What did Goldman do?

After reading through the SEC complaint, it’s really pretty simple in concept. A shark worked with his bookie to set up a couple of patsies. The shark has not been charged, and from what I’ve read in the press and heard from the rumor mill, I don’t think it likely …

I’ve tried to diagram it out, probably still needs some work. (Suggestions welcome!).

The core of the complaint seems to be in paragraphs 38 and 41 of the SEC doc, where they state:

“Similarly, a 65-page flip book for ABACUS 2007-AC1 finalized by GS&Co on or about February 26, 2007 represented on its cover page that the reference portfolio of RMBS had been “Selected by ACA Management, LLC.” The flip book included a 28-page overview of ACA describing its business strategy, senior management team, investment philosophy, expertise, track record and credit selection process, together with a 7-page section of biographical information on ACA officers and employees. Investors were assured that the party selecting the portfolio had an “alignment of economic interest” with investors. This document contained no mention of Paulson, its economic interests in the transaction, or its role in selecting the reference portfolio. “

And then (paragraph 41):

"On or about April 26, 2007, GS&Co finalized a 178-page offering memorandum for ABACUS 2007-AC1. The cover page of the offering memorandum included a description of ACA as “Portfolio Selection Agent.” The Transaction Overview, Summary and Portfolio Selection Agent sections of the memorandum all represented that the reference portfolio of RMBS had been selected by ACA. This document contained no mention of Paulson, its economic interests in the transaction, or its role in selecting the reference portfolio."


Early notes from GS to some clients make it look like the GS defense will come down to “Caveat emptor – we’re all big boys here, and, besides, if you look at this from our accounting perspective (the one we’re using here, anyway), we lost money on this deal”. As one GS client who shared a note with me said: “True, but irrelevant”. The fact that Paulson made $1B, and Goldman’s customers, who they pitched the deal to, lost that $1B, is not mentioned.

The ethics of playing both sides have always been a bit murky in the markets, especially when it comes to intermediaries. Setting up your customers is not. Or at least it didn’t use to be.

There's a lot more coming down the pike here -- Goldman is just the biggest baddest wolf in the pack, so the SEC smacked them in the face first. Check out this piece -- "Other Major Banks Did Deals Similar to Goldman’s" on ProPublica.

A friend of mine, who runs derivatives operations at a large bank, sent me these thoughts yesterday:

The regulators have grown brand new serrated teeth in rows and funnily enough are now teething....

Was on the ABS call with SIFMA.....

Wall St. Chief of Compliance & General Counsel conversation "What's that sound?" "Incoming.....!!!!!"

It's going to be an interesting couple of months -- this is all clearly tied to activity on the Hill regarding financial regulatory reform ....