Bond Rating of Moody’s and Standard & Poors
The main accusation against Goldman Sachs is that it created collateralized debt obligations (CDOs), then offered them to customers, after which it bet short against them. A CDO is a collateralized debt obligation, a security where cash flows generated by a portfolio of assets are used to repay the principal and interest. A case of Goldman Sachs CDO which has been given a lot of media coverage is the Abacus 2007-AC1.
According to Reuters, partial proceeds from the sale of Abacus 2007-AC1 notes went into the purchase of Greywolf CLO 1, while Abacus prospectus failed to disclose whom the $192 million “tranche” of the Greywolf deal was being purchased from, Greywolf Capita...
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...l Management was related to Goldman Sachs has it had been formed by a faction of ex- Goldman upset bond traders, this therefore created a conflict of interest between investors and underwriters who were putting their own deals into CDOs.
According to the U.S. Securities and Exchange Commission (SEC), investors in the Abacus 2007-AC1 were misled since Goldman Sachs did not reveal the clear cut operations of the hedge fund manager John Paulson. John Paulson had participated in picking the underlying portfolio of mortgage-backed securities and was shorting the synthetic collateralized debt obligation as Blumberg (12-24) argues. The Greywolf invested in a $1 billion CDO backed by mostly subprime assets called Timberwolf 1, which was underwritten by Goldman Sachs.
Whereas by the summer of 2008, according to Securities and Exchange Commission, institutional investors lost $1 billion on the deal and the Abacus deal was no more, in contrast Paulson & Co which was shorting the transactions made the same amount in profits. Moody’s Investors Service had given it Triple A rating in February 2007, however regulators have absolved Paulson & Co from any wrongdoing in the Abacus transaction.
The collateralized debt obligations (CDOs), therefore performed very poorly, therefore the investors lost colossal amounts of money, in addition there are claims that CDO regulations appertaining CDO-default pay outs were altered in 2005to favour short sellers. It is alleged that Goldman distorted facts presented to potential investors that an autonomous selection agent, ACA, had made an assessment of the mortgage package, Goldman is also accused of failing to reveal to ACA that Paulson & Co, which had sought to short the package, had conflicting and competing objectives with ACA, which was made to believe that Paulson & Co.s interests were aligned with ACA’s.
The accusation against Goldman is that one of its employees, Mr. Egol was a prime mover of CDO, occasioned by sky rocketing housing prices soaring and obsession with mortgage, this was when Abacus was created. It is alleged that in a four year period, Abacus deals worth over $10. 9 billion were issued. In the scheme, investors were allowed to bet for or against the mortgage securities related to the deal, since the C. D. O. ’s were made up credit-default swaps and not actual mortgages, which is a sort of insurance, where payments are made when a borrower defaults, this was the driving force behind the 2007 and 2008 soaring in C. D. O value when the mortgage market collapsed In addition, Goldman is accused to have attempted to distort actual value of assets that were concerned in Abacus transactions. In the allegation, analysts at Moody’s Investors Service, a Credit rating agency, were requested to assign a higher rating Abacus C. D. O. related assets.
However, the performance of the C. D. O’s was instrumental in the downgrading of the rating of the C. D. Os,