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Fraud*
According to the Collins English Dictionary 10th Edition fraud can be defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage".[1] In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain
*As defined in Wikipedia

Friday, February 17, 2012

Goldman Sachs and the Demise of New Century Financial

In a posting on February 4, 2012, we described how Goldman Sachs is facing a class-action lawsuit for defrauding investors in a 2006 offering of risky mortgage securities made from New Century Financial sub-prime mortgages.

We read elsewhere:

"The suit also alleges that New Century didn't follow its own mortgage underwriting standards when making loans....Goldman's alleged negligence arises from its failure to properly vet the loans and the inaccurate information about the quality of the loans investors say they received as a result." (from an article by Tracey Samuleson - WNYC News)

But there is more to this story and much more to learn about the relationship that Goldman Sachs had with New Century Financial Corp. Mark Mitchell published a report on March 4, 2010, that traces the demise of New Century Financial through the predation of others including Goldman Sachs. If you want to know how Goldman works it magic to make a profit, be sure to read the report.

How David Einhorn and Dan Loeb along with Goldman Sachs Brought Their Special Talents to Bear On New Century Financial
By Mark Mitchell

You don’t hear much about it, but the March 2007 bankruptcy of a company called New Century Financial was arguably one of the most important events leading up to the financial crisis that nearly caused a second Great Depression.

It was the demise of New Century, then the nation’s second largest mortgage lender, that triggered the collapse of the market for collateralized debt obligations. And it was the collapse in the value of collateralized debt obligations (a majority of which contained New Century mortgages) that hobbled a number of big financial firms. Once hobbled, the likes of Bear Stearns and Lehman Brothers were ripe targets for unscrupulous hedge fund managers who amplified their problems by spreading exaggerated rumors while bombarding them with illegal naked short selling.

So we must ask: Why did New Century Financial go bankrupt? Did the
company die of natural causes, or did miscreants orchestrate its destruction?And if miscreants destroyed New Century, did they do so planning to profi tfrom the broader economic calamities that were certain to result from its collapse?

I do not yet have definitive answers to these questions. But interviews with
sources close to New Century and a review of documents, including the oddly biased 500-page New Century bankruptcy report, make it clear that at least two hedge fund managers — David Einhorn of Greenlight Capital and Dan Loeb of Third Point Capital — played a significant role in creating the conditions that made New Century vulnerable to catastrophe. And they did so while building massive short positions in Bear Stearns, Lehman Brothers, MBIA and other companies that were likely to be seriously damaged if New Century were to go bankrupt.


. . . .

Moreover, some banks, most notably Goldman Sachs [NYSE:GS], created and sold collateralized debt obligations containing New Century mortgages while simultaneously betting that the CDOs would plummet in value. Multiple media stories (such as this one in “Investment News”) have speculated that Goldman Sachs actually designed these CDOs in such a way that they would be certain to implode, delivering large profits to Goldman and preferred hedge fund clients. Those CDO could not have been created without Einhorn and his allies inside New Century delivering the mortgages that went into them. And there is no doubt that Goldman Sachs delivered the knock-out punch that put New Century out of business, ensuring that the CDOs would,in fact, implode. This constellation of facts may be coincidental, of course. Or not. This essay lays them out, and leaves it to the reader to decide.New Century’s problems began in December 2005, when board member Richard Zona drafted a letter in which he threatened to resign if senior executives did not agree to sell a greater percentage of the mortgage loans on its books to various banks, such as Goldman Sachs. In his letter, Zona explicitly stated that he was making this demand in league with David Einhorn and Dan Loeb.


Read the entire report here

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