Goldman Sachs has been ordered to pay National Australia Bank $80 million after it incurred losses from investing in a toxic Collateralised Debt Obligation that the US investment bank had sold them, but secretly bet against.
The dispute resolution conducted by the US Financial Industry Regulatory Authority brings an end to a long running claim lodged by NAB against Goldman with the regulator finding evidence of “knowing and material omissions and misstatements in the marketing material” that “masked significant conflicts of interest” between Goldman and NAB.
NAB invested $80 million into Goldman’s Hudson CDO with 24 other investors in 2006. Goldman then made nearly $1.7 billion from the deal by shorting the credit indices that were tied to the securities in addition to tens of millions of dollars in underwriting fees.
The FINRA arbitration panel awarded the return of the $80 million invested plus 3 per cent interest accrued from December 2006.
“NAB confirms that it was awarded 100 per cent of its claim plus interest by a FINRA arbitration panel. NAB is pleased with the result,” a spokesperson said.
A senate report into the conduct of Wall Street’s banks showed that NAB had actually raised concerns and demanded Goldman disclose its position in the Hudson CDO to make sure the US bank was “making restructuring decisions for the right reasons – make sure [it is] serving the right interests”, but the bank failed to disclose its large short position in the securities.
NAB was not the only Australian victim of sales of toxic CDOs by overeager Goldmans salesmen. A Sydney-based hedge fund Basis Capital that had taken funds from retail investors also bought toxic structured products constructed by Goldman Sachs.
Goldman Sachs local CDO salesman George Maltezos famously titled an email subject “Utopia” before writing “I think I found white elephant, flying pig and unicorn all at once,” to describe his enthusiasm in meeting with Basis.
That CDO – officially titled “Timberwolf” was branded “shitty” by another Goldman executive in an internal email.
While most of the Australian banks dabbled into structured products, NAB and ANZ Banking Group were perhaps the most exposed to naïve investments in complex credit securities.
NAB built a portfolio of CDOs tied to US mortgages while ANZ Banking Group’s notorious and naïve credit intermediation trades also left the bank nursing losses. NAB has bought $1.2 billion worth of CDOs in 2006, two years before the financial crisis inflicted losses on holders of securities tied to US mortgages.
Meanwhile ANZ took a $670 million hit from its ill-fated “credit intermediation” trades conducted by its markets desk that attempted to arbitrage obscure pricing differentials for credit insurance.
The Australian Financial Review