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GOLDMAN SACHS: DEJA VU PENN CENTRAL

March 13, 2016

GOLDMAN:  DÉJÀ VU PENN CENTRAL

On Monday, May 11, 2009, Goldman Sachs agreed to pay $60 million to end an investigation, involving Goldman’s sale of questionable home loans, by Martha Coakley, the Attorney General of Massachusetts,

Ten million dollars was to be paid to the State of Massachusetts.  Approximately $50 million would be used to reduce mortgages in Massachusetts, of which 714 were held directly by Goldman, and thousands of others were held by Goldman’s affiliated company, Litton Loan Servicing L.P.  This alone should dispel the false idea that it is impossible to discover the identities of the victims of these predatory lending practices.

We at The Black Star like to think that we assisted the State of Massachusetts in its pursuit of justice.  On February 20, 2008 I mailed a letter, certified mail 7007 1490 0003 6321 1837, to the Honorable William Francis Glavin, Secretary of the Commonwealth of Massachusetts.

With this letter I enclosed copies of three articles. These articles were Goldman’s Obscene Bonuses, published on March 1, 2007; Goldman’s Toxic CMOs, published on January 4, 2008; and, Goldman’s CMO Liabilities, published on February 5, 2008.

In the article, Goldman’s CMO Liabilities, I proved that Goldman Sachs was liable for the CMOs, which it sold to its clients.  No other media outlet stated since then has even stated that Goldman was liable.  The Black Star stood alone.  And The Black Star News has stood alone since then.

In that article the basis for the determination of liability was that Goldman Sachs had sold commercial paper of Penn Central to various entities, including University Hill Foundation.  Commercial paper is an unsecured note promissory note with a fixed maturity of between one and 270 days.

In this article, I shall quote from another case against Goldman Sachs, Alton Box Board Company, Appellant v. Goldman Sachs and Company, Appellee, 560 F.2d 916, 1977.

 

But first let us examine one pertinent fact:  Alton Box purchased its Penn Central commercial paper via First National Bank.  The Court stated as fact:  “On March 31, 1970, First National Bank, per Alton’s instruction, asked Goldman, Sachs for the names of companies rated NCO prime.”  National Credit Office rated securities and prime was its highest rating.  One might reasonably inquire:  Who is NCO?  NCO is National Credit Office and it was a subsidiary of Dun & Bradstreet- who in the current financial crisis gave subprime mortgages a AAA rating.

Alton Box sued under the provision of the Securities Act of 1933 Section 12(2).  Under this section of the Securities Act of 1933, the plaintiff must establish that:  (1) defendant made a false or misleading statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made not misleading; (2) plaintiff did not know of the untruth or omission; and (3) defendant knew, or in the exercise of reasonable care could have known, of the truth or omission.

There were several important facts, which Goldman neglected to notify Alton.  These included:

  1. On February 5, 1970 Brown Brothers Harriman & Co., a banking institution which in the past had purchased up to 15% of outstanding Penn Central Commercial Paper had removed the company from its approved list.
  2. On February 9, 1970 Goldman had reduced its inventory of Penn Central Commercial Paper from $15 million to $5 million.
  3. In February Penn Central advised Goldman Sachs that additional bank-line coverage for its commercial paper was no longer available to Penn Central.

The Court held:  “Under the circumstances the record makes it clear that Goldman, Sachs did not, as a matter of law, shoulder its burden of proving that it was reasonable for it to have determined on March 31, 1970, that the Penn Central notes it purveyed were creditworthy and of high quality.  In fact the record shows it assumed no burden at all.  Therefore, we are led to the conclusion that Goldman Sachs’ representation that the Penn Central notes were creditworthy was misleading, and Goldman, Sachs thereby violated Section 12(2) of the Securities Exchange Act of 1933.

“Defendant contends that there was no showing that plaintiff relied on its representations either that the Penn Central notes were creditworthy, or that it had made an investigation….

“To recover under that section, Section 12(2), a plaintiff need not prove reliance; however some causal relationship between the misleading representation and the sale must be shown.  As we have indicated, the record is undisputed that Goldman, Sachs failed from March 1, 1970 to the date of the sale, to further investigate the creditworthiness of the Penn Central notes.  We are satisfied that these facts establish, as a matter of law, sufficient causal relationship between Goldman, Sachs’ violation of the Act and Alton’s injury.”

Approximately fifty lawsuits were initiated against Goldman Sachs.  After repeated courtroom defeats, Goldman settled the cases.

But what about Goldman’s liability in the present CMO debacle.  Let us examine Goldman’s knowledge of the creditworthiness of the CMOs that it held in its inventory- and I shall quote from a previous article, Goldman’s CMO Liabilities.

On December 14, 2006 David Viniar, Chief Financial Officer of Goldman Sachs, chaired a meeting of senior members of the trading desk, the risk department, the controller’s office and other senior employees of Goldman Sachs, according to a media report. Lloyd Blankfein, Chairman of Goldman Sachs; Jon Winkelried, Co-President of Goldman Sachs; and Gary Cohn, Co-President of Goldman Sachs, were informed of the proceedings of the meeting, the article reported.

Goldman Sachs determined that it was losing money on its positions in CMOs. It was decided that Goldman Sachs should reduce its inventory of CMOs by selling these CMOs to Goldman’s customers. Goldman Sachs has acknowledged to the press that Goldman had reduced the CMOs in its inventory to $400 million and had reduced the CDOs in its inventory to $1.2 billion.  Goldman has refused to provide the dollar value of CMOs and CDOs, which beginning in the fourth quarter of 2006 the company had sold to its customers.

As Yogi Berra, member of the Baseball Hall of Fame and the greatest living Yankee, said:  “It’s deja vu all over again.”

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