April 17 2010: Message from Stoneleigh (and lots of Goldman)

Dorothea Lange TruckFarmWife November 1938
"Farm woman beside her barn door. Tulare County, California. No more horseshoes!"

Stoneleigh: The Automatic Earth is approaching a significant point in its evolution - a point where we need to increase the impact we have in order to provide a timely warning, or else.

To do that, first of all, will take more time and resources. Hence I am leaving my day job at the end of this month. It was no longer possible to do both, and I have chosen to devote my time to TAE, because that is where I feel I am needed.

The next leg of the decline is rapidly approaching and we intend to help people navigate it. We're looking at considerably expanding the site in order to accommodate what we feel is needed. Mood can turn on a dime, and when it does we should be looking at strong declines across the board, with increasing downward momentum. The global financial system is capable of seizing up in very short order, but there are always warning signals, and we intend to bring them to people's attention.

We are considering a number of options for presenting information at TAE. It is likely we will increase the frequency of posts, and make them shorter. We want to provide coverage that is more comprehensive, but more accessible at the same time. We also want to better organize the existing information so that readers can for instance more easily find the primers with our basic arguments, evidence for our position and recordings of interviews and talks (yes, there’ll be a YouTube channel).

I intend to write a book pulling together all information necessary to communicate the big picture. I want to do this as quickly as possible, but it will inevitably take time. And a book deal/advance would be good too.

In accordance with the aim of accessible information (and my personal enjoyment), I will be touring extensively in order to explain our position to people in person and give them a chance to ask as many questions as they like. I have done several talks already in the Pacific Northwest and in Ontario, and not only have people found them useful, they never seem to get enough or want to leave (not my words), and nor do I by the way.

My next talk will be in the Anderson Theatre at Hartwick College in Oneonta, NY, at 7pm on the evening of April 20. The following evening I will be speaking in Rhinebeck, NY (for details please e-mail gfcomms@gmail.com). New York City is scheduled for April 22/23, details will follow. On Sunday April 25, I will be presenting in Brockville, Ontario, at 2pm in the Brockville Public Library. 

Next month, on May 18, I will be doing a talk at the library in Tamworth, NH, more dates in that area should be known soon. I am working also on a plan for a short trip to Texas, involving either Austin, San Antonio or both. Specific details will follow nearer the time.

In June and July I will be heading to Europe for several weeks. I'll start in the UK, where 2-3 talks are tentatively booked, then travel to the Netherlands (we need contacts there still), Belgium, France and Italy. Arrangements are still fluid at this point, so if you would like me to speak somewhere, please let me know so that I can plan a sensible itinerary. The address to use for arrangements is StoneleighTravels(at)gmail(dot)com.

I recall requests for Finland, Berlin, the Czech republic and Switzerland, but I would need an email contact address and some sense of what arrangements would need to be made. Some destinations would involve a flight, due to time constraints, and would therefore be more problematic. But do send in your requests and arrangements, I'm open to anything that fits my schedule.

My talks do not need to be large affairs, and those who organize them do not need to have connections with academic institutions (as many of you seem to presume). I have presented in community centres, church halls and large living rooms. I am quite happy to speak to small groups of people informally if that is what people want. Transition Towns groups seem particularly appropriate. As long as I can cover my expenses and make a little bit of money for my efforts, I’m good.

I will also be speaking more formally at various colleges where the audiences will be larger and more organization is required. All I want to do is to get our message out so that ordinary people can save as much as possible of what they have worked hard for all their lives.

In August and September I am planning to travel in the American midwest. My initial thoughts are to visit Ohio, Wisconsin, Minnesota, Iowa, Kansas and Missouri, as these are places people have asked me to visit and are close enough together to be combined into a single round trip. I have other destinations tentatively in mind, depending on where the demand is. So far I have requests for California, Montana and Wyoming.

A major focus of this speaking tour is to help turn virtual communities into real ones. As we have pointed out many times before here at The Automatic Earth, connections with other people are what matter most in hard times. We have a virtual community of regular readers and commenters whom we very much appreciate. By traveling and bringing these people together for discussions, we can contribute to establishing groups of people in many localities who may be in a position to help each other, as they will be collectively forewarned.


Meanwhile, you can all help our efforts along by donating to the site (upper left hand corner) and/or visiting our sponsors. We need your support more than ever in our quest to expand this site and make it more valuable and more rewarding for you, our readers.


I am very much looking forward to meeting many more of you, whether you're avid readers of TAE or not.


With love,

Stoneleigh

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Ilargi: To donate, go to the sidebar at the upper left hand corner of the site. And do visit our advertisers, there’s no commitments, but you do help us if you do.


And then or course there’s the Goldman Sachs story below. I’m pretty much with Dylan Ratigan on this. But I also have to wonder how much they can shove onto one rogue trader, and get away claiming innocence. We’ll see as we go forward.

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Dylan Ratigan: SEC files civil lawsuit against Goldman Sachs

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S.E.C. Accuses Goldman of Fraud in Housing Deal
by Louise Story and Gretchen Morgenson

Goldman Sachs, the Wall Street powerhouse, was accused of securities fraud in a civil lawsuit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly intended to fail. The move was the first time that regulators had taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.

In a statement, Goldman called the commission’s accusations “completely unfounded in law and fact” and said it would “vigorously contest them and defend the firm and its reputation.” The focus of the S.E.C. case, an investment vehicle called Abacus 2007-AC1, was one of 25 such vehicles that Goldman created so the bank and some of its clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

As the Abacus portfolios in the S.E.C. case plunged in value, a prominent hedge fund manager made money from his bets against certain mortgage bonds, while investors lost more than $1 billion. According to the complaint, Goldman created Abacus 2007-AC1 in February 2007 at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst. Mr. Paulson is not named in the suit.

Goldman told investors that the bonds would be chosen by an independent manager. In the case of Abacus 2007-AC1, however, Goldman let Mr. Paulson select mortgage bonds that he believed were most likely to lose value, according to the complaint. Goldman then sold the package to investors like foreign banks, pension funds and insurance companies, which would profit only if the bonds gained value. The European banks IKB and ABN Amro and other investors lost more than $1 billion in the deal, the commission said. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio,” Robert Khuzami, the director of the commission’s enforcement division, said in a written statement.

The lawsuit could be a sign of a revitalized Securities and Exchange Commission, which has been criticized for early missteps in assessing the causes of the financial crisis. The agency appears to be tracing the mortgage pipeline all the way from the companies like Countrywide Financial that originated home loans to the raucous trading floors that dominate Wall Street’s profit machine. At a conference in New Orleans on Friday, Mr. Khuzami indicated that he was scrutinizing other deals involving mortgage securities. “We’re looking at a wide range of products,” he said at a news conference. “If we see securities with similar profiles, we’ll look at them closely.”

Shares of Goldman Sachs plunged more than 10 percent in just the first half-hour of trading after the suit was announced Friday morning. They closed down 13 percent, at $160.70, wiping away more than $10 billion of the company’s market value. Investors sold other bank stocks, as well, as rumors swirled about which other firms might become embroiled in the commission’s investigation. Next to Goldman Sachs, Deutsche Bank’s American shares had the steepest decline, falling 7 percent. Goldman issued a second statement after the market closed saying that the firm had lost money on the deal in the S.E.C. case and that it provided investors with extensive disclosure on the deal. The firm said the losses in the deal came from the overall collapse of the mortgage market, not from the way the deal was structured.

The accusations amount to a black eye for the once-untouchable Goldman Sachs, a money machine that is the epicenter of Wall Street power. For decades, its platinum reputation has attracted top investors and stock underwriting deals. Several of its former chief executives have gone on to high public office, among them Henry M. Paulson Jr., the former Treasury secretary, and Jon Corzine, the former New Jersey governor. (Henry Paulson and John Paulson are not related.)

In recent months, Goldman has been defiant in the face of criticism, repeatedly defending its actions in the mortgage market, including its own bets against it. In a letter published last week in Goldman’s annual report, the bank rebutted criticism that it had created, and sold to its clients, mortgage-linked securities that it had little confidence in. “We certainly did not know the future of the residential housing market in the first half of 2007 any more than we can predict the future of markets today,” Goldman wrote. “We also did not know whether the value of the instruments we sold would increase or decrease.” The letter continued: “Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients.’ ” Instead, the trades were used to hedge other trading positions, the bank said.

Goldman was one of many Wall Street firms that created complex mortgage securities — known as synthetic collateralized debt obligations — as the housing wave was cresting. At the time, traders like Mr. Paulson, as well as those within Goldman, were looking for ways to bet against the overheated market. For months, S.E.C. officials have been examining mortgage bundles like Abacus that were created across Wall Street. The commission has been interviewing people who structured Goldman mortgage deals about Abacus and similar instruments. The commission advised Goldman that it was likely to face a civil suit in the matter, sending the bank what is known as a Wells notice several months ago.

The S.E.C. action is a civil complaint, but it could be referred to criminal prosecutors who would have to prove that individuals intended to defraud investors. The S.E.C. focused on only one Abacus deal in its complaint, but Mr. Khuzami said in a conference call on Friday that the commission continued to look at the rest. All told, $10.9 billion of Abacus investments were sold. Mr. Tourre, the Goldman vice president named in the lawsuit, was one of the firm’s top workers running the Abacus deals, selling the investment to investors across Europe. Mr. Tourre was raised in France and moved to the United States in 2000 to earn his master’s degree in operations at Stanford. The next year, he began working at Goldman, according to his profile on the LinkedIn social network.

He rose to prominence working on the Abacus deals under a trader named Jonathan M. Egol. Mr. Egol, who is now a managing director at Goldman, is not named in the S.E.C. suit. Goldman structured the Abacus portfolios with a sharp eye on the credit ratings assigned to the mortgage bonds contained in them, the S.E.C. said. In the Abacus deal cited in the S.E.C. complaint, Mr. Paulson pinpointed those mortgage bonds that he believed carried higher ratings than the underlying loans deserved. Goldman placed insurance on those bonds — called credit-default swaps — inside Abacus, allowing Mr. Paulson to bet against the bonds while clients on the other side of the trade wagered that they would make money.

But when Goldman sold shares in Abacus to investors, the bank and Mr. Tourre disclosed only the ratings of those bonds and did not disclose that Mr. Paulson was on the other side, betting those ratings were wrong. Mr. Tourre at one point complained to an investor who was buying into Abacus that he was having trouble persuading Moody’s to give the deal the rating he desired, according to the investor’s notes, which were provided to The Times by a colleague who asked for anonymity. In seven of Goldman’s Abacus deals, the bank went to the American International Group for insurance on the bonds. Those deals have led to billions of dollars in losses at A.I.G., which received a $180 billion taxpayer rescue. The Abacus deal in the S.E.C. complaint was not one of them.

That deal was managed by ACA Management, a part of ACA Capital Holdings, which changed its name in 2008 to Manifold Capital. Goldman told investors the mortgage bond portfolio would be “selected by ACA Management,” according to the deal’s marketing document, which was given to The Times by an Abacus investor. That document says Goldman may have long or short positions in the bonds. It does not mention Mr. Paulson. ACA was not named in the suit. That firm was led to believe that Mr. Paulson was positive on mortgages, not negative, and so it did not see a problem with his involvement, the S.E.C. said. Mr. Tourre was aware of ACA’s misconception, the commission said.

In February 2007, Mr. Tourre met with both ACA and Mr. Paulson, and he sent an e-mail message to a Goldman colleague acknowledging the awkwardness of the situation. “This is surreal,” Mr. Tourre wrote. Nine days later, a Goldman colleague wrote Mr. Tourre and said, “the C.D.O. biz is dead. We don’t have a lot of time left.”

The Abacus deals deteriorated rapidly when the housing market hit trouble. For instance, in the Abacus deal in the S.E.C. complaint, 83 percent of the mortgage bonds underlying it were downgraded by rating agencies just six months later, and 99 percent had been downgraded by early 2008, according to the S.E.C. It takes time for such mortgage investments to pay out for investors who make bets against them. Each deal is structured differently, but generally, the bonds underlying the investment must deteriorate to a certain point before those who bet against the bonds get paid. By the end of 2007, Mr. Paulson’s credit hedge fund was up 590 percent..

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Goldman Sachs hit with fraud charges

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For Goldman Sachs, a Winning Bet Carries a Price
by Louise Story and Gretchen Morgenson

For Goldman Sachs, it was a relatively small transaction. But for the bank — and the rest of Wall Street — the stakes couldn’t be higher. Accusations that Goldman defrauded customers who bought investments tied to risky subprime mortgages have only just begun to reverberate through the financial world. The civil lawsuit filed against Goldman on Friday by the Securities and Exchange Commission seemed to confirm many Americans’ worst suspicions about Wall Street: that the game is rigged, the odds stacked in the banks’ favor. It is the first big case — but probably not the last, legal experts said — to delve into a Wall Street firm’s role in the mortgage fiasco.

The move against Goldman came at a particularly sensitive time for Wall Street. Washington policy makers are hotly debating a sweeping overhaul of the nation’s financial regulations, and the news could embolden those seeking to rein in the banks. President Obama on Saturday stepped up pressure for financial reform by accusing Republicans of “cynical and deceptive” attacks on the measure. The S.E.C.’s action could also hit Wall Street where it really hurts: the wallet. It could prompt dozens of investor claims against Goldman and other Wall Street titans that devised and sold toxic mortgage investments.

And it raises new questions about Goldman, the bank at the center of more concentric circles of economic and political power than any other on Wall Street. Goldman — whose controversial success has leapt from the financial pages to the cover of Rolling Stone — has fiercely defended its actions before, during and after the financial crisis. On Friday, it called the S.E.C.’s accusations “unfounded.”

Wall Street played a complex and, at times, seemingly conflicted role in the mortgage meltdown. Goldman and others worked behind the scenes, bundling home loans into investments for sale to investors the world over. Even now, more than 18 months after Washington rescued the teetering financial system, no one knows for sure how much money was lost on those investments. The public outcry against the bank bailouts was driven in part by suspicions that a heads-we-win, tails-you-lose ethos pervades the financial industry. To many, that Goldman and others are once again minting money — and paying big bonuses to their employees — is evidence that Wall Street got a sweet deal at taxpayers’ expense. The accusations against Goldman may only further those suspicions.

“The S.E.C. suit against Goldman, if proven true, will confirm to people their suspicions about the total selfishness of these financial institutions,” said Steve Fraser, a Wall Street historian and author of “Wall Street: America’s Dream Palace.” “There’s nothing more damaging than that. This is way beyond recklessness. This is way beyond incompetence. This is cynical, selfish exploiting.”

On Friday, Goldman’s stock took a beating, falling 13 percent and wiping out more than $10 billion of the company’s market value. It was a possible sign that investors fear that the S.E.C. complaint will damage Goldman’s reputation and its ability to keep its hands on so many sides of a trade — a practice that is immensely profitable for the firm. It is unclear whether the S.E.C. can prevail against Goldman. The bank has long maintained that it puts its clients first and, in a letter in its latest annual report, reiterated that position. Goldman said that it never “bet against our clients” in its trades but rather was trying to hedge against other trading positions.

Still, Wall Street analysts said Goldman and other banks, having navigated the financial crisis, might now face a new kind of risk: angry investors. Most major Wall Street banks also created collateralized debt obligations, which are at the heart of the Goldman case. C.D.O.’s, which are essentially bundles of securities backed by mortgages or other debt securities, turned out to be among the most toxic investments ever devised. “Any investor who bought these C.D.O.’s and lost a significant amount of money is probably looking at their investment and wanting to know: what were the details behind the sale?” said William Tanona, an analyst at Collins Stewart. “Will they contact the S.E.C. and say, ‘Here’s the transaction we participated in, and we’d love to know who is on the other side of it?’ ”

Among the investors were several European banks, the S.E.C. complaint said. The biggest victim was the Royal Bank of Scotland, which inherited a loss of $841 million after it took over the Dutch bank ABN Amro, which made the original investments in 2007. According to a person briefed on the matter, Royal Bank, now controlled by the British government, is studying the documents but is not yet ready to decide whether to take action to recoup some or all of the money from Goldman. Goldman faces a dilemma in its response. Wall Street firms tend to settle cases like this one, but Goldman’s statement Friday indicated it intended to dig in its heels and fight, perhaps in part to discourage suits by investors. But that strategy could set it up for a drawn-out, messy and public battle.

The S.E.C. complaint named just one Goldman employee: Fabrice Tourre, a vice president in the bank’s mortgage operation who worked on the questionable transaction. But securities lawyers say Mr. Tourre appears to be a small fish. Federal investigators may try to gain his cooperation and extend their investigation to other Goldman employees. On Friday Mr. Tourre’s lawyer did not provide a comment on the complaint. A big question is how far up this might go. The S.E.C. said the deal in its complaint had been approved by a committee at Goldman called the Mortgage Capital Committee.

“It’s typical that they’d start with someone lower down on the chain and try to exert pressure on that person,” said Bradley D. Simon of Simon & Partners, a white-collar defense lawyer in New York. “Is it really conceivable that no one else was involved in this?” As the housing market began to fracture in 2007, senior Goldman executives began overseeing the mortgage department closely, according to four former Goldman Sachs employees, who spoke on the condition of anonymity because of the sensitivity of the matter.

Senior executives routinely visited the unit. Among them were David A. Viniar, the chief financial officer; Gary D. Cohn, the president; and Pablo Salame, a sales and trading executive, these former employees said. Even Goldman’s chief executive, Lloyd C. Blankfein, got involved. Top executives met routinely with Dan Sparks, the head of the mortgage trading unit, who retired in the spring of 2008. Managers instructed several traders to sell housing-related investments. Indeed, they urged Mr. Tourre and a colleague, Jonathan Egol, to place more bets against mortgage investments, the former employees said.

A Goldman spokesman did not reply to a request for comment on these executives’ roles. It is unclear if any of the top executives knew about all of Mr. Tourre’s actions. Mr. Blankfein has already been questioned about the toxic vehicles Goldman devised and sold, even as the bank realized the housing market was in trouble. Recent public statements made by Mr. Blankfein seem to conflict with the account laid out by the S.E.C. In testimony before the Financial Crisis Inquiry Commission in January, for example, Mr. Blankfein described Goldman’s approach to dealing with its clients: “Of course, we have an obligation to fully disclose what an instrument is and to be honest in our dealings, but we are not managing somebody else’s money.”

But the S.E.C. complaint says Goldman misled investors who bought one of the bank’s so-called Abacus deals. The bank failed to tell them that the mortgage bonds that underpinned the investment had been selected by a prominent hedge fund manager who wanted to bet against the investment, the S.E.C. says. Those bonds were especially vulnerable, the commission says. The deal cost investors just over $1 billion, a relatively small deal by Wall Street standards. At a conference in New York in November, Mr. Blankfein talked about the risks to the firm’s reputation that it faced as a result of the mortgage mania and ensuing credit crisis.

“Are we worried about our image and reputation, and what are we doing to fix it? The answer, of course, is we’re very concerned about this,” Mr. Blankfein said. He added: “People understand our bona fides who deal with us.”

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Who gets hurt by toxic bonds?

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RBS lost $841 million in alleged Goldman fraud through ABN Amro aqcuisition
by Philip Aldrick

Royal Bank of Scotland was the biggest victim of the alleged sub-prime mortgage fraud orchestrated by Goldman Sachs and involving hedge fund Paulson & Co. In August 2008, the part-nationalised lender paid Goldman $841m (£545m) to close its position on the single trade. According to the US Securities & Exchange Commission, "most of this money was subsequently paid to Paulson". RBS acquired the problem trade in 2007 after buying ABN Amro, the Dutch bank that ultimately proved the cause of its downfall. RBS went on to post a £24bn loss in 2008, which led to a £45.5bn taxpayer bail-out that has left the state with an 84pc stake in the bank.
 
Following the SEC's accusations yesterday, RBS's lawyers were examining whether there would be any action to take against Goldman to recover losses. RBS found itself bearing the bulk of the losses because ABN had written insurance against the "synthetic collateralised debt obligation (CDO)" at the centre of the alleged fraud. However, according to the SEC, Goldman convinced investors to buy a poor quality CDO in the full expectation that it would collapse. Paulson, which was shorting the product, is alleged to have selected the sub-prime mortgage assets to be referenced by the "synthetic CDO" that were most likely to default.

Goldman then sold the CDO to investors to put someone on the other side of the trade without revealing Paulson's involvement. Investors would have believed the sub-prime assets to be high quality. ACA Capital, a monoline insurer that specialised in financial products, "wrapped" a $909m tranche of the CDO. In exchange for the protection, it charged investors $4.5m a year. ACA covered its position by getting ABN to "intermediate". For a $1.5m annual fee, ABN effectively took the risk of any loss if ACA was unable to pay. ACA was put into run-off in November 2007, leaving ABN with the bill for any losses. RBS acquired ABN at roughly the same time and paid off its $841m loss position the following August.

The other principal casualty was German bank IKB. Unlike ABN, IKB's involvement was fairly straightforward. It bought $150m worth of notes in the CDO, which paid annual interest. "Within months of closing [the deal], the notes were nearly worthless," the SEC said. "IKB lost almost all of its $150m investment." In total, "investors in the CDO lost over $1bn", the SEC said. "Paulson's opposite positions yielded a profit of approximately $1bn for Paulson." Goldman denies the allegations. No charges have been brought against Paulson.

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Dutch RaboBank: Merrill Committed Same Fraud as SEC Claims Goldman Did
by Chad Bray

Merrill Lynch & Co. engaged in the "same type of fraudulent conduct" that Goldman Sachs Group Inc. was accused of committing by the U.S. Securities & Exchange Commission in a lawsuit on Friday, a Dutch bank said Friday. In a letter filed in New York State Supreme Court in Manhattan on Friday, lawyers for Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, or Rabobank, said Merrill Lynch committed a similar fraud in the structuring of a $1.5 billion collateralized debt obligation, known as Norma CDO Ltd.

"The SEC charges bear directly on the sufficiency of Rabobank's complaint as Rabobank has alleged that Merrill Lynch engaged in precisely the same type of fraudulent conduct in the structuring and marketing of Norma through having failed to disclose that Norma's collateral pool had been selected to benefit short positions taken by" an equity investor in Norma, said Jonathan Pickhardt, a lawyer for Rabobank. Rabobank sued Merrill Lynch in New York state court last year, alleging it was owed about $45 million in a senior secured loan when the CDO defaulted and was liquidated in 2008. The Dutch bank claimed Merrill Lynch misrepresented that the CDO was carefully structured investment vehicle when Rabobank made a $57.7 million upfront loan in March 2007.

Rabobank claims the Norma CDO was a "dumping ground" impaired subprime assets and was structured with the help of a prized Merrill Lynch hedge fund client as a bet against the mortgage-backed securities market.
Merrill Lynch has asked for the Rabobank complaint to be dismissed, saying the risks inherent in Norma's assets were fully disclosed in the transaction documents and has failed to show Merrill committed fraud. "The two matters are unrelated and the claims today are not only unfounded but weren't included in the Rabobank lawsuit filed nearly a year ago," said William Halldin, a Merrill Lynch spokesman.

On Friday, the SEC sued Goldman Sachs in U.S. District Court in Manhattan, claiming the investment bank committed fraud by misstating or omitting key facts about a synthetic collateralized debt obligation tied to subprime mortgages. In part, the SEC claimed a hedge-fund firm designed the investment, but then bet against it and investors weren't told of the hedge-fund firm's role or its intentions. Goldman denied the allegations and said it would "contest them and defend the firm and its reputation." John Heine, a SEC spokesman, declined to comment late Friday on whether the regulator was investigating the Rabobank allegations.

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Matt Taibbi: “I Heard Whiffs of this Story” a Year Ago

Rolling Stone’s reporter Matt Taibbi talks with Bloomberg TV’s Carol Massar where he discusses SEC’s lawsuit against Goldman Sachs (GS).

Excerpts Below: Courtesy of Bloomberg Television

On whether he’s surprised about the Goldman lawsuit:

“No it doesn’t. But you know what’s interesting is that I heard whiffs of this story going back as far as a year and you know I’m one of the harshest critics of Goldman Sachs and I actually backed off the story because I didn’t really believe it. I thought it was too outlandish. So that tells you exactly how crazy this story is coming out now.”

On the timing of the lawsuit:

“That was the first thing I thought of. That the timing of this is extremely unusual. This story has been out there for awhile. The [NEW YORK] Times first broke it really in December. So why are they doing this now? Cleary it could have been because this bill is about to hit, crucial period in Washington, this financial regulatory reform bill, maybe this, you can look at this as a shot across Wall St’s bow during that period.”

On whether there is a whistle blower:

“That is hard to say. When I read Gretchen Morgenson’s piece in December it was not all clear to me who her sources were. I think she had several of them. So I don’t think this is something where there is a single whistle blower. I think that there are a number of parties who came forward with this story.”

On how solid the SEC case is:

“Yes. I don’t think the facts are really in dispute here and I’m sure it’s not going to be difficult for them to demonstrate what took place. I think what’s probably going to be more difficult is what happens after the civil suit. I talked to a former prosecutor for the justice department this morning who said that these sort of ‘failures to disclose cases’ don’t turn into criminal cases. So, maybe Goldman ends up paying a lot of money in a fine but I would doubt anyone goes to jail over this.”

On where does Goldman go from here:

“Well this is a massive blow to Goldman Sachs because you know it’s one thing to have some sort of left leaning reporter going after them, it’s another thing to have people, you know complaining that they are bilking the government out of money during the bailout, but this is a story about Goldman ripping off their own clients and this is going to resonate loud and clear across Wall St and across their entire client base. I can’t imagine who would want to do business with this bank after they’ve learned about this story and I think it’s going to be very damaging.”

On Blankfein:

“Lloyd Blankfein is in a tough spot right now. I was thinking about this this morning. Who is less popular the Pope or Lloyd Blankfein? It’s really a race for the finish right now. You know I almost think it would be too easy for Goldman if the solution was to get rid of Lloyd Blankfein. That would probably be the easy PR response for the company to remove him but I think there needs to be a deeper examination of how this company does business.”

On whether he has heard of other firms having similar relationships:

“No. I was working on a story about Goldman at the time when I started hearing about this. And here I have to confess that I am not a financial reporter. I was coming from a place where I didn’t even know what a CDO was until a year ago. So when I first heard about this stuff, it seemed like it was too complicated for me to take on at the time and didn’t want to make a mistake on it. But I did not hear about any other firms. This was strictly a Goldman Sachs story.”

On whether Goldman culture has changed since the crisis:

“I don’t think so. I think that when Lloyd Blankfein was responding to criticism how big the bonuses were at the beginning of last year and he said ‘well performance is the ultimate narrative,’ basically meaning that that we deserve this money because we work so hard, that tells you that they still really don’t get it. They still think they actually earned all this money and I don’t see any evidence that there has been a culture change at the company.”

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FDIC shuts down 8 banks on Friday; 2010 total 50

As the U.S.regulators have shut down eight banks Friday, the total number of bank failures have risen to 50 in the nation this year. According to the Federal Deposit Insurance Corporation (FDIC), the banks that faced seizure included City Bank of Lynnwood, Washington, Tamalpais Bank of San Rafael, California, First Federal Bank of North Florida of Palatka, Florida, American First Bank, of Clermont, Florida, Riverside National Bank of Florida, Butler Bank of Lowell, Massachusetts, , Lakeside Community Bank of Sterling Heights, Michigan, and Innovative Bank of Oakland, California. The FDIC, backed by the government, would insure the depositors up to $250000 per account.

TD Bank Financial Group, a sub division of TD Bank (Canada), has decided to acquire the deposits and assets of all the three Florida banks, whereas Center Bank, based in Los Angeles, would assume the deposits and assets of Tamalpais Bank. The assets of City Bank, amounting to $704.1 million, would be taken over by Whidbey Bank, Washington. FDIC was however unable to find a buyer for the Lakeside Community Bank. Thereby, its direct deposit operations like social security and veteran benefits would be acquired by the First Michigan Bank in Troy.

Banks have been closing at a rising pace as the banking industry is working through massive mortgages and real estate loans. “State regulators and the FDIC were unable to find a buyer for Lakeside Community Bank, of Sterling Heights, Michigan, which was closed and deposits paid out,” the FDIC said. Customers who have any queries about their account transactions can call the FDIC toll-free at 1-800-830-4706 or can visit the FDIC’s website at http://www.fdic.gov/bank/individual/failed/tamalpais.html.

Banks have been closing at a rising pace as the banking industry is working through massive mortgages and real estate loans. “Lenders are collapsing amid losses on residential and commercial real estate loans which pushed the FDIC’s list of “problem” banks to the highest level since 1992 in the fourth quarter”, Toronto-Dominion Chief Executive Officer Edmund Clark said. The year 2009 had witnessed around 140 bank failures in the nation, the highest since 1992, the period of loan crisis. These failures had hit FDIC’s Insurance Fund by a whopping $30 billion. Twenty five banks were seized in 2008 and three were shut down in 2007. Bank failures this year will be higher than in 2009, according to projections by FDIC Chairman Sheila Bair.

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