EFTA00766500.pdf

From: "Sultan Bin Sulayem" To: "Jeffrey Epstein" <jeeproject@yahoo.com> Subject: Banks Bundled Bad Debt, Bet Against It and Won Date: Fri, 25 Dec 2009 15:38:51 +0000 Banks Bundled Bad Debt, Bet Against It and Won By GRETCHEN MORGENSON and LOUISE STORY SIGN IN TO Published: December 23, 2009 RECOMMEND In late October 2007, as the financial markets were starting to come TWITTER unglued, aGoldman Sachs trader, Jonathan M. Egol, received very COMMENTS (561) good news. At 37, he was named a managing director at the firm. SIGN IN TO E- MAIL Enlarge This Image Mr. Egol, a Princeton graduate, had PRINT risen to prominence inside the bank by creating mortgage-related securities, SINGLE PAGE named Abacus, that were at first REPRINTS intended to protect Goldman from SHARE investment losses if the housing market collapsed. As the market Right. William P. 0tonnell(The New York Time soured, Goldman created even more of One former Goldman salesman wrote a novel about the crisis. A Deutsche these securities, enabling it to pocket Bank trader passed out T•shirts for huge profits. investc•s k op iq to profit on a housing bust Goldman's own clients who bought them, however, were less fortunate. Multimedia Pension funds and insurance companies lost billions of .,Profits in a Crisis dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm. Graphic Profits in a Crisis Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.'s — and then made financial bets Related against them, called selling short in Wall Street parlance. Statement by Goldman Sachs Others that created similar securities and then bet they would fail, according to Wall Street traders, Add to Portfolio include Deutsche Bank and Morgan Stanley, as well as Goldman Sacha Group smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who EFTA00766500 GO to your Portfolio ), this year became a special counselor to Treasury SecretaryTimothy F. Geithner. How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street's self- regulatory organization, according to people briefed on the Left. Treasury Depanment: Kevin Woftukssociated Pres investigations. Those involved with the inquiries declined Lewis Sachs. left, who oversaw M.'s before becoming a Treasury to comment. adviser, and John Paulson. whose company profited as the housing While the investigations are in the early phases, authorities market collapsed. appear to be looking at whether securities laws or rules of Readers' Comments fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet Readers shared their against the clients who purchased them, people briefed on thoughts on this article. Read All Comments (561)2 the matter say. One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded. Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured within months of being created. Goldman and other Wall Street firms maintain there is nothing improper about synthetic C.D.O.'s, saying that they typically employ many trading techniques to hedge investments and protect against losses. They add that many prudent investors often do the same. Goldman used these securities initially to offset any potential losses stemming from its positive bets on mortgage securities. But Goldman and other firms eventually used the C.D.O.'s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients' interests. "The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen," said Sylvain R. Raynes, an expert in structured finance at R. & R Consulting in New York. "When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else's house and then committing arson." Investment banks were not alone in reaping rich rewards by placing trades against synthetic C.D.O.'s. Some hedge funds also benefited, including Paulson & Company, according to former Goldman workers and people at other banks familiar with that firm's trading. EFTA00766501 Michael DuVally, a Goldman Sachs spokesman, declined to make Mr. Egol available for comment. But Mr. DuVally said many of the C.D.O.'s created by Wall Street were made to satisfy client demand for such products, which the clients thought would produce profits because they had an optimistic view of the housing market. In addition, he said that clients knew Goldman might be betting against mortgages linked to the securities, and that the buyers of synthetic mortgage C.D.O.'s were large, sophisticated investors, he said. The creation and sale of synthetic C.D.O.'s helped make the financial crisis worse than it might otherwise have been, effectively multiplying losses by providing more securities to bet against. Some $8 billion in these securities remain on the books atAmerican International Group, the giant insurer rescued by the government in September 2OO8. From zoos through 2007, at least $1O8 billion in these securities was issued, according to Dealogic, a financial data firm. And the actual volume was much higher because synthetic C.D.O.'s and other customized trades are unregulated and often not reported to any financial exchange or market. Goldman Saw It Coming Before the financial crisis, many investors — large American and European banks, pension funds, insurance companies and even some hedge funds - failed to recognize that overextended borrowers would default on their mortgages, and they kept increasing their investments in mortgage-related securities. As the mortgage market collapsed, they suffered steep losses. 1 2 1 3 1 4 NEXT PAGE ie Sign in to Recommond Aversion of this article appeared in print on December 24. 2009. on More Articles in Business D page Al of the New York edition. Times Reader 2.0: Daily delivery of The Times - straight to your computer. Subscribe for just $3.45 a week. COMIvIENTS (561) SIGN IN TO E- MAIL PRINT SINGLE PAGE Investments. Forex Club. The simplest and most favorable way to trade global currencies. REPRINTS www.ForexClub.biz Boulevard Motorcar Co Wealth Asset Management Fine Automobiles bought and Sold www.Blvdmc.com EFTA00766502 Sent from my iPhone ********************************************DIscLAImER*************************************** *www* This email and any files transmitted with it are confidential and contain privileged or copyright information. 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