RBS lost £545m in alleged Goldman fraud

Royal Bank of Scotland was the biggest victim of the alleged sub-prime mortgage fraud orchestrated by Goldman Sachs and involving hedge fund Paulson & Co.

In August 2008, the part-nationalised lender paid Goldman $841m (£545m) to close its position on the single trade. According to the US Securities & Exchange Commission, "most of this money was subsequently paid to Paulson". RBS acquired the problem trade in 2007 after buying ABN Amro, the Dutch bank that ultimately proved the cause of its downfall.

RBS went on to post a £24bn loss in 2008, which led to a £45.5bn taxpayer bail-out that has left the state with an 84pc stake in the bank.

Following the SEC's accusations yesterday, RBS's lawyers were examining whether there would be any action to take against Goldman to recover losses.

RBS found itself bearing the bulk of the losses because ABN had written insurance against the "synthetic collateralised debt obligation (CDO)" at the centre of the alleged fraud.

However, according to the SEC, Goldman convinced investors to buy a poor quality CDO in the full expectation that it would collapse. Paulson, which was shorting the product, is alleged to have selected the sub-prime mortgage assets to be referenced by the "synthetic CDO" that were most likely to default.

Goldman then sold the CDO to investors to put someone on the other side of the trade without revealing Paulson's involvement. Investors would have believed the sub-prime assets to be high quality.

Goldman Sachs’s ‘Fabulous Fab’ Tourre Loses ‘Survivor’ Bet

(Bloomberg) -- Goldman Sachs Group Inc.’s “Fabulous Fab” saw himself as the “only potential survivor” when the housing market began to collapse in 2007. Instead he became the only person named when regulators sued the firm for fraud.

Fabrice Pierre Tourre, the 31-year-old French trader accused by the U.S. Securities and Exchange Commission yesterday of misleading investors in selling securities linked to mortgages, saw the wreckage coming early on.

“The whole building is about to collapse anytime now,” Tourre, an executive director at Goldman Sachs in London, wrote to a friend in a January 2007 e-mail, according to the SEC’s complaint. “Only potential survivor, the fabulous Fab... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”

Tourre was a vice president on the structured product correlation trading desk in New York at Goldman Sachs’s headquarters when the SEC claims he packaged mortgage bonds he knew were toxic into securities he sold to unwitting clients.

Tourre, who joined Goldman Sachs in July 2001, according to his LinkedIn profile, was “principally responsible” for creating and marketing a collateralized debt obligation known as Abacus 2007-AC1, the SEC said.

Paulson & Co.

According to the complaint, he knew hedge fund Paulson & Co. had played a “significant role” in selecting many of the securities used to create the CDOs and was betting against them. Tourre and Goldman didn’t tell Abacus investors about Paulson’s role, the SEC said. New York-based Paulson wasn’t accused of wrongdoing.

Goldman Sachs said in a statement that it lost more than $90 million because it had an investment in the deal, overwhelming the $15 million it made in fees. The firm said it provided “extensive disclosure” about the risk of the underlying mortgage securities.

Tourre received a bachelor’s degree in mathematics at Ecole Centrale Paris, one of France’s top engineering schools, in 2000, according to his LinkedIn profile. He graduated the next year from Stanford University in California with a master’s degree in operations research.

Before college, Tourre studied three years at Lycee Marie Curie, a French high school, according to JournalduNet, a professional networking Web site. Tourre spent two years at Lycee Henri IV and Lycee Louis Le Grand, two prep schools known for getting students into France’s top universities.

Tourre’s registration with the U.K.’s Financial Services Authority began in November 2008.

The SEC complaint described Tourre thusly:

Fabrice Tourre, age 31, is a registered representative with GS&Co. Tourre was the GS&Co employee principally responsible for the structuring and marketing of ABACUS 2007-AC1. Tourre worked as a Vice President on the structured product correlation trading desk at GS&Co headquarters in New York City during the relevant period. Tourre presently works in London as an Executive Director of Goldman Sachs International.

Tourre was principally responsible for ABACUS 2007-AC1. Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. Tourre knew of Paulson’s undisclosed short interest and its role in the collateral selection process. Tourre also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting.

Later, the complaint describes the marketing challenges in selling the security:

At the same time, GS&Co recognized that market conditions were presenting challenges to the successful marketing of CDO transactions backed by mortgage-related securities. For example, portions of an email in French and English sent by Tourre to a friend on January 23, 2007 stated, in English translation where applicable: “More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!” Similarly, an email on February 11, 2007 to Tourre from the head of the GS&Co structured product correlation trading desk stated in part, “the cdo biz is dead we don’t have a lot of time left.”

SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages

The Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs for securities fraud on Friday, charging the bank with creating and selling mortgage-backed securities that were designed to fail.

According to the complaint, Goldman let John Paulson, a prominent hedge fund manager, select mortgage bonds that he wanted to bet against because they were most likely to lose value and packaged those bonds into the “Abacus” investments, which were sold to investors like pension funds. As those securities plunged in value, Goldman and the Paulson hedge fund made money on their negative bets, while the Goldman clients who bought the investments lost billions of dollars.

full text here http://www.sec.gov/news/press/2010/2010-59.htm

John Paulson: Bank of America's stock will double by 2012

Bank of America's stock will double over the course of the next two years, hedge fund investors have been told.

In a letter to clients, Paulson & Co, which is run by billionaire John Paulson, predicted that Bank of America shares may rise to almost $30 by December 2011.

The share price currently stands at $15.77 on the New York Stock Exchange, reports Bloomberg.

In February this year, Bank of America shares stood at $2.53 but investment by John Paulson's hedge fund has helped the turnaround.

The letter told investors that Paulson & Co believes they have yet to reach their peak.

"[While the bank] has risen from when we purchased the stock, we believe considerable upside remains," it said.

Paulson & Co is a respected name in the financial sector and had its reputation improved last year after it made an estimated $2.5 billion by betting against the US housing market.

Last month, Bank of America reported a net loss of $1 billion for the third quarter of 2009, partly due to paying $402 million to terminate an asset guarantee term sheet with the government.