04-20-2010, 07:26 AM
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#35 (permalink)
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Super Moderator
Location: essex ma
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before everything goes skittering off down some private-language rabbithole, pivoting on some imaginary conflict between ace's wholesale erasure of the notion of fraud and reality, maybe this little summary will be useful:
Quote:
Goldman and SEC: The main arguments
By Brooke Masters and Patrick Jenkins in London
Published: April 19 2010 20:07 | Last updated: April 19 2010 20:07
The SEC’s complaint rests on two main allegations:
●Goldman banker Fabrice Tourre misled investors into believing that Paulson & Co, the hedge fund, was an equity investor in the Abacus 2007-AC1 CDO (collateralised debt obligation), making the investment more marketable. In fact, Paulson was short-selling the underlying mortgage assets in the CDO, convinced that they would fall in value.
●Goldman also failed to disclose that Paulson had been closely involved in the design of the CDO, proposing the initial list of 123 mortgage securities. Instead Mr Tourre presented the fund selection as the work of a third party, ACA, which had, according to the SEC, taken its cue from Paulson.
●Several investors were burned as a result of the transaction. IKB, a German lender, lost $150m, contributing to the bank’s failure in the summer of 2007. ACA, the structuring company and also an investor, lost as much as $900m. When it, too, failed, ABN Amro – since acquired by Royal Bank of Scotland – was left to pick up a $841m tab, as guarantor of ACA’s involvement.
Goldman has told the SEC that the complaint was based on “the benefit of perfect hindsight” and offered four main points in its defence:
●Short-sellers were a routine part of such synthetic CDO structures and it was common practice not to disclose the identity of the short investors to the long investors.
●At the time, Paulson & Co was a “relatively unknown hedge fund manager” which had lost a lot of money betting against the mortgage market in the prior few years, so investors would have gained little from knowing he was on the other side.
●The SEC is overstating Paulson’s role. Goldman notes that the portfolio that ACA selected with Paulson’s input “had the same characteristics . . . and experienced virtually the same poor performance” as other similar CDOs.
●The bank said it kept a portion of the CDO on its books and ended up losing $75m, net a $15m fee on that investment.
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FT.com / Companies / Banks - Goldman and SEC: The main arguments
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