Goldman committed fraud, plain and simple. They failed to disclose Paulson’s short position and Goldman *knew*, prior to the creation of the Abacus instrument, that Paulson was going to go short. They knew this when they accepted Paulson’s “suggested” CDO’s to include in the synthetic. They failed to tell either ACA or the long-side clients that the person taking the short side a) was the reason why the instrument existed at all and b) that the short side client had a hand in selecting the underlying instruments for the synthetic.
Goldman, in the settlement, said:
“Goldman acknowledges that the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was “selected by” ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.”
Now, that’s nice, neutral language, but it is a clear-cut admission that they knew material information that they failed to disclose to clients, as required by the SEC under 10(b)5. That’s fraud, by the book.
The SEC has not withdrawn any of their allegations of fraud in the original complaint. The Goldman settlement did not calm any of those claims either. The SEC could still develop a fraud case against Goldman. But the admission that they failed to meet 10(b)5 regulatory requirements is the thin edge of the wedge. There will be civil cases brought by victims of Goldman’s mendacity going forward as a result of the settlement, even if the SEC chooses to not pursue this any further.
The reputation damage to Goldman was severe.
Here’s the question :
Did Goldman Sachs not allege that ACA (And their partner IKB) KNEW the instruments that were going to be part of the ABACUS deal and had a hand in structuring that deal as well ?
In other words,ACA was well informed as to the collateral in the CDO, and in fact selected the collateral with Paulson.
Did Goldman Sachs not allege that if their intent was to defraud ACA, they would not have joined them in the long side of the deal ( they claimed that they themselves LOST MONEY to the tune of $94 Million on this CDO ).
According to this article :
http://www.realclearmarkets.com/articles/2010/04/23/dont_falsely_blame_goldman__paulson_98434.html
On January 2007 Goldman approached ACA and proposed that it serve as the ‘Portfolio Selection Agent’ for a CDO transaction sponsored by Paulson. ACA previously had constructed and managed numerous CDOs for a fee and as of December 31, 2006, had closed on 22 CDO transactions consisting of $15.7 billion of assets.
On January 9, 2007, Goldman sent to ACA a list of 123 RMBS selected by Paulson. About the selections, an ACA analysis showed that it had previously purchased 62 of the securities on Paulson’s list.
On January 22, 2007, ACA sent an email listing 86 sub-prime mortgage positions for the fund. Of the 123 positions that were originally selected by Paulson, ACA rejected all but 55.
On February 2, 2007, ACA emailed Paulson and Goldman a list of 82 RMBS on which Paulson and ACA concurred. Finally, on February 26, 2007, Paulson and ACA came to an agreement on a reference portfolio of 90 RMBS for ABACUS 2007-AC1.
Clearly ACA had the opportunity to review and select all the securities, which indicates that neither Paulson nor Goldman can be blamed for the fact that ACA simply made a bad investment or failed to perform adequate diligence
IN OTHER WORDS :
Both Goldman Sachs and John Paulson entered into this much discussed investment opportunity to maximize value for their respective constituents, which is what participants in a free market capitalist economy should do. In this transaction, Goldman Sachs’s duty was to serve as a market maker whose job was to structure and execute a transaction to meet multiple client needs. Goldman did just that.
Paulson & Co.’s role was to act as a responsible fiduciary for its investors and earn a desirable return, which it did. ACA and IKB have a customer mandate to earn an appropriate return as well.
In this case, however, ACA and IKB’s investment selections resulted in approximately $1 billion in losses. Whether those losses were the result of poor investment selection or inadequate due diligence, neither Goldman Sachs nor Paulson & Co. is to blame. As such, it’s irresponsible and deceptive for the SEC, the media and politicians to hold Goldman and Paulson accountable.