Friday, April 16, 2010

The most fascintating news release you'll read this week

"Undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund... played a significant role in selecting which RMBS should make up the portfolio."

"...after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Goldman Sachs did not disclose Paulson & Co.'s short position... to investors."

"The deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded."

"Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion."
John Paulson, if you recall, was lauded by congress for seeing the crises ahead of time.

Source: SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages

3 comments:

KevinB said...

This kind of money-play doesn't surprise me one bit, however Paulson's investors might feel a bit litigious that their fund manager shorted his own fund (if I'm reading this correctly). The SEC might also be wondering why GS felt the need to avoid the disclosure. And Congress now has yet another good reason to legislate meaningful financial reform (whether or not that is actually in the language of the bill). Shareholders in financial institutions ought to wonder why personal incentives for managers are so high while punitive actions for gaming the system hit only at the corporate level, a double cut to distributable dividends.

Consultant Ninja said...

I may have cut the press release too much.

Paulson selected the ABACUS portfolio of RMBS for GS, then paid them $15M to go sell it to other investors. Meanwhile Paulson shorted it from day 1.

andrea said...

thanks for the info..

Friday, April 16, 2010