RBS lost £545m in alleged Goldman fraud
Royal Bank of Scotland was the biggest victim of the alleged sub-prime mortgage fraud orchestrated by Goldman Sachs and involving hedge fund Paulson & Co.
Royal Bank Of Scotland Group
In August 2008, the part-nationalised lender paid Goldman $841m (£545m) to close its position on the single trade. According to the US Securities & Exchange Commission, "most of this money was subsequently paid to Paulson". RBS acquired the problem trade in 2007 after buying ABN Amro, the Dutch bank that ultimately proved the cause of its downfall.
Following the SEC's accusations yesterday, RBS's lawyers were examining whether there would be any action to take against Goldman to recover losses.
RBS found itself bearing the bulk of the losses because ABN had written insurance against the "synthetic collateralised debt obligation (CDO)" at the centre of the alleged fraud.
However, according to the SEC, Goldman convinced investors to buy a poor quality CDO in the full expectation that it would collapse. Paulson, which was shorting the product, is alleged to have selected the sub-prime mortgage assets to be referenced by the "synthetic CDO" that were most likely to default.
Goldman then sold the CDO to investors to put someone on the other side of the trade without revealing Paulson's involvement. Investors would have believed the sub-prime assets to be high quality.
ACA Capital, a monoline insurer that specialised in financial products, "wrapped" a $909m tranche of the CDO. In exchange for the protection, it charged investors $4.5m a year. ACA covered its position by getting ABN to "intermediate". For a $1.5m annual fee, ABN effectively took the risk of any loss if ACA was unable to pay.
ACA was put into run-off in November 2007, leaving ABN with the bill for any losses. RBS acquired ABN at roughly the same time and paid off its $841m loss position the following August.
The other principal casualty was German bank IKB. Unlike ABN, IKB's involvement was fairly straightforward. It bought $150m worth of notes in the CDO, which paid annual interest. "Within months of closing [the deal], the notes were nearly worthless," the SEC said. "IKB lost almost all of its $150m investment."
In total, "investors in the CDO lost over $1bn", the SEC said. "Paulson's opposite positions yielded a profit of approximately $1bn for Paulson." Goldman denies the allegations. No charges have been brought against Paulson.