Make sure you don’t get mired in the minutiae like some senators did at the hearing with Goldman Sachs executives on Tuesday. Know the meaning of the terms bandied about by the Goldman whizzes.
Goldman Sachs CEO Lloyd Blankfein responds to questions. (Mari Fagel/MEDILL)
Abacus – Synthetic CDOs (see entry) betting against the housing market. Abacus 2007-AC1 was the one Fabrice Tourre, Goldman’s math whiz and architect of the deal, made with hedge fund manager John Paulson. The Securities and Exchange Commission charges that Abacus 2007-AC1 was built to fail and Goldman led clients to believe otherwise.
ABS (asset-backed securities) – Bundles of debt, like mortgages. These can be turned into CDOs. Though Goldman didn’t originate mortgages like a bank, it securitized billions in this way. The executives asked to testify in the first panel made markets in ABS and its related securities.
“The ABS desk did not only take short positions and, indeed, took many positions that ultimately reduced profits that the mortgage department otherwise might have realized,” Former Goldman Sachs Managing Director Michael Swenson told a Senate investigations subcommittee, defending the accusation that Goldman was too short.
ABX (asset-backed credit default swaps)– This is a bet against an asset-backed security using a CDS (see entry). “Numerous clients wanted to sell ABX to express negative view of the housing market,” Swenson said.
ACA Management – A New York-based bond insurer that insured some of the long side of the Abacus 2007-AC1 deal, sustaining huge losses in the process. It acted as an independent third party selecting the portfolio of CDOs that would go into the deal. The SEC has charged Goldman with fraud by not disclosing Paulson & Co.’s short position. “I’m surprised that ACA could believe that Paulson was a long investor in this deal,” Tourre said.
Anderson Mezzanine 2007-1 – CDO (see entry) mentioned in Tuesday’s hearing that turned out to have high default rate. A Goldman internal e-mail exclaims “Profit!” about their sale. “Goldman is selling Anderson securities to clients, but betting against it,” said Sen. Carl Levin, D-Mich., chairman of the investigative subcommittee.
CDOs (collateral debt obligations) –Packages of other debt packages, which can include mortgages. Levin continually seared Goldman’s brightest with quotes from their colleagues on CDOs they were selling being “crap,” “junk” and “lemons.”
CDS (credit default swap) – Probably the most basic term among complex derivatives, a CDS is insurance against debt defaulting. Sellers of CDS, like AIG and Lehman Brothers, collect a fee from buyers for taking on the risk of the debt defaulting. The buyers don’t have to hold the debt they’re betting against.
Hudson Mezzanine 2006-1 – A CDO that Goldman made and sold in December 2006. Goldman was the only investor to short its own deal, betting $2 billion would fail.
IKB – The German bank that invested in the Abacus deal that is the subject of the lawsuit against Goldman.
Investment adviser – A firm that gives advice about stocks, bonds or mutual funds, often registered with the Securities and Exchange Commission. The firms sometimes manage funds for their clients and have a fiduciary duty, or a responsibility to look out for clients’ best financial interests. There was confusion between this term and a market maker (see entry), which does not have a fiduciary duty.
“I do not believe we act as an investment adviser to our clients,” Tourre told lawmakers.
Market maker – A firm that acts as the go-between for buyers and sellers of stock or securities, holding enough of them to buy and sell nearly on-demand. This is how you can buy most stocks instantaneously. The first panel of young Goldman execs grilled by the Senate subcommittee justified selling the toxic CDOs because they were market makers, not investment advisers. Levin did not buy that excuse for not disclosing more in each transaction.
“You are market makers, but you’re also playing in the market,” Levin said. “I do sense that you are not taking full responsibility for your actions.”
Goldman CEO Lloyd Blankfein later was bold in asserting that’s just not what market makers do.
“I’m not sure how a market would work if it was premised on the assumption that the other side of the market knows your opinion of the market,” Blankfein said.
Short sale – A bet against something. Short sellers borrow a stock or security and immediately sell it to someone, hoping its price will drop so they can buy it back and cover the borrowing price and then some.
“Tells you what might be happening to people who don’t have the big short,” David Viniar, CFO of Goldman wrote in an e-mail, referring to investors losing money in the mortgage market.
“So the big short saved your rear end,” Levin told Viniar.
Single-name ABX – An asset back credit default swap on just one company. Goldman increased its use of single-name ABX to reap profits while the market collapsed.
Synthetic CDOs – Side bets that debt like mortgages will default, using packages of credit default swaps. These are the tools that Goldman helped make for Paulson to bet against the housing market, and that the subject of a federal lawsuit against Goldman Sachs and Tourre. “Synthetic CDOs were really about somebody just trying to place a bet,” said Sen. Claire McCaskill, D-Mo.
“I don’t believe our words are misleading because we would not have had that significant short if we had not had a significant long,” said Viniar. Later he did admit to some responsibility.
“I believe we share responsibility because we are major player in the financial markets,” Viniar said.
Timberwolf – A $1billion CDO made for Goldman client Greywolf Capital, which itself consisted of former Goldman employees. Greywolf wanted to grow its assets under management so Goldman sold it CDOs, which turned out to be largely toxic. A Goldman salesman said in an e-mail, “Boy, that Timberwolf was one shitty deal.” The Goldman employees denied wrongdoing.
Goldman hearing glossary
Make sure you don’t get mired in the minutiae like some Senators did in the hearing with Goldman Sachs executives on Tuesday. Know the meaning of the terms bandied about by the Goldman whizzes.
Abacus – Synthetic CDOs betting against the housing market. Abacus 2007-AC1 was the one Fabrice Tourre, Goldman’s math whiz and architect of the deal, made with Paulson. The Securities and Exchange Commission charges that this Abacus was built to fail and Goldman led clients to believe otherwise.
ABS (asset-backed securities) – bundles of debt, like mortgages. These can be turned into CDOs. Though Goldman didn’t originate mortgages like a bank, it securitized billions in this way. The executives asked to testify in the first panel made markets in ABS and its related securities.
“The ABS desk did not only take short positions and, indeed, took many positions that ultimately reduced profits that the mortgage department otherwise might have realized,” Swenson said in his testimony, defending the accusation that Goldman was too short.
ABX (asset-backed credit default swaps) – this is a bet against an asset-backed security using a credit default swap. “Numerous clients wanted to sell ABX to express negative view of the housing market,” Swenson said.
in order to hedge those positions, began to increase short positions in single-names – volatility in ABX continues – Dec. 14, 2006, David Viniard CFO called meeting – reiterated that they were not told what direction to take, just to get there
ACA Management – A New York-based bond insurer that insured some of the long side of the Abacus 2007-AC1 deal, sustaining huge losses in the process. It acted as an independent third party selecting the portfolio of CDOs that would go into the deal. One of the companies the SEC charges Goldman with defrauding by not disclosing Paulson & Co.’s short position. “I’m surprised that ACA could believe that [John] Paulson was a long investor in this deal,” Tourre said.
Anderson Mezzanine 2007-1 – CDO mentioned in the hearing that turned out to have high default rate. A Goldman internal e-mail exclaims “Profit!” about their sale. “Goldman is selling Anderson securities to clients, but betting against it,” said Sen. Carl Levin, D-Mich.
CDOs (collateral debt obligations) – these are packages of other debt packages, which can include mortgages. Levin continually seared Goldman’s brightest with quotes from their colleagues on CDOs they were selling, being “crap,” “junk” and “lemons.”
CDS (credit default swap) – practically the most basic term among complex derivatives, CDS are insurance against debt defaulting.
Hudson Mezzanine 2006-1 – a CDO that Goldman made and sold in December 2006. Goldman was the only investor to short its own deal, betting $2 billion would fail.
IKB – The German bank that invested in the Abacus deal that is the subject of the lawsuit against Goldman.
Investment adviser – this is a firm that gives advice about stocks, bonds, or mutual funds, often registered with the Securities and Exchange Commission. They sometimes manage funds for their clients and have a fiduciary duty, or a responsibility to look out for clients’ best interests. There was confusion between this term and a market maker, which do not have a fiduciary duty.
“I do not believe we act as an investment adviser to our clients,” Fabrice Tourre told lawmakers.
Market maker – a firm that acts as the go-between for buyers and sellers of stock or securities, holding enough of them to buy and sell nearly on-demand. This is how you can buy most stocks instantaneously. The first panel of young Goldman execs grilled by the Senate justified selling the toxic CDOs because they were market makers, not investment advisers. Levin did not buy that excuse for not disclosing more in each transaction.
“You are market makers, but you’re also playing in the market,” Sen. Levin said. “I do sense that you are not taking full responsibility for your actions.”
Goldman CEO Lloyd Blankfein would later be bold in asserting that’s just not what market makers do.
“I’m not sure how a market would work if it was premised on the assumption that the other side of the market knows your opinion of the market,” Blankfein said.
Short sale – A bet against something. It is the borrowing of a stock or security and immediately selling it at one price, hoping it will decrease in price.
“Tells you what might be happening to people who don’t have the big short,” David Viniar, CFO of Goldman wrote in an e-mail, referring to investors losing money in the mortgage market.
“So the big short saved your rear end,” Levin told Viniar.
Single-name ABX – an asset back credit default swap on just one company. Goldman increased its use of Single-name ABX to reap profits while the market collapsed.
Synthetic CDOs – side bets that debt like mortgages will default, using packages of credit default swaps. These are the tools that Goldman helped make for hedge fund manager John Paulson to bet against the housing market, and the subject of a federal lawsuit against Goldman Sachs and Tourre. “Synthetic CDOs were really about somebody just trying to place a bet,” said Sen. Claire McCaskill, D-Mo.
“I don’t believe our words our misleading because we would not have had that significant short if we had not had a significant long,” said David Viniar, CFO of Goldman. Though later he did admit to some responsibility.
“I believe we share responsibility because we are major player in the financial markets,” Viniar said.
Timberwolf – A $1billion CDO made for a Goldman client Greywolf Capital, which itself consisted of former Goldman employees. Greywolf wanted to grow their assets under management, so Goldman sold it CDOs, which turned out to be largely toxic. A Goldman salesman said in an e-mail, “boy that Timberwolf was one shitty deal.” The Goldman employees denied wrongdoing.