pyramid to continue un abated, (a) the original customer has to pay above market prices for underlying asset (the house) and (b) the interest rates company A sold the individual mortgages to the customers have to be inherently high for the profit to be shared to each player in the pyramid.
Customer cannot afford to make monthly payments because the customers’ income has not change and the “basket of goods” the customer has to pay for from a fixed income has now become unaffordable. Customer breaks under the pressure and cannot make the monthly payments. What happens, next – the pyramid falls apart.
CDOs are a pyramid scheme setup to take money from the bottom to support the top. Take from first investor to pay second investor (take money from first payer to pay the second person and take from the third to pay the second, etc.,) CDOs are basically a Berny Madoff scheme.
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