Details of one Goldman deal reveal lopsided conflicts

McClatchy NewspapersDecember 30, 2009 

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NEW YORK — Some banks were only too happy to take big bets from Goldman against the housing market.

Merrill Lynch, the biggest player in the offshore market, remained bullish on the subprime mortgage market until late 2007 and plunged $369 million into a deal that Goldman assembled in 2006 in the name of a newly created Cayman Islands-based company, Broadwick Funding Ltd.

The mortgage-backed securities that were part of the $720 million Broadwick credit-default swap arrangement with Goldman were riskier than $280 million in bonds that also were sold to the investors in another part of the deal. Experts say that Goldman likely paid less than $100,000 a year for what initially was $720 million in insurance against a default or some other "credit event."

Despite Goldman's disclaimers in an offering circular that McClatchy obtained, the transaction was tainted by "a potentially huge conflict of interest" that "cannot be addressed by standard prospectus disclosures," said New York bond analyst Sylvain Raynes.

"This is not an arms-length situation, as brokering always pretends to be," said Raynes, the co-author of the forthcoming book "The Elements of Structured Finance," to be published in March by the Oxford University Press. "Goldman can easily and selectively sell the riskiest securities into the deal with no oversight from anyone."

Indeed, he said, Goldman could even select the worst imaginable loans and "collect 100 cents on the dollar."

Merrill Lynch recently joined a court fight against Goldman over $10 million of Broadwick's cash reserves, but neither side has revealed how much Goldman has collected so far under the swap agreement.

In a similar deal, known as Fortius I Funding Ltd., Goldman advertised that 86 percent of a $601 million package, or $517 million, would comprise a credit-default swap that would hinge mainly on the performance of residential mortgages yet to be identified.

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McClatchy Newspapers 2009

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