FMX | Connect Analysis: Goldman Allegations & Commodity Prices
FMX | Connect - (www.fmxconnect.com) - (Reported 4/19/10)
FMX Comments: We can only speculate on what happens in the capital markets short term. Perhaps the shoe is on the other foot now for GS. There may be a lot of “front-running” type behavior as players speculate on what GS positions are in Oil, Gold, Gas, etc. It may be early to think GS will unwind positions to pull in its own reigns, but these prophecies can be self fulfilling as GS knows full well being on the other side of the table often enough.
Crude Oil Forensics: Passover week, over 100k lots in crude oil were liquidated, longs exiting. This dovetails nicely into the Reuters’ allegation that GS knew it was being investigated in advance of action. That position may have already been exited, if it even existed.
Reality is; this is a watershed moment for leveraged capitalism. PIMCO’s New Normal concept has even more weight now as lesser leverage and more regulation return us to 1950s style capitalism where capital expenditures and positive cash flows are more important than growth projections. Volumes may drop in times ahead, banks will lend more locally creating an economic nationalism, and the velocity of money will slow further. Globalization may give way to partial protectionism and all fluff will be removed from assets via deleveraging. The fed won’t have to tighten. Fear will prevent good businessmen from trading as well. We think this is very deflationary. Just our two cents.
SEC Charges Goldman Sachs With Fraud On Subprime Mortgages, Paulson & Co. Implicated (via zerohedge)
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. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure
Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson’s adverse economic interests or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors...The deal closed on April 26, 2007.
Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% were on negative watch. By January 29, 2008, 99% of the portfolio had been downgraded. As a result, investors in the ABACUS 2007-AC1 CDO lost over $1 billion. Paulson’s opposite CDS positions yielded a profit of approximately $1 billion for Paulson.
By engaging in the misconduct described herein, GS&Co and Tourre directly or indirectly engaged in transactions, acts, practices and a course of business that violated Section 17(a) of the Securities Act of 1933, 15 U.S.C. §77q(a) ("the Securities Act"), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b) ("the Exchange Act") and Exchange Act Rule 10b-5, 17 C.F.R. §240.10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, civil penalties and other appropriate and necessary equitable relief from both defendants.
“The bottom line, at least according to one market observer, Michael Pento, the chief economist at Delta Global Advisors (who, BTW, correctly predicted the 2008 price collapse in raw materials) is that this [filing of charges] is not good for commodities, [as] it could [turnout to] be the case that traders stop making trades with Goldman. Paulson has been a big bettor on gold. If this fetters the ability of the fund to keep adding positions, or forces them to do some asset sales, it's going to be bad." As of Feb. 28, Goldman Sachs was the largest commodity brokerage according to CFTC data. The investment bank's shares tumbled as much as 16 percent on Friday.” –Jon Nadler of Kitco
Goldman Sachs CDS around 130 bps for the last hour or so. We could see renewed volatility near the close.
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FMX | Connect Team
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