The recent news cycle has featured a story about a civil lawsuit filed by the SEC against the insanely profitable Wall Street Master (Of All Masters) of the Universe, Goldman Sachs ("Goldman").  The SEC charges in the Complaint initiating this soon to be titanic litigation, made public last Friday, that Goldman created some 25 ‘Deals’ (like the one from which this piece derives its title: "Abacus 2007-AC1"). 

These Deals enabled Goldman and some of its most beloved clientele to literally bet against the housing market, at a time when those bets could pay off BigTime.

Now, Goldman vehemently denies all of this (in a press release within minutes of the filing, Goldman called the allegations: "completely unfounded in law and fact").   I want to make it very clear at the outset that what I am about to discuss further here are but allegations in a new lawsuit, neither proven facts nor adjudicated matters found true by any court anywhere.   It does not take much to file a lawsuit – in fact, even a Rhesus Monkey, armed with a typewriter, about $300 (here in the Los Angeles Superior Court) and a stack of papers, who can find his or her way to the Courthouse, can file a lawsuit!

Now back to the story:  these 25 Deals, let’s call them the "Abacus Deals," started their nosedive when everything else related to housing began crashing and burning a few years ago, and really dropped in value like a lead balloon.  But, as the Abacus Deals dropped like a rock, Goldman, together with certain hedge funds, began to make big money on negative bets that the market would fall.  And, the Goldman clients who bought some $10.9 Billion in housing-related investments, lost Billions.

A major hedge fund manager, John A. Paulson, the guy who raked in some $3.7 Billion in 2007 by precisely timing his bets (investments) that the bubble (which housing had become by then) would burst, like so much chewing gum all over a kid’s face, is alleged to be the one who prompted Goldman to create the Abacus Deals.  Paulson was even allowed by Goldman to select the exact mortgage bonds (securitized pools of home loans, all bundled together in on package to re-sell to investors), to be packaged into the Abacus Deals.  The SEC’s suit alleges that Paulson was careful to pick the mortgage bonds that seemed to him the ones most likely to crash, burn and lose their value!   Goldman then went about merrily (and profitably) selling the Abacus Deals to all kinds of investors, including (according to the NYT, breaking the story last Friday morning) "foreign banks, pension funds, insurance companies and other hedge funds."  And, man, were those ever profitable!  Goldman people were, no doubt, already thinking of all the Rolexes, Ferraris, Rolls, yachts and manifold other toys of the rich that could be bought with the bonuses that those profits would turn into.

The NYT reported last Friday that Robert Khuzami , SEC Director of Enforcement, succinctly summed it up this way: "’The product was new and complex, but the deception and conflicts are old and simple . . . . Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.’"

A recipe for obscene profits for Goldman, translated into unbelievable bonuses for its sales force, became, at the same time, a nightmare whereby investors, located both hither and yon, flushed Billions of their, or more likely, other people’s money ("OPM," the essence of most Wall St. deal-making) straight down the toilet, alleges the SEC.  So far, despite the financial bodies that have littered the landscape since the Fall of 2008 (with Bear Stearns and a few others having gone down earlier that Spring, perhaps to avoid the last-minute rush!), Goldman had risen from the ashes unscathed, and, of course, even richer and more dominant in its field and that much more of an Uber-Master of the Universe than before housing became a negative epithet, rather than an investment.

Within thirty (30) minutes after the announcement that the SEC sued Goldman went public last Friday, Goldman’s stock plunged 10% of its value.  No kidding . . .

All of these shenanigans, if proved true, were made possible by something I have written about a lot here – those loveable collateralized security instruments that nobody (except math geeks, called "Quants" on Wall St.) understands – synthetic collateralized debt obligations ("CDO’s), where you literally bet that people will crap out on, and not pay their mortgages.  CDO’s were sold as being risk-free, which is of course absurd – waking up in the morning has risk attached, as does any investment whatsoever.  Goldman has said, however, "We also did not know whether the value of the instruments we sold would increase or decrease."

But, the guts of what the SEC lawsuit against Goldman is charging is that Goldman deliberately lured their sophisticated investor clients into buying packages of these mortgage-based CDO’s, and then, through equally impenetrable (to the average human) hedge funds, short-selling and some other exotic financial instruments, actually proceeded to bet against their own clients, betting that people would crap out on those very mortgages, housing would melt down – thereby making Goldman a fortune.

This is incredibly big news in the financial world, as the drop in Goldman’s stock price within a half hour of the mere announcement makes clear.  It bears close watching; you know I will, and I will report back to you when there are further developments.  Stay tuned . . . .

(I repeat, that nobody other than some math geeks, really understands – and, if the math geeks understood them so well, even they were surprised when so many got their clocks cleaned buying them and relying on their math)