Monday, April 19, 2010

Goldman speaks out

It seems that the SEC releases failed to disclose a number of key facts released by Goldman today, and this certainly makes the case seem more political than substantive. I am assuming Goldman is not releasing any outright lies, because if it did, it would functionally end the firm.
For reference, ACA was the largest of the long-side investors, and IKB was the smaller long-side investor. Paulson was the short-side. This means that ACA and IKB were betting on the securities going up, and Paulson was betting on them going down. ACA is most commonly listed as the allegedly defrauded party. All bolding is mine.
It seems that this complaint is based almost entirely on the way in which Goldman disclosed or referenced Paulson's interest in this transaction as a short on the portfolio in its entirety. From Goldman: "The SEC does not contend that the two professional institutional investors involved did not know what they were buying, or that the securities included in this privately placed transaction were in any way improper. These institutions were very experienced in the CDO market."
more: "ACA had the sole right and responsibility to select the portfolio and it in fact did so. As part of the process, ACA received input from other transaction participants. ACA had served as portfolio selection agent or collateral manager for numerous other transactions, and no doubt was accustomed to an interactive selection process."
also: "IKB, ACA and Paulson all provided their input regarding the composition of the underlying securities. ACA ultimately and independently approved the selection of 90 [RMBS], which it stood behind as the portfolio selection agent and the largest investor in the transaction. The offering documents for the transaction included every underlying reference mortgage security. The offering documents for each of these RMBS in turn disclosed detailed information concerning the mortgages held by the trust that issued the RMBS. Any investor losses resulted from the massive decline of the broader subprime mortgage market, not because of which particular securities ended up in the reference portfolio or how they were selected." [I wonder about this last piece... is it provable? If so, that exonerates Goldman completely]
ACA "evaluated every security in the reference portfolio using its own proprietary models and methods of analysis. ACA rejected numerous securities suggested by Paulson & Co., including more than half of its initial suggestions, and was paid a fee for its role as portfolio selection agent in analyzing and approving the underlying reference portfolio."
Goldman didn't benefit from the transaction. Goldman's intermediary position left them holding a long piece - shorted by Paulson's fund - which meant Goldman lost $90 million on the transaction on a $15 million fee. Paulson (or perhaps some other unnamed short investor) earned the $90 million.
Goldman also says it never claimed to ACA that Paulson was taking the long side, and that confidentiality rules prohibit them from telling anyone purchasing a security who is on the other side.
Again, I look at this and see the only issue as being that there is a difference between structuring a portfolio of long securities where each has an individual short investor attached and structuring a portfolio of long securities that another party is shorting in its entirety. Given ACA's role in selecting the securities used, it seems like no matter whether Goldman improperly disclosed Paulson's interest as the short on the entire synthetic CDO, this is actually a bit of a mountain out of a molehill kind of case. Should Goldman have been required to tell ACA, who was very experienced in this market, that the synthetic CDO they constructed was being shorted in its entirety by another experienced participant and thus the interactive portion was with one party instead of lots of parties each shorting an individual piece? Maybe Goldman did screw up part of the disclosure and may have to pay for it, but this doesn't look like outright fraud - more like a very, very minor issue that wouldn't have hit the headlines (and perhaps wouldn't have even been prosecuted) if the public didn't hate Goldman Sachs so much.
To quote the Wall Street Journal this morning, "Is that all there is? After 18 months of investigation, the best the government can come up with is an allegation that Goldman misled some of the world's most sophisticated investors about a single 2007 [synthetic CDO]?" (source: Taking it further, after all of the allegations of criminal misdealing, the best they can do against Goldman is a civil complaint?

1 comment:

  1. You gotta love the timing, right during the financial reform discussion. I guess they felt like they had to come out with _something_.