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Halftime: Forget Fraud Freak-Out, Profit From The Panic!


Investors crushed Goldman on Friday after the SEC charged the firm with fraud related to subprime mortgages. The news dragged down the Dow by triple digits.
But don’t freak out. You can profit while others panic.

(* If you want more details about the lawsuit it’s at the bottom of the page)

Strategy Session with the Fast Money traders


There’s concern in the market that investors will punish other top CDO underwriters, explains Fast Money host Melissa Lee. Exactly who are we talking about? A list follows:

Top CDO Underwriters 2002-2007
Merril Lynch                           107
Citigroup                                80
Credit Suisse                          64
Goldman Sachs                       62
Bear Stearns                          52
Source: S&P CDO Interface

There’s speculation that the banks mentioned above may be the next to be hit with charges, add Joe Terranova, but that's a very speculative trade. Personally it's a bet I'm not willing to make – but with that said, I’d prepare for further downside in the space. My advice is that if you're long financials buy puts in the XLF for protection.

Fast Money Halftime Report

And remember Asia hasn’t felt this yet, so Sunday night could be a difficult night, adds Terranova. If you're looking for a long trade I’m a buyer of the FXY for exposure to the Japanese yen as a bet that the carry trade undwinds as Asia takes risk off the table.

I wouldn’t cherry pick from the names mentioned above, adds Patty Edwards of Storehouse. If you want to play the space go with names that aren’t involved in this stuff at all. I sold my Goldman position on this news. I just don’t want to be anywhere near this.


Gold might seem like an unusual play but Wall Street whale John Paulson’s hedge fund is named in the lawsuit. And as you may know Paulson holds a large position in gold. Take a look:

Paulson & Co. Top Holdings                     % weighting as of 12/31/09
Gold ETF                                                       17%
Bank of America                                             12%
AngloGold                                                       9%
Citigroup                                                        9%
Boston Scientific                                            4.5%

All of these stocks may take it on the chin, explains host Melissa Lee. The chatter is that Paulson may have liquidate some of these holdings. That could drag down these names whether he actually sells or not.


Investors are also punishing Moody’s and other ratings agencies on the potential that these firms may be somewhat culpable – if they improperly rated the securities in question. However, this is purely speculative, explains Steve Grasso.


Investors are also making completely ancillary trades based on the fraud charges facing Goldman. Some follow:

In the wake of this kind of news I just don’t see any way bankers can pull the sizable bonuses they once did – I be cautious Saks and Tiffany, says Patty Edwards.

I’d look at longWalmart , counsels Steve Grasso of Stuart Frankel. It trades somewhat inversely to the overall market. I think it will appeal to investors who go running out of financials on the news.

It’s not a second derivative play, it’s a direct bet. I’m selling put spreads in Goldman – because I think it bounces, counsels Jon Najarian.


Nuts & Bolts Info on Goldman Lawsuit

Here’s what you must know about the civil charges facing Goldman Sachs as reported by our news partner Reuters

According to the SEC lawsuit two Wall Street giants are involved in these events – Goldman Sachs and Paulson & Co - the major hedge fund run by Wall Street Whale John Paulson that we talk about all the time on Fast Money.

Regulators say Paulson & Co. worked with Goldman in creating a collateralized debt obligation or CDO in which “Paulson heavily influenced the selection of the portfolio to suit its economic interests.”

In turn, Paulson took a short position against the CDO – therefore standing to benefit as its value fell - again that’s according to allegations.

What may be implied here is that the security was made up of particularly weak mortgages – deliberately.

Now, here’s the really bad part for Goldman.

According to the lawsuit, Goldman did not tell investors "vital information" about the security including the fact that Paulson & Co was involved in choosing which securities would be part of the portfolio.

Fabrice Tourre, a Goldman vice president who the SEC said was principally responsible for creating the product, was charged with fraud. Paulson has not been charged.

Goldman responded to the charges, saying they were "completely unfounded in law and fact."

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Trader disclosure: On April 16, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Finerman's Firm Is Short (IYR), (IJR), (MDY), (IWM); Finerman's Firm Is Long S&P Puts; Finerman Owns (AAPL); Finerman's Firm Owns (BAC), (BAC) Leaps; Finerman Owns (BAC), (BAC) Preferred; Finerman's Firm Owns (JPM); Finerman's Firm And Finerman Own (WFC) Preferred; Kelly Owns (FRE); Kelly Owns (FXE) Puts; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Terranova Owns (SWN), (XCO); Terranova Owns (FXY) May Calls; Terranova Owns (C) May Calls; Terranova Is Short (BRE); Terranova Is  Long (SONC) May Calls; Seymour Owns (AAPL), (BAC), (EEM), (FXY), (GOOG)

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For Joe Terranova
Terranova Works For (VRTS)
Terranova Is Chief Market Strategist Of Virtus Investment Partners, Ltd.
Virtus Investment Partners Owns More Than 1% Of  (XLU)
Virtus Investment Partners Owns More Than 1% Of  (IGE)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of  (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of  (XLB)
Virtus Investment Partners Owns More Than 1% Of  (XLV)
Virtus Investment Partners Owns More Than 1% Of  (XLI)

For Brian Kelly
Kanundrum Capital Owns (FNM)
Kanundrum Capital Owns (FRE)
Kanundrum Capital Owns (DHI)
Kanundrum Capital Owns (MORN)
Kanundrum Capital Owns (AWI)
Kanundrum Capital Owns (TLT)
Kanundrum Capital Owns (GFI)
Kanundrum Capital Owns (AUY)
Kanundrum Capital Is Long U.S. Dollar
Kanundrum Capital Is Short Yen
Kanundrum Capital Is Short Pound
Kanundrum Capital Is Short Euro
Kanundrum Capital Is Short (MCO)

For Brad Hintz

*Disclosures as of 3/10/10:
Hintz Owns Morgan Stanley And Discover

Hintz Owns (CME)
Accounts Over Which Bernstein And/Or Affiliates Exercise Investment Discretion Own More Than 1% Of  Barclays PLC, Credit Suisse Group, (C), (GS), (JPM), (MS), (BAC)
Barclays PLC, (C), Credit Suisse Group, (GS), (JPM), (MS), (BAC) UBS AG Are Or In Past 12 Months Were Clients Of Bernstein (Non-Investment Banking-Securities Related Services), Bernstein Received Compensation
An Affiliate Of Bernstein Received Compensation From Barclays PLC, (C), Credit Suisse Group, (JPM), (GS), (MS), UBS AG (Non-Investment Banking-Securities-Related Services)
Bernstein Or Affiliate Received Investment Banking Compensation From (C) In Past 12 Months
Bernstein Or Affiliate Expects To Receive/Seek Investment Banking Compensation From Barclays PLC, (C), Credit Suisse Group, (GS), (JPM), (MS), (BAC) UBS AG In Next 3 Months

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