Goldman sachs – a bubble making machine
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Transcript of Goldman sachs – a bubble making machine
Goldman Sachs – A Bubble Goldman Sachs – A Bubble Making Making MachineMachine
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Date :- 25th November 2012
RoadmapRoadmapGoldman Sachs HistoryBubble 1 – Great DepressionBubble 2 – Internet AgeBubble 3 – Abacus – Housing
Boom
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Goldman Sachs - HistoryGoldman Sachs - HistoryWorld’s most powerful Investment bankFounded in 1869, and headquartered in
the Lower Manhattan area of New York CityFounded by German immigrant named
Marcus Goldman, with his son-in-law Samuel Sachs.
Its everywhere across GlobeFirm Provides M&A advice, Underwriting
services, Asset Management and Prime Brokerage to its Clients
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1869
2012
The Great DepressionThe Great DepressionStarted in late 1920’sGoldman Sachs were pioneer in using the
Commercial paper, made money lending out of short term IOUs to small time vendors in downtown Manhattan
Main Financial tool used to attract investors was “Investment Trust”
Made an Endless Investment Pyramid.; Goldman hiding behind Goldman.
First Effort was “Goldman Sachs Trading Corporation”
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1869
20121928 - 1929
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GoldmGoldman an
SachsSachs
Goldman
Sachs Trading
Co. 1928
Shenandoah
Blue Ridge Corp.
Public
Issued 1 Million Shares @ $ 100 per
share
They bought it all with its own money
July 1929
7.2 Million Shares – 6.2 Million Shares owned by Shenandoah mostly owned by GSTC.
The sold 90% to Public at $ 104.Sold common &
Preferred Share to Public
Goldman Sachs 1928-29
The Great Depression – The Great Depression – Contd..Contd.. Simple technique was a daisy chain of borrowed
money.
E.g.: You have a $1, and you borrow $9 against it.. Then you take that $10 fund to borrow $90, then again take your $100, so long as public is still lending, Borrow and invest $900.
If last fund in the line starts to lose value, you no longer have money to pay back and every one gets into losses.
Bank suffered a totaled losses of $475 Billions.
Economist John Galbraith held up the Blue Ridge and Shenandoah trusts as classic examples of madness of leverage based investment.
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1869
20121928 - 1929
Internet Age – Technology Internet Age – Technology BoomBoomAfter the depression, strict underwriting
guidelines were followed that Wall Street adhered to taking a company Public.
After 1995, technology outperformed all other sectors, and .com service companies started performing better.
After around 65 years, Goldman Sachs created a reputation for attracting the smartest talent on the street.
It trained its executives to firms Mantra = “LONG TERM GREEDY”
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20121999 –
2001
Internet Age – Contd..Internet Age – Contd..Robert Rubin, Goldman’s Co-chairman
became the treasury Secretary of America.He was prototypical Goldman banker. Just as it did with “Investment Trust” in the
1920’s, Goldman started slow in this era and finished crazy in the Internet Years.
Major problem was Nobody told Investors that the rules had changed. “Everyone on the inside knew”.
Goldman has denied that it changed its underwriting standards during the Internet Years.
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20121999 –
2001
Internet Age – Contd..Internet Age – Contd..Goldman helped Yahoo, a little known
company with weak financials to go public in 1996.
Technology boom had begun.Goldman quickly became the IPO king of the
Internet Era. In 1999, Goldman at the height of boom,
took 47 companies public including etoys.com, and webvan.com
As leading Underwriter of internet stocks, goldman provided profits far more volatile than those of its competitors,.
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20121999 –
2001
Internet Age – Contd..Internet Age – Contd..
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Laddering Spinning
Manipulating the share prices of the new offerings
Process of bribery
Artificially jack up the new company's price which is of course was to bank's
benefit - 6% fee of $500 million IPO is a very serious money
Offering the executives of newly public company shares at extra-low prices, in
exchange of future underwriting business.
Goldman was repeatedly sued by shareholders for engaging in laddering in
IPO's.
Banks engaged in spinning would then undervalue the IPO, ensuring that hot
openings price shares it had handed out to insiders would be more likely to rise
quickly, supplying bigger first day rewards for chosen few.
Maier, a leading hedge fund manager termed Goldman as worst Perpetrator, as
goldman totally fueled the bubble.
Spinning of hot IPO shares was not a harmless corporate perk, instead it was an integral part of fraudulent scheme to win new investment banking business.
This led to the market crash, As they built these stocks upon an illegal
foundation, manipulated up.
Goldman paid $40 million for its laddering violations
Internet Age – Contd.. Internet Age – Contd.. Some $5 Trillion of wealth was wiped out on NASDAQ
alone. Major problem wasn’t money that was lost by
shareholders, it was money gained by investment bankers who received hefty bonuses.
Goldman paid $28.5 billions in compensation and benefits from 1999 to 2002.
Market was no longer a rationally managed place to grow real and profitable businesses. It was ocean of someone else’s money
Goldman paid $7 billion a year into salaries and $110 million fines.
After Internet Tech bubble, Goldman was ready with its new profit driven strategy, just for another bubble to inflate.
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20121999 –
2001
Abacus – The Housing Abacus – The Housing BoomBoom A legal entity registered in the “Cayman Islands” in 2005 Series of SCDO structured & marketed by Goldman Sachs Managed by the “Correlation Trading Desk” of Goldman Sachs
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What is “ABACUS 2007 – AC1”?What is “ABACUS 2007 – AC1”?
SCDO structured & marketed by Goldman Sachs in 2007
Consisted reference portfolio of 90 RMBS amounting to $2B (mostly sub-prime mortgages)
Who is Fabrice Tourre?Who is Fabrice Tourre?
1. 31 year old, Executive Director in Goldman Sachs
2. Part of the Correlation Trading Desk
3. Responsible for structuring & marketing of ABACUS
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Abacus – Players InvolvedAbacus – Players Involved• Goldman Sachs & Co:
A global investment banking & securities firm founded in 1869 Known for advisory service & proprietary trading
• Paulson & Co: Well known Hedge fund founded in 1994 by John A. Paulson Known for advisory service & proprietary trading
• ACA Management: Well known manager of Collateralized Debt Obligations Experience in analyzing Credit Risk in RMBS
• ACA Capital: Parent company of ACA Management Experience in under writing protection
• IKB Deutsche Industriebank AG: Bank based in Dusseldorf, Germany Specializes in lending to small & medium sized companies
• ABN Amro: Major European bank
• Security & Exchange Commission (SEC): Agency that acts as the primary enforcer of federal securities laws
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Abacus - Abacus - Residential Mortgage Residential Mortgage Backed SecuritiesBacked Securities
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1. Group of residential mortgages that banks package together
2. A type of security whose cash flows come from residential mortgages
3. Holders of an RMBS receive interest and principal payments from the residential debt
Bank:Packages securities into
RMBS
Bank:Packages securities into
RMBS
Homeowner
Homeowner
Homeowner
Homeowner
Homeowner
LoanLoan
Mortgage payment
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Abacus – Collateralized Debt Abacus – Collateralized Debt ObligationsObligations
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1. Holder Bank divides RMBS into tranches & sells to another party
2. Buyer pays initial principal to seller, accordingly to tranches
3. Buyer receives interest from cash flows
4. Seller receives principal from cash flows
5. Seller pays back principal to Buyer on maturity
Buyer Bank
Seller Bank
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RMBS:Packages
securities into tranches rated
by risk1
3 4
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Features of CDO–
1. A kind of bond / assets (RMBS)
2. One bank borrows money from another bank by selling it’s asset portfolio
3. Exchange of interest payment & the principle amount due on maturity
4. Value derived from underlying portfolio
5. CDO rely upon the cash flow generated from RMBS to pay the interest payments
Works exactly similar to normal CDO
Except that buyer doesn’t have to own any underlying assets
Mirror image / Replica of normal CDO
Operates through financial contract called “Credit Default Swaps”
Risk of loss on SCDO is divided into tranches just like normal CDOs
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Abacus – Credit Default Abacus – Credit Default SwapsSwaps
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• OTC traded “Derivative contract” (Kind of insurance policy)
• There are 2 sides, protection buyer & protection seller
• Each have a different perspectives on the reference CDO’s future performance
• Buyer of protection pays monthly premiums
• Performance is evaluated based on the underlying assets
SCDO:Debt security packaged in a
Special Purpose Vehicle
Reference CDO, based on
portfolio of RMBS
Protection Seller
Shorting the CDS in order to Long SCDO
Protection Buyer
Long CDS in order to short SCDO
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2
3Initial investment
Premiums
In credit event, the protection buyer
receives All sellers Money
Paulson & Co.* Goldman Sachs* ACA / ABN Amro
* IKB* ACA
Abacus - StructureAbacus - Structure
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Super Senior notes
Class - A notes
Equity Tranche
0%
9%
21%
45%
50%
100%
Paulson
CDS protection Buyer
CDS protection Seller
ACA/ABN Amro
Goldman Sachs
IKBACA
Lower-rated Notes
Abacus – Ethical IssuesAbacus – Ethical Issues Serving two clients on the opposite sides of the
same deal Goldman withheld the information from IKB about Paulson’s
significant involvement in selecting the securities in the ABACUS CDO.
GS provided wrong information to ACA that Paulson had long equity in CDO & represented that ACA was the sole “Portfolio Selection Agent” to investors.
Truth Telling & Transparency Goldman withholds a material fact in its marketing brochure
& does not inform its client verbally of the same fact.
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Abacus - ConclusionAbacus - Conclusion CDO failed due to Subprime market meltdown. Johan Paulson earn approx $ 1billion due to short sale. IKB lost approx $ 150 million. ACA Capital lost approx $ 900million GS lost approx 100million which was partially offset by $15million
fees which he received from Paulson. GS also charged by SEC worth $550 million for marketing
materials for the ABACUS transaction with incomplete information.
ABN AMRO has filed a case in SEC against Goldman Sachs
Bottom line, based on the information in this case study of the Goldman Sachs ABACUS case, Goldman Sachs acted unethically because:
1. The institution failed in its fiduciary duty to act in the best interest of its client. It failed in this duty because it chose to be in a position where it was subject to conflicts of interest.
2. The institution was not honest. It failed to disclose material information to its client, IBK and to its service provider, ACA.
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Thank YouThank You
We welcome Questions?
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