Concerning Abacus: Tails you lose, heads I win

| 20/04/2010

The news broke last Friday that Goldman Sachs, the banking giant whose CEO recently declared that his company was about doing God’s work, had been the subject of fraud charges filed earlier in the day by the Securities and Exchange Commission.

The charges allege that Goldman Sachs made material misstatements and omissions in connection with a synthetic collateral debt obligation “CDO” Goldman Sachs structured and marketed to investors in 2007.

The name of the particular CDO is ABACUS 2007- AC1. It is alleged that the marketing materials failed to disclose that a large hedge fund (Paulson & Co Inc), with economic interests directly adverse to investors in the ABACUS 2007-AC1, played a significant role in the portfolio selection process. Incidentally, John Paulson, the CEO of the hedge fund, is celebrated for having personally earned $2.0 billion in 2008 and $2.3 billion in 2009.

To put it bluntly, the investors, as is generally the case in the casino game that is held up as high finance, were being played for stiffs. The greed game they had willingly decided to play goes simply like this: “tails you lose, heads I win”.

What, you might ask, does this have to do with us ordinary mortals in the Cayman Islands?

The Transaction Overview of the Offering Document (page 20) provides an explanation. ABACUS 2007-AC1 is incorporated with limited liability in the Cayman Islands. The Class D Notes are governed and construed in accordance with the Laws of the Cayman Islands.

Such a vehicle would have delivered less than $25,000.00 to the public revenues of the Cayman Islands. The SEC allegations suggest that investors were relieved of over $1.0 billion and that the Paulson hedge fund’s opposite CDS positions yielded a profit of approximately $1.0 billion. (There is a 99% chance that the Paulson positions were similarly facilitated by entities incorporated with limited liability in the Cayman Islands, Exempted Companies.)

A gamed transaction in excess of the $2.0 billion and the house (that’s us the offshore facilitator) is happy to put its reputation on the line for less than $50,000.00!

Are we really so naïve to continue to believe that $25,000.00 is adequate compensation to the public purse for the provision of an enabling environment, wherein so called reputable institutions can arrange for investors to be gamed for billions?

Are we truly satisfied that the reputational damage that is wrought on this little island by the globalrevelations of our involvement in such despicable acts by greedy self- interested financiers is worth the transient material illusion of development that it has brought us over the last two decades?

We continue to hear the self-interested captains of the financial industry and their choir boys and girls warn us that the industry is contributing to the local economy at an absolute optimal level. They continue to chide the public sector for its profligate ways and suggest that the real fix to our current financial and economic woes is to be found in finding ways for the immediate curbing of public sector expenditure.

Maybe rather than reducing the public service we the ordinary folks should be clamouring for the hiring of a few more good people who really understand what goes on the name of high finance and have them deal with the white collar scoundrels as they should really be dealt with.

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  1. Git 'er done says:

    Well folks I did it I found a simplified version of what this whole mess is all about in terms we can understand.


  2. Zzzzz says:

    If it wasn’t for financial services, Cayman would just be known as a really terrible choice for a Caribbean vacation.  Oh and the place that eats turtles with pride. 

    • Anonymous says:

      What a nasty post. And to think we harbour the likes of you.   

    • isandman says:

      That’s very true. But Cayman should not rest on it’s laurels. That is part and parcel of us losing ground in recent years…kinda like USA automakers.

      Cayman should keep aware of G20 happenings and expectations and strive to be as ethical as possible at all times.

      Decisions need to be made for the long term benefit of the masses…not just this years bonuses for the few already rich.

  3. Anonymous says:

    That Paulson believed the U.S. sub-prime mortgage market was heading for collapse was well known at the time. In a letter to investors this week, John Paulson explained the role his company played in the market and the ABACUS transaction.  “When we expressed our concerns about the mortgage markets many of the most sophisticated investors in the world, who had analyzed the same publicly available data as we had, were convinced that we were wrong, and more than willing to bet against us.”

    When Goldman came to work on ABACUS 2007-AC1, all participants would have known that the transaction involved two sides, a long and a short, representing the two divergent views of the market. “All of our dealings,” said Mr. Paulson, “were through arms-length transactions with experienced counterparties [ACA] who had opposing views based on all available information at the time.”

    Goldman Sachs, which put together the ABACUS deal, says it lost more than $100-million on it. A German bank, another sophisticated sub-prime mortgageinvestor, lost $150-million. There were no innocent victims of fraud. There was no fraud, or at least not on the basis of information available so far.

    Cayman isn’t mentioned at all in the circles and discussions that matter, and only tangentially by the authors with no clue (or recall) as to the climate at that time.

  4. whodatis says:

    Mr. Iton,

    Excellent post.

    However, I am afraid nothing shall come of your efforts.

    This country has long been manipulated as the facilitator and scapegoat for those at the top of the food chain.

    They are a spineless, conniving and hypocritical bunch who sit pretty yet enjoy the shield of "the tax haven of the Caymans".

    I find it so ironic that the USA, Canada, UK and EU constantly harp on and on about this "Offshore Financial Centre" and the going-ons therein – yet it is their very own citizens who are doing the goings-ons herein!

    Whenever I see the rare photo-op of the leaders of "our" financial industry I can do nothing but laugh. Who the heck are these people!? Regardless, when the hammer drops and the international media picks up on yet another white collar multi-billion dollar scam of the international financial industry – it is the name of the "Cayman Islands" that is dragged through the mud. (I know, for I have worked overseas and constantly received the "side-eye" as I shook hands with and greeted new colleagues and friends.)

    Oh well, to each his own. They have amassed a decent nest egg through their "hard work" – nice homes, vehicles and wives (lol!) – however, personally I don’t have much respect for them simply because they are inherently shady characters.

    When the ride is over it shall be these very same individuals that will be sailing over the Atlantic to Ireland, Singapore and Hong Kong.

    Integrity (as if it has any place whatsoever in this discussion) is a precious and irreplaceable element of any entity or person. As Cayman’s has been allowed to be kicked, dragged, and pulled around in the dirt (by non-Caymanians) for so long now – I believe that a fairer share of the pie is not an unreasonable demand.

    But wait…I’m not suppose to think and say such things. Have I forgotten what an ignorant, blind and unaware good little native that I have been systematically trained to be?! Do I not realize that I should be grateful and kissing the feet of these glorious human beings? Shame on you … naughty, naughty Whodatis!


  5. slowpoke says:

     It is reassuring to know that, there is at least a small group of moderates in Cayman, who do not espouse the financial/lawyer industry mantra of, less regulation & government, and "all will be well" philosophy. 

  6. Durrrr says:

    Seems like a clear case of another one looking for something for nothing. What exactly is the author suggesting the Government should be paid more for?


    If the figures quoted are correct, $25k for being a company’s domicile seems more than sufficent to me.  Lest we forget that there are countless other jurisdictions who would be more than happy to take this type of business away from us.


    And the talk of ‘damage to reputation’ of Cayman is surely nonsense – the only reputations damaged are those of Goldman Sachs and the individuals involved.


    Otherwise, a great article.

    • Xpat lova says:

      Wait till this clears it first hurdles and it becomes more clear of what our role is in this, you obviously like others do not or pretends not to understand the animosity and perceptions held  in certain quarters. The UK now has jump in on the matter also to investigate wait a little, until it picks up some steam you like many others have your heads buried deep in the sand are you truly so naive. Yet another Bi@#*% lick coming.

  7. ARRRRRRRR! says:

    Applying true pirate logic, Andre seems concerned that Cayman did not participate more in "the booty" as "facilitator" to the alledged fraudulence (to the extent of its limited liability)?!?  


  8. Kaboom says:

     No comments here it is sure funny how on this island some people are conveniently silent when the truth is stated. Yes our great leader and his immigration UDP chairman and their little team of financial wizards are telling us we need these incentives to restore our financial status . Let me stated the obvious for all you absent minded dodo birds. We are giving certain people preferential permits to ruin our reputation and to blacken our name. A criminal by a different name is still a criminal Cayman. When our reputation is totally destroyed they shall pack their bags and head on out with their disposable Cayman islands useless work permit or residency and laugh at the poor Caymanian stuck here in this financial utopia. wise up Caymanian your very existence is at risk here.

  9. Anonymous says:


    Thanks Andre for this most interesting article that ordinary people like me can understand the real sacrifice that Caymanians are making and who the beneficiaries are.    


    You are correct, we are putting our repetition on the line for a messily amount while the pirates get rich off of us; then they got the face to demand that the poor civil servants who have to work like dogs to amend the laws for them ( to get rich) should take a pay cut to fix the Govt’s deficit.  It’s clear to me that they should have to contribute more to the economy if they want to do business here.    If the government is expected to provide goods and services then they should have to pay the true worth.    Don’t expect the servants who deliver these services to have to bear this burden too.   They don’t earn billions they live from pay cheque to pay cheque. 


     It has always been very evident to me from where I sit that the answer to government’s recurrent expenditure is not solely the civil service problem to fix , but instead everyone that lives, works or do business here should have to contribute fairly.

  10. isandman says:

    Thanks Andre for yet once again bringing to light the extent of the GREED that is running and ruining our world.

    If Cayman was truly benifitting (as an entire country) then surely after some three decades of providing "Financial Services" to the WORLD to the tune of countless trillions of dollars, we should/would have been able to wheather this "economic crisis" much better. Surely we should have been able to have some REAL savings set aside as a country to truly provide for a measly sixty thousand population.

    But the truth is much closer to Cayman providing for very few aready very rich people/corporations. And so i agree with the post completely in it’s suggestion that our current mode of "doing business" is morally flawed and NOT sustainable. It will not be the few, very rich who will be left here to pay the price. But those few, very rich will do everything to continue at the expense of the rest of us, not unlike the makers oftobaco have done.

    Where do we get off at taxing the migrant 2% while also saying we cannot tax the BIG financial institutions 0.0010% on transactions? While also refusing to provide for a minimum wage. While allowing employers to provide health insurance at a minimum of $25,000 (which is wholly inadequate, espcially for traumatic accidents which require air ambulance).

    Such practices are just plain wrong and does nothing to convince anyone that Cayman is truly interested in doing what is right…maybe signing various documents to "appear" to be doing so…but this trick is rapidly getting old. It’s high time for a more moral (fairer to all, rather than just a few). It is known that the gap between the few rich and the many middle class and even more poor is continuing togrow at an alarming rate.

    We have to demand more and not settle for less. Otherwise what are we truly gaining as a country?…as a world? Surely there is a better way, a more sustainable… and moral way forward!

    Who are those in Cayman (in the know) and powerful enough that will step forward to do the right thing…consistantly…for country (or island).

  11. TennisAce says:

     The 25,000 or 50,000 that your article cites, is that the fee paid to Government as incorporation fees? I am a bit perturbed that once again the Cayman Islands is being dragged through the mud as a facilitator and/or enabler in these large financial institutions bilking investors of billions of dollars. For every offering memorandum or offering document or prospectus that I have seen, one would think that investors, who are savvy business people would have read the fine print and had their financial advisors or business managers provide good advice on the stock being sold.  Goldman Sachs is a reputable company. As a matter of fact most of the companies that have gone under are reputable companies.  The fact that they are now taking investors down one after the other has nothing to do with them being incorporated in the Cayman Islands.  The fact is that these companies have their centre of main interest (COMI) in the United States and as such any prosecution of these companies will be done in the United States.  The questions that need to be asked is why did the regulators in the United States continue to turn a blind eye to these discrepancies.  The Securities and Exchange Commission has oversight on these companies. Clearly, that organisation which has a budget 10 times that of the Cayman Islands Government should have been more on the ball when it came to informing the public that the stocks that they were buying were worth nothing, however, that was not the case and right now everyone is looking for someone to blame and unfortunately the Cayman Islands seems to be it.