“The idea that Wall Street came out of this thing just fine, thank you, is just something that just grates on people. They think you didn’t just come out fine because it was luck. They think you guys just really gamed this thing real well.”
So said then-Senator Edward E. Kaufman, a Democrat from Delaware, at the Congressional hearing in the spring of 2010 where assorted members of Congress lambasted Goldman Sachs’ activity in the run-up to the financial crisis.
But it turns out two members of Congress actually made money from that crisis, according to publicly available documents. During the crisis years, two now-senators, Mark Warner (D-Va.) who was the governor of Virginia until his Senate term began in 2009, and Bob Corker (R-Tenn.), who took office in 2007, were invested in a fund that appears to have made sizable profits from Goldman products that were designed to bet against the real estate market.
There’s no evidence either Senator was aware of the specific strategy, although both have reported millions of dollars of income from the fund. A little bit of ancient history: Back in the spring of 2010, the SEC charged Goldman Sachs with fraud over a deal called Abacus 2007-AC1. Abacus 2007-AC1 was a so-called CDO, which in essence requires investors to wager against each other. One set of investors was betting that homeowners would continue to pay their mortgages. Others, who were short, were betting there would be massive defaults.
In this particular deal, Goldman allowed a hedge fund client, Paulson Capital Management, to take the short position and help choose which securities would go into it. The SEC alleged that Goldman hadn’t told the long investors that Paulson’s team essentially had designed the CDO to fail. According to a report done by the US Senate Permanent Subcommittee on Investigations, three long investors together lost about $1 billion from their Abacus investments, while the Paulson hedge fund profited by about the same amount.
Goldman paid $550 million to settle the SEC’s charges in the summer of 2010. A young vice president who had worked on the deal, Fabrice Tourre, was eventually found liable in a civil suit brought by the SEC, making him one of the few to face any repercussions from the crisis era.
But Abacus 2007-AC1 wasn’t unique. In fact, it was merely the last in a series of Abacus CDOs. According to the Senate report, these were “pioneered by Goldman to provide customized CDOs for clients interested in assuming a specific type and amount of investment risk" and “enabled investors to short a selected group” of securities. Many of the Abacus deals were tied in part to the performance of subprime residential mortgage-backed securities, but some were also tied to the performance of commercial mortgage-backed securities.
Because AIG provided insurance on at least some of the Abacus deals, the Abacus deals were also part of the collateral calls that Goldman made to AIG, and part of the reason that taxpayers ended up bailing out AIG. Plenty of well-known hedge funds availed themselves of Goldman’s Abacus deals, according to a document Goldman provided the Financial Crisis Inquiry Commission. The list of those who were short various Abacus deals includes Moore Capital Management, run by billionaire Louis Bacon; Magnetar, an Illinois-based fund run by Alec Litowitz; Brevan Howard, a European hedge fund management company; and FrontPoint Partners (which shows up in the movie "The Big Short").
There are also some lesser known names in the document, including Pointer Management, a Tennessee-based fund which was founded in 1990 by Joseph Davenport, a Chattanooga area businessman and former Coca-Cola executive, and Thorpe McKenzie, also from Chattanooga, according to the Campaign for Accountability.
Specifically, Pointer took short positions in an Abacus deal called ABAC07-18, as did FrontPoint Partners and several others. According to several sources, this Abacus deal was based entirely on securities tied to commercial real estate, rather than residential real estate. While few people have heard about this particular Abacus deal, it too resulted in Goldman making a collateral call on AIG. According to a document Goldman submitted to the FCIC, it looks as if by late 2008, AIG had posted a total of $308 million in collateral to Goldman in connection with Abacus 2007-18.
And it too was controversial — so controversial that at a meeting of the Financial Crisis Inquiry Commission on October 12, 2010, the commissioners voted to refer the matter to the Department of Justice, citing “potential fraud by Goldman Sachs in connection with Abacus 2007-18 CDO.”
In its write-up, the FCIC quoted Steve Eisman, the FrontPoint trader whose character figures prominently in "The Big Short." According to his interview with the FCIC, Eisman seemed to feel that Goldman might have gamed the rating agencies, and might have brought in outside investors so that the firm could justify marking the deal down immediately, meaning long investors would suffer and short sellers would make money.
According to Eisman’s testimony, he said to the Goldman traders, “So you put this stuff together and you went to the agencies to get a rating and the biggest issue with the rating is the correlation of loss, and you presented a correlation analysis that was lower than you actually thought it was but the rating agencies were stupid, so they’d buy it anyway. So assuming your correlation analysis was correct, you took the short side, sold it to the client, and then [did the deal with me to get a mark].” One of the Goldman traders responded, according to Eisman's testimony, “Well, I wouldn’t put it in those terms exactly.”
Eisman went on to say he believed Goldman “wanted another party in the transaction so if we have to mark the thing down, we’re not just marking it to our book.” He added that, “Goldman was short, and we [FrontPoint] were short. So when they go to a client and say we’re marking it down, they can say well it wasn’t just our mark.”
The FCIC noted that if Goldman did agree with Eisman’s characterization, this could raise legal issues for Goldman as to whether the firm deliberately misled the rating agencies, thereby leading to a material omission in the offering documents for Abacus 2007-18 and violating securities laws. The FCIC also noted that if Goldman indeed knew it was expecting to lower the value of the security as the firm was creating it, and brought in other investors only to make that look more genuine, that could be another potential violation of securities laws. Anyway. Nothing came of this, just as nothing came of any of the FCIC’s other referrals to the Justice Department.
According to a document Goldman submitted to the FCIC, the short investors did very well: Pointer appears to have been paid $120 million in “termination payments” in 2008 and 2009. (Although commercial real estate held up fairly well in the end, prices also collapsed in the crisis.) The documents don’t make it clear what, if any, upfront investment was required; the monthly coupon rate was small.
“This amount of money that’s going into AIG, there is no upside now,” Corker told Politico in early 2009 about the taxpayer bailout of the company. “This is all just like gone money.”
Gone where? Well, what is clear is that Corker especially, but also Warner, made money from their overall investments in Pointer. According to his disclosure forms, Corker’s investment in Pointer first shows up in 2006. He put the value of his investment between $5 million and $25 million. In July 2007, several months before the effective dates for Pointer’s Abacus deals, he put an additional $1 million to $5 million into Pointer. From 2006 to 2014, he reported total income from Pointer of between $3.9 million at the low end and $35.5 million at the high end (including funds from the sale of part of his stake in the fund in 2012.) He sold the rest of his stake in 2014 and reported a cash receivable from Pointer of between $5 million and $25 million that year.
According to Warner’s disclosure forms, he first invested in Pointer in 2007. He assigned his stake the same value range as Corker did his: between $5 million to $25 million. Warner, who sold his entire position in 2012, reported total income from Pointer of between $1.5 million and $10 million. There’s no evidence that either senator knew that a fund in which they had invested was shorting the real estate market.
A letter from Pointer’s chief compliance officer says that Corker “can neither exercise control nor have the ability to exercise control over the financial interest held by Pointer.” Nonetheless, Corker and the principals of Pointer have known each other for a long time. According to the Campaign for Accountability, in 2004, Corker named Joseph Davenport among his co-chairs of his campaign committee ahead of his 2006 election; Pointer employees and their spouses have contributed $76,840 to Corker’s campaigns and $55,000 to his Rock City PAC, says CfA. And several business entities tied to Corker list the same address as Pointer. There aren’t any obvious ties between Warner and Pointer.
Pointer did not return a call for comment. A spokesperson for Warner declined to comment. Corker’s spokesperson says, “This is yet another ridiculous narrative being peddled by a politically-motivated special interest group that refuses to disclose its donors. This dark money entity has an abysmal track record for accuracy, and just like the other unfounded claims they have leveled against Senator Corker, this too is completely baseless." (They are apparently referring to the Campaign for Accountability, although this story was sourced from publicly available documents.)
It’s also a little ironic that Corker and Warner were the co-sponsors of the Corker Warner bill, which set out to reform the housing finance system. Let’s give them some credit. Since they already benefitted from the last crisis, maybe they’re trying to protect us from the next one?