Friday, as news of the allegations of fraud at Goldman Sachs spread, I got a call from someone who works in the insurance business.
"Check out the former head of ACA" he said referring to the now-defunct and formerly down-graded bond insurer who asked the-not-so-omniscient hedge fund manager John Paulson to choose which securities to put into the CDO, Abacus, that Goldman Sachs subsequently sold to two big clients, the German bank IKB and the Royal Bank of Scotland -- without disclosing that Paulson would be shorting his own hand-picked stocks on the other side of the trade.
Now the SEC's complaint states that ACA had no idea that Paulson was shorting the stocks he'd been asked to select, yet my deepthroat was not so convinced.
"ACA had a horrible reputation," he told me, which led me to ask the obvious question so why would Goldman want ACA's stamp as selection manager on the CDO they were marketing? Fabrice Tourre, the 31-year-old named as the architect of Abacus, is quoted as insisting that Goldman wanted ACA's brand name and "credibility" on the CDO.
My source told me to check out who the head of ACA was married to. "I think you'll find it's a senior woman at Goldman Sachs," he said.
Well, yep, it is.
Alan S. Rosenman took over ACA Capital as president and CEO in 2004 - because -- wait for it -- his predecessor Michael Satz had "personal income tax issues" -- (how murky is this story going to get you must be asking?)
According to a Business Week article dated April 3 by David Henry and Matthew Goldstein, Rosenman "immediately began to push ACA into CDO insurance, an area his predecessor, Satz, had only begun to explore."
Rosenman's wife, or at least partner -- they are listed as sharing a house together for which they paid $6.1 million in 2005 in New York -- is Frances "Fran" R. Bermanzohn, who is managing director and deputy general counsel at ... Goldman Sachs.
I called Mr. Rosenman who gave me the illuminating statement: "I am not offering any comment at this time."
I asked him, did he ever disclose their relationship to buyers of Abacus? Did she? And Could ACA really therefore not have known about Paulson's activities?
One thing that is certainly puzzling is that if ACA did know, then why on earth would it have issued protection on the so-called "superior senior tranche" which turned out to be of course anything but 'super senior," thanks to Paulson betting against it -- and ACA went bust in December last year?
But, just as much as the SEC is claiming Goldman should have disclosed that John Paulson had hand-picked stocks he was choosing to short (which means, by the way, in case anyone has missed this point, that Mr. "supposed-good-guy " Paulson just made one billion dollars off the back of the German tax payer who had to bail out the German bank IKB on the back of its collapse) so too this relationship should have been disclosed. That it is not mentioned in the SEC's complaint strikes me as being very odd.
I was still waiting for Goldman Sachs to respond as this article went to press.
When I named my recent book on Lehman Brothers, The Devil's Casino, I knew that Wall Street was rigged and that everyone on it was playing with loaded dice. Lehmanites told me they were no different from anyone else on the Street and just as Goldman is saying there is no fraud here with the rigged CDO (and they may be right -- legally) so Lehmanites believe there was no fraud connected with Repo 105.
The conundrum is that weak accounting rules enabled both Goldman and Lehman and no doubt every other gambler out there to get away with what they did legally. (I, for one, do not believe will the SEC will win their suit against Goldman because the law protects Goldman). That their actions were arguably immoral? Well, that's a question no one on Wall Street wants to ask of themselves.
Watch closely what happens Tuesday when former Lehman CEO Dick Fuld goes before Harry Reid's committee to explain Repo 105. He will insist he did not break the law, just as Goldman will insist the same - and the problem is that technically they may be right.
The bigger question is: how do we stop immoral acts that are technically legal? We need to change the law -- and fast, but carefully. Things that are hidden need to be brought to light, and contorted complex accounting rules about disclosure needs to become far simpler.
And people who are married and whose respective firms are doing business together need to disclose it to any third parties.