Goldman Sachs: CDOs Custom Built To Fail

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“GS&Co. and Tourre knew that it would be difficult, if not impossible, to place the liabilities of a synthetic CDO if they disclosed to investors that a short investor, such as Paulson, played a significant role in the collateral selection process.”Section D.19., page 7 of SEC complaint

The SEC on Friday charged Goldman Sachs (GS) and GS employee Fabrice Tourre with securities fraud for failing to disclose to investors that its $2 billion ABACUS 2007-AC1 synthetic CDO trust was custom built to fail.

GS created the CDO for the sole purpose of providing its client (hedge fund manager John Paulson of Paulson & Co.), with a mechanism to short the most exaggerated portions of the housing bubble. GS was also on the same side as Paulson by writing the CDS used to bet that the underlying trust would fail.*

GS then marketed this rigged portfolio to so-called sophisticated investors, using a third party collateral manager (ACA Management LLC; now part of RBS/Royal Bank of Scotland) to be the CDO’s portfolio selection agent as a marketing tool to increase the comfort level of perspective investors. The SEC alleges that GS misled ACA into believing that Paulson’s interest in selecting the underlying derivatives tracking subprime RMBS was because he was taking a “long” position in the CDO.

GS will likely defend itself by arguing that sophisticated investors should have read the prospectus rather than relying on the salesperson’s representations. GS might claim it’s unethical for them to disclose to prospective investors the counterparties participating on each side of the trade.

Whether it was creating IPOs of companies it manufactured to fit investors’ insatiable appetite for investments in the late 1990s or creating synthetic CDOs during the housing bubble because there were not enough bad mortgages to go around, packaging accounts for most of Wall St’s profits. Most of Wall St.’s “trading” could be classified as repackaging; GS needed to get all sides of the deal sold to minimize their credit risk.

During Saturn’s transit of Cancer (June 2003-July 2005) there was a limited supply of low quality subprime residential mortgages to satisfy speculative demand. Fabrice Torres, the GS employee charged in the SEC’s complaint, recognized in 2005 that the housing bubble was reaching its limit. Traders had successfully lobbied the International Swaps and Derivatives Association that year to make it easier for short sellers to collect by loosening the rules for the circumstances that would trigger a credit event.

John Paulson’s big bet against the housing market might have been hatched in late November 2004 when Pluto (debt/mortgages) in Sagittarius (gambling) first began to conjoin his natal Sun, and Mars in Pluto-ruled Scorpio returned to its natal position. These transits could have motivated Paulson to investigate how potentially toxic the excess debt would become.

By August 2006 Saturn in Leo made the first of three oppositions to Neptune in Aquarius. Speculation on housing had created an asset price bubble that was beginning to crack around the edges as lax and in many cases fraudulent credit criteria was affecting the performance of subprime loans. Like Paulson, many Wall St. traders were purchasing protection to speculate in the opposite direction. In its annual letter to shareholders, GS now admits that in late 2006 it switched its outlook on the mortgage market from positive to negative.

After being turned down by several banks including Bear Stearns, GS as well as Deutsche Bank, agreed to create CDOs so Paulson could take his biggest bets against the mortgage market by purchasing CDS to bet against these asset pools.

In January 2007, Paulson had comprised a list of what he considered to be the most likely triple B RBMS to experience a credit event in the near future: ARMs issued to homebuyers with low FICO scores in states that had experienced the highest home price appreciation (AZ, CA, FL, NV). Similar to the hedge fund Magnetar, Paulson was so discerning in ensuring the CDO portfolio contained the most toxic assets possible that he excluded any RMBS issued by Wells Fargo who was perceived to be one of the higher-quality subprime loan originators.

On February 26, 2007, two days before Saturn opposed Neptune for the second time, GS issued its prospectus on ABACUS 2007-AC1 to investors that contained Paulson’s handpicked selections. The SEC complaint alleges that “investors were assured that the party selecting the portfolio had an ‘alignment of economic interest’ with investors.”

If investors aligned themselves with planetary cycles, they would understand that Saturn in Leo opposing Neptune in Aquarius would describe a company that despite having a reputation as a leader in their field is selling and/or promoting a product to investors that could be deceptive or fraudulent in some way. Mercury rules all forms of communication and was retrograde then, indicating that investors were not being provided with a completely clear picture of the risks.

Neptune rules Pisces. Mercury retrograde along with the Sun and Uranus in Pisces creates an aura of illusion. GS’ prospectus was operating under the “don’t ask, don’t tell policy” regarding the true purpose of the fund’s creation; investors believed they could earn a high yield in a low interest rate environment without regard for any risk.

The CDO deal closed exactly three months later as Mars in Pisces conjoined Uranus and squared Jupiter in Sagittarius, indicating that the profit for Paulson and loss for big foreign investors such as German commercial bank IKB and Dutch bank ABN Amro, would be huge and happen fairly quickly.

Saturn and Neptune opposed each other for the final time in late June 2007. By the time Saturn entered Virgo in early September 2007, the subprime mortgage market was collapsing and coming under scrutiny as home prices were no longer rising. At the end of 2007 Jupiter conjoined Pluto in Sagittarius which harmonized with Paulson’s natal Jupiter/Pluto conjunction. Individuals born with Jupiter conjunct Pluto have the potential to accumulate massive wealth; Paulson made almost $4 billion in 2007 on his bearish bets.

When Pluto entered Saturn-ruled Capricorn in late January 2008, huge amounts of asset backed securities suddenly became nuclear fallout. Financial firms began writing down massive amounts of asset backed securities as the market for these instruments froze up. On January 29, 2008, Mercury turned retrograde as it conjoined Neptune. The CDO investors illusions had been shattered, as 99% of the portfolio had been downgraded by the ratings agencies. The investors lost over $1 billion while Paulson’s CDS against the portfolio yielded a $1 billion profit.

With the proliferation of synthetic CDOs, the financial tsunami was accelerating at warp speed during September 2008. Lehman Brothers filed for bankruptcy, and the government took 79.9% stakes in Fannie, Freddie, and AIG. Even GS needed the government to come to its rescue.

And now as the major stock market averages revisit levels not seen since September 2008, the message of Mercury retrograde in Taurus (banking) is that it’s time to review the financial practices that contributed to the crisis so reforms can be enacted. As I wrote in my post on the Aries New Moon cycle, “Mercury retrograde could reveal previously undisclosed information concerning deceptive financial practices.” I elaborated that “Venus squaring Neptune April 23 could elevate these issues into a possible scandal.”

Saturn’s recent shift back into Virgo to oppose Uranus in Pisces (exact April 26) for the fourth time while Mercury is retrograde in Taurus, reflects the government will enforce the rules and regulations already existing on the books (Saturn in Virgo) and enact reforms (Uranus) to establish a new regulatory structure that encompasses the lax or loosely regulated parts of the financial system that allowed fraudulent and deceptive practices (Pisces) to flourish into a credit contagion. Saturn retrograde in Virgo reflects government regulators had been working on the details to build a case against GS for some time. (GS didn’t publicly disclose it received a Wells notice from the SEC nine months ago.)

The New Moon is the best time each month to initiate new action, and this is especially true each year at the Aries New Moon. Aries is ruled by Mars, and with Mars in Leo, it is time to take action on speculative trading practices. As the first sign of the zodiac, Aries represents initiating something new which is why this sign likes to be the first to do something.

The SEC’s case against GS was the first case to come up out of its new structured products enforcement division. On Friday Neptune (fraud/deception) was precisely conjoining the SEC’s natal Saturn (structure/enforcement) for the first time since in its history, reflecting that the Commission would hold firms accountable for deceptive trading practices. The Aries New Moon squared the SEC’s natal Pluto and progressed Mars indicating that it would take action against fraud connected to secret trading deals of opaque financial products connected to mortgage debt.

The Aries New Moon squared SEC Chairman Mary Schapiro’s natal Uranus in Cancer and opposed Neptune in Libra, motivating her to move forward with fraud charges at this time. Schapiro’s progressed Mercury and Pluto conjoin the SEC’s progressed Sun in Leo; together they oppose the SEC’s natal Saturn. This is further confirmation that the SEC is determined to stake their reputation going after fraudulent behavior by starting with the king of investment banks, GS.

The SEC and Schapiro’s progressed planets conjoin President Obama’s natal Uranus in Leo. Mars in Leo conjoins the President’s natal Neptune, and Mercury in Taurus turns retrograde squaring Obama’s natal Sun in Leo. The Administration issued its proposal for financial regulatory reform June 17, 2009, the House passed their reform legislation December 11, and the Senate is scheduled to take up Sen. Dodd’s bill over the next two weeks.

Since Obama’s victory passing healthcare reform, Wall St. has been aggressively fighting to defeat financial reform. Republicans are continuing their blockade of anything Obama and the Democrats want to pass and GOP leaders have been telling Wall St. that they can help them defeat reform. Just as the health insurance companies assured the Administration they supported reform, Wall St. Democrats such as JPMorgan Chase CEO Jamie Dimon and GS acted supportive when the financial system was on life support. Now that the speculative markets are getting frothy again, Wall St. has returned to their arrogant and reckless behavior. In short, the behavior of all the players in this drama is politically motivated.

Friday was the right time for the SEC to file its lawsuit against GS as Fridays are ruled by Venus (money/banks). This energy was further strengthened as Venus is in its home sign Taurus. The Moon (sentiment) was in Taurus where its energies function well, placing further emphasis on the banks. The Moon conjoined Venus and formed a favorable aspect to Jupiter in Pisces Friday morning, a prelude to the sextile between Venus and Jupiter that would be exact on Saturday. Jupiter rules lawsuits, and with Venus and Jupiter in the signs they naturally rule and Pisces ruling fraud, Friday was a favorable day for the SEC to file their lawsuit against GS. Additionally, it appears that the SEC’s announcement of the lawsuit hit the newswires at 10:42 AM EDT - 7 minutes before the Moon would exactly square Neptune (fraud).

Wednesday’s Aries New Moon conjoined the NYSE’s natal Saturn; on Friday the alignment became exact. GS’ stock closed down $23.57 to $160.70 as Mars exactly conjoining GS’ stock chart’s natal Saturn, exerted selling pressure on the stock. Mercury turning retrograde conjoining the stock chart’s natal Sun in Taurus ensures GS stock will be remain prominently in the news over the next three weeks.

I have been unable to find the data for when GS was founded in 1869, but the incorporation chart of GS would describe how the company operates in modern times. The Sun in Moon ruled- Cancer shows the firm is security conscious and places a high priority on protecting itself from risk. This is further emphasized by the Moon conjoining Venus in Cancer.*** The Sun squaring Saturn in Taurus further reinforces the firm’s emphasis on prudent risk management to protect its enormous profits (Sun trine Jupiter; Venus in Cancer square Jupiter in Pisces).

You might say there is an element of a truth in CEO Lloyd Blankfein’s remark that GS is “doing God’s work,” as Jupiter-ruled Sagittarius (religious beliefs, ethics/morals) rules the sector of the Inc. chart representing the firm’s assets and values.

GS’s Sun opposite Neptune in Aquarius gives the firm a tendency to believe they have a higher calling that somehow releases them from the restraints of regulation and proprietary boundaries. There is a murky quality in GS’ relationships with its trading partners. GS does not believe it has an obligation to look out for the best interests of those the firm does business with unless it enhances the reputation and profits of GS (Saturn in Taurus square Neptune). With Scorpio ruling the Inc. chart and its planetary ruler Pluto in Sagittarius in the sector representing how the firm presents itself, GS cultivates its aura of secrecy, wealth and power.

Mars in Leo turned direct opposite the Inc. chart’s natal Neptune in March, indicating that the firm’s image would be affected by accusations of fraud and deceit. Neptune is currently opposing progressed Mercury in Leo which is retrograde, reflecting that the SEC’s fraud charge relates to past speculative bets where GS failed to disclose to investors that the CDO it was offering was engineered to be defective. Neptune squaring GS’ progressed Scorpio Ascendant further erodes the firm’s image, forcing GS to reveal its secrets.

I could not find the birth information for Fabrice Tourre, the 31 year old Frenchman who now works at GS’ London office, but it is obvious that Tourre would have taken his cues from senior management. The Aries New Moon squares Lloyd Blankfein’s natal Jupiter and Uranus in Cancer and opposes natal Neptune in Libra. Mercury turns retrograde opposite natal Venus in Scorpio, while Mars in Leo squares natal Saturn and Venus in Scorpio. Blankfein is not immune from feeling the heat and will have to personally defend the firm’s conduct.

Although the SEC’s charges do not extend to John Paulson since he did not do anything illegal, Neptune squaring Paulson’s natal Saturn in Scorpio and squaring Pluto in Leo reflects that Paulson had to purposely manipulate the situation to his advantage in order to yield his most profitable bearish bet. With his natal Saturn square Pluto in the signs ruling speculation and opaque and unregulated debt instruments, Paulson encapsulates the cycle of Saturn square Pluto as an example of why derivatives trading needs to be regulated and fully transparent.

Uranus conjoining GS’ natal Jupiter in Pisces means that the SEC’s lawsuit against GS could have unexpected consequences that cause a ripple effect beyond GS. The fact that the SEC did not pursue its usual path of reaching a financial settlement where the firm admits no wrongdoing says that the SEC thinks it has constructed a strong enough case to successfully challenge GS in court.

A legal defeat for GS would open the floodgates to more lawsuits as at that point any GS counterparty related to this transaction could demand financial restitution. Jupiter rules international interests, and British PM Gordon Brown is calling for the UK’s equivalent of the SEC to file charges against GS as the UK government owns a majority stake in RBS which lost $841 million in the CDO deal. The German government is considering action against GS since state owned bank KfW provided financial support during the crisis to IKB Bank, another big foreign investor in the CDO.

Pension funds, monoline insurers such as Ambac and MBIA, and AIG who wrote contracts issued on some of the insurance for older ABACUS deals GS issued, could potentially file lawsuits against GS. However, since the government owns 79.9% of AIG, the insurer might be blocked from taking legal action. GS Inc’s natal Sun conjoins the Federal Reserve’s natal Neptune. From forcing AIG to abandon negotiating a settlement to pay GS and other counterparties at par, issuing an emergency banking license to save GS from collapsing and qualifiy for TARP, and the Fed allowing GS director Stephen Friedman a waiver to retain his GS shares while Chairman of the NY FRB, the Fed has been a particular help to GS.

Even if the SEC’s case does not succeed, the lawsuit can cause GS clients to wonder if they were deceived too. A bank’s very survival depends on trust, and as the world is all too painfully aware, so does the entire global financial system.

Between March 2009 and March 2012 (and most critically through the summer and early autumn of 2010), Jupiter, Saturn, Uranus, and Pluto will form challenging alignments to the USA’s natal Venus, reflecting that the banking system is in the process of undergoing major transformation. GS Inc’s natal Venus conjoins the USA Venus indicating, that the SEC’s lawsuit is a prop that sets the stage for enacting financial regulatory reform. President Obama’s natal Venus also conjoins the USA Venus, reflecting that the Administration will determine how successful financial reform will turn out to be.

*A synthetic CDO (Collateralized Debt Obligation) consists of a CDSs (Credit Default Swaps) written on a series of bonds and loans (in this case residential mortgage backed securities/RMBS). A CDS is insurance against default.

**A mathematical calculation that moves the planets forward in time as a method of prediction. The Ascendant is the zodiac sign rising on the eastern horizon at the time of GS’s incorporation.

***Due to GS’ natal emphasis and the upcoming transits to GS Inc’s Venus/Moon/Mars, I think it is possible that a woman could become GS’ next chief executive.

Reference: NYT “Banks That Bundled Bad Debt, Bet Against It and Won” (published when Pluto exactly opposed the USA Venus).

Goldman Sachs, Inc: July 21, 1998 3:15 PM EDT Wilmington, DE
Goldman Sachs first publicly traded: May 4, 1999
Lloyd Blankfein: September 20, 1954 time unknown Bronx, NY
John Paulson: December 14, 1955 time unknown Queens, NY
SEC: June 6, 1934 time unknown Washington, DCBarack Obama: August 4, 1961 7:24 PM Honolulu, Hawaii

1 comment:

RevJ said...

Hey Deborah it's me, RevJ. Great work on this post!

I quoted you in my myspace blog last October when you said Goldman's stock would decline.
As I mentioned last time I commented, predictions often have paradoxical timing.

You were about GSO's stock. The news reports say that Goldman knew the SEC would sue some months ago, around when you made your prediction. But the effects of an event take time to gestate and manifest.

I still think you are correct about inflation; and I have apprised my readers of your weather predictions for the summer of 2010. KEEP UP THE GREAT WORK! RevJ