THE Securities and Exchange Commission in recent weeks has questioned executives of a little-known firm that played a key role in the business of arranging mortgage investments, as part of the agency's probe into now-controversial deals struck at the height of the housing bubble.
GSC Group was one of several firms that helped banks including Goldman Sachs Group put together deals that allowed investors to bet on the housing market.
The New Jersey investment firm turned down Goldman’s request to select assets for the debt deal at the centre of the agency’s fraud lawsuit against Goldman, according to a person familiar with the matter and an email released by a senate sub-committee this week. The concern: The deal was too risky for investors, according to the person and the email.
GSC received a subpoena from the SEC last summer and held subsequent discussions with the agency, including in recent weeks, according to an executive at the firm.
“GSC’s involvement here is strictly as a witness, and we’re cooperating with the SEC,” said Daniel Ross, a lawyer for the firm.
A spokesman for the SEC declined to comment. Goldman and an employee on the deal who also was sued, Fabrice Tourre, have denied wrongdoing.
GSC was founded in 1994 as Greenwich Street Capital Partners, a private-equity unit of Travelers Group. In 1999, it became an independent company and now goes by GSC.
GSC, which manages about $US8 billion ($8.7bn), counts among its senior investment professionals five Goldman alumni, including GSC’s chief executive and chairman, Fred Eckert. Goldman regularly offered GSC a chance to work on its debt deals earlier this decade, according to someone close to the matter.
A representative of GSC said executives who ran the firm’s mortgage unit didn’t come from Goldman and the unit didn’t have a special relationship with the bank.
A Goldman spokesman said the firm had no comment.
In January 2007, Goldman bankers approached GSC to select mortgage-backed securities for a complex deal known as a synthetic collateralised debt obligation that it was creating at the behest of hedge-fund manager John Paulson.
At the time, Mr Paulson was bearish on the mortgage market, according to an email released this week by the senate sub-committee questioning Goldman executives and according to the SEC complaint. GSC turned away the business.
“As you know, a couple of weeks ago we had approached GSC to ask them to act as portfolio selection agent for that Paulson-sponsored trade, and GSC had declined given their negative views on most of the credits that Paulson had selected,” said the email, from Mr Tourre in late-January 2007.
Goldman eventually tapped ACA Management to select the securities for the deal, which was named Abacus 2007-AC1.
The SEC alleges Goldman and Mr Tourre didn’t inform investors that Mr. Paulson’s firm, Paulson & Co, played a role in picking the assets and that Goldman and Mr Tourre misled ACA about Paulson’s position.
The deal quickly lost value, leading to investor losses in excess of $US1bn and gains to Paulson of about the same amount.
GSC worked with Goldman on a $US1.6bn mortgage-linked deal called GSC ABS Funding 2006-3g that closed in January 2007.
GSC also was involved in Anderson Mezzanine Funding 2007-1, a $US307.5 million mortgage-linked CDO underwritten by Goldman in March 2007 that soured quickly after it was sold, according to documents released by the sub-committee.
GSC agreed to manage the collateral of several mortgage-linked CDOs that hedge fund Magnetar Capital had input on from 2006 to 2007, according to documents reviewed by The Wall Street Journal and people familiar with the matter.
Magnetar purchased a risky “equity” slice of these and other CDOs overseen by third-party managers and bought credit default swaps on other parts of the same CDOs or similar deals that would help Magnetar profit in a housing downturn.
Those deals also tumbled in value.
A spokesman for Magnetar declined to comment.
GSC stopped helping create new mortgage CDOs two years ago amid a downturn in the market, according to the firm.
Banking and Finance News 