A Melman Minute By: Leonard Melman   NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of the developing international financial crisis and its relationship to gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday. Since the work has been expanded to include potential solutions to the growing list of seemingly insoluble dilemmas, the working title of the book has been revised to 'REVERSING THE WAY IN!"   April 19, 2010 The world continues to pay rapt attention to the fallout from the SEC suit against banking giant Goldman Sachs & Co. (GS) as additional information has been inundating the financial news networks. Most importantly, let us take a close look at the complaint itself; remembering that both legally and in fact, these are allegations, not court-proven facts.  The basic thrust of the SEC suit is that Goldman Sachs deliberately deceived investors by allowing the management of a hedge fund operated by Paulson & Co. to participate in the selection of securities which would comprise the assets of their fund, presumably designed to profit from the success of a collection of residential mortgage-backed securities selected for the likelihood of both capital gains and reliable income generated by the payment of mortgage payments.  Another company, highly-reputed ACA Management LLC was a primary participant in the choice of the underlying debt obligations. The accusation against Goldman Sachs is that they knowingly marketed these collateralized debt obligations (CDOs), designated by the fund name of "ABACUS 2007-AC1" (AC1), as a positive investment while being aware of the fact that Paulson's participation was geared to profit from the potential downgrading and poor performance of the fund's assets.  An individual party named in the suit, Fabrice Tourre, was named as the principal person in the creation of AC1 and the suit describes him as the person responsible who, "...devised the transaction, prepared the marketing materials and communicated directly with investors.  Tourre knew of Paulson's undisclosed short interest and its role in the collateral selection process." The suit also provides what it states as corroborative statistics to demonstrate the poor quality of the underlying assets - thanks to Paulson's influence - by noting that, "By January 29, 2008, 99% of the portfolio had been downgraded.  As a result, investors in AC1 lost over $1 billion.  Paulson's opposite Credit Default Swaps (CDS) position yielded a profit of approximately $1 billion for Paulson." The suit singles out Tourre's role by clearly noting that he was not only aware of the risks to the fund, but knew that damage could occur quickly and quotes Tourre sending an e-mail to a friend which stated in part, "...More and more leverage in the system.  The whole building is about to collapse at any time now..."  The SEC also quotes an e-mail to Tourre by the head of GS structured product correlation trading desk which stated in part, "the CDO biz is dead we don't have a lot of time left." showing they also knew that time was limited and risks were very high, none of which was disclosed to potential investors. Apparently, the central character, Fabrice Tourre - nicknamed the 'Fabulous Fab' - was well known for his expensive tastes and high living, who, among other things, was prone to throwing noisy parties.  One accuser pointed to Tourre, noting in a UK Daily Mail article that, "This is the most cynical scheme I ever saw.  Tourre was very aggressive about trying to make the assets look better than they were." At last word, the SEC said a formal request would be made to have Tourre returned from his home in London to the USA to face charges. Fallout continues to spread.  In one case the SEC is stating that it will now look at other soured deals to see if charges are appropriate and Great Britain's government has also stated that it will investigate financial deals of a similar nature. However, there is another side to the story.  Goldman Sachs itself has denied the SEC's charges and stated that it is not normal to disclose the identities of buyers and sellers of its funds.  They also stated that the lawsuit was, "...unfounded in law and fact."  GS cannot but help be concerned regarding the effect of the suit on their reputation, as well as the price of their shares, which took a 15% hit on Friday and continue to trade slightly to the downside this morning. The editorial board of the Wall Street Journal also took exception to the suit.  After presenting their rebuttal to the specifics of the charges, they also made the following comment; one which we believe may have more than just an element of truth.  "Which leads us to the real impact of this case, which is political.  The SEC charges conveniently arrive on the brink of the Senate debate over financial reform, and its supporters are already using it to grease the bill's passage...Three years later, after the mortgage market has blown up and after the panic and recession, the political class is looking for legal cases to prove its preferred explanation that the entire mess was Wall Street's fault.  Goldman makes a convenient villain." Undoubtedly, we will continue to hear much more about this case in the future, but our particular interest lies in the direction of the suit enabling yet another expansion of government regulations, more bureaucracies and greater ultimate pressure on the stability of the entire financial system - all relevant considerations to the future of precious metals. Speaking of metals, two stories of particular interest to the mining community hit the newswires this morning, one potentially negative, the other potentially positive. First, another government is once again playing the game of demanding grater participation in resource revenues - in this case petroleum - after companies have made enormous investments in their country.  In this case, the country is Ecuador as President Rafael Correa just announced that unless oil companies are willing to hand over more revenues to his cash-strapped country, they may face expropriation of their Ecuadorian holdings. The dictionary defines 'extortion' as, "...obtaining something by force, threats or other unfair means."  Ecuador's latest action appears to us to closely conform to this definition of extortion. The other article is much more favorable to the industry as we learn from this morning's Wall Street Journal that, "...Nathan Rothschild, former co-president of Atticus Capital and scion of the Rothschild banking dynasty, is seeking to raise 750 million Pounds for an investment vehicle aimed at making an acquisition in the mining sector..."  (Our emphasis) In our opinion, it cannot be anything but positive for the mining world when old-line money such as the Rothschild family is looking to the future of mining in a positive manner such as this. Metals markets this morning have been relatively quiet as of 9:00 AM PDT, with precious metals slightly lower on balance, base metals also off a bit and mining share indexes 1-2% to the downside.  The US Dollar is higher in currency markets, crude oil is off by more than $2.00, interest rate future are mostly close to unchanged and financial markets are trading lower with the Dow Industrials down by about 35 points and Canada's TSX off by about 75. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Wednesday, April 21, 2010.                  ◄  Previous Minute                                                                                                        Next Minute  ►
		DISCLAIMER The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed.  Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only. Any investment decisions should be made only following consultation with registered investment professionals.