The Abacus pitchbook

By Felix Salmon
April 16, 2010
Here is the Goldman Sachs pitchbook for the Abacus deal in question today. It spends 30 pages talking in great detail about ACA and its qualifications to manage CDOs; it never mentions Paulson. Here's my favorite bit:

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Here is the Goldman Sachs pitchbook for the Abacus deal in question today. It spends 30 pages talking in great detail about ACA and its qualifications to manage CDOs; it never mentions Paulson. Here’s my favorite bit:


Not a lot of indication here that the entirety of the Abacus deal was chosen not by ACA’s professionals at all, but rather by Paulson: the extent of ACA’s involvement was limited to picking which deals they wanted from a master list provided by Paulson. In fact, this bit comes close to being an outright lie:


Well yes, “selective basis” is one way of putting it. “Selected by John Paulson” is another.

This definitely makes ACA look bad: their name and logo is on every page of this presentation, and they knew full well that the names in the deal were handpicked by someone never mentioned in the pitchbook. Yet they said nothing about this massive lie of omission. Goldman looks worse, of course — and ACA ended up losing hundreds of millions of dollars on the deal. But there are few players who come out well from this sorry saga.


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I have just been reading the text of the SEC’s complaint, and the only way I can describe it is that this is incredible, but not surprising. This is naked fraud, and for some reason, GS and Paulson seemed very confident that they would never get caught, or that there would ever be action taken against them. Not surprising in that the environment in 2007 was anything goes, and the SEC was too stupid to find out.

Posted by randymiller | Report as abusive

“optimized for relative value.” Relative to which party?

It’s not their fault if the customers didn’t think to ask just who the value was optimized for . . . .

Posted by retr2327 | Report as abusive

The complaint doesn’t persuade me that ACA didn’t vet the portfolio of reference securities or that GS undertook somehow to shortcircuit ACA in the performance of their duties as manager. Also, purchasers of synthetics undoubtedly realized they were selling protection to someone who took an opposing view. No?

Posted by xyz70 | Report as abusive

In reply to xyz70: Of course ACA vetted the portfolio, however they were nonetheless clearly influenced by the proposed portfolio submitted by Paulson. If they thought he was going to be the equity investor, they would have naturally been agreeable to trying to make him happy by picking the kinds of names he wanted in the deal. What they didn’t know – because Goldman misled them – was that Paulson was actually net short the deal. And while investors in the deal could have surmised that *someone* was taking the opposing view, they couldn’t have known that the person taking the opposing view had actually picked the portfolio for that very deal! That’s a huge material difference which was not properly disclosed.

Posted by o_nate | Report as abusive

I’m not certain that the fact that ACA did their job badly is Goldman’s problem. Fact is that they picked the securities, just in a lazy manner starting from Paulson’s list.

Real issue will be proving that Tourre was “reckless” in not correcting ACA’s assumption that Paulson was long – which likely encouraged ACA’s lazy execution of their role. The securities regulation is broad enough that it seems possible, but there’s no smoking gun in the filing so it seems to me it’ll be a fight or settlement.

From the filing:

On January 22, 2007, ACA sent an email to Tourre and others at GS&Co with the subject line, “Paulson Portfolio 1-22-10.xls.” The text of the email began, “Attached please find a worksheet with 86 sub-prime mortgage positions that we would recommend taking exposure to synthetically. Of the 123 names that were originally submitted to us for review, we have included only 55.”

Posted by Darrren77 | Report as abusive

Are you guys saying there was on fraud here? Goldman knew that Paulson was picking the securities, knew that he was going to short them….

Of course the Germans knew there was another party in the transaction. What they did not know was the other party had gone to GS and paid them $15 million to stack the deck.

And it looks like ACA looked the other way, but if they were assured by GS that Paulson was taking the equity layer, that would certainly influence them.

If you guys think Goldman is clean on this, think again. If you are in the financial community and think this is all OK, you need to hire a lawyer, and soon. Because I think they will be in short supply.

Posted by randymiller | Report as abusive

Page 20 and 52 clearly state that a GS affiliate is going to buy CDS protection on all the tranches. That’s why GS will most likely walk.

However, I think GS defense that they lost money on the deal is both disingenous and reeks of contempt. The analysis should be on the total profit made from deals with Paulson. He might have bought tsys at a 2 pt premium to cover GS risks.

Posted by longandshort | Report as abusive

It does not matter whether Goldman made money on these deals or not. That is not the point, point is whether Goldman disclosed enough information which was material to this deal to all those purchasers of ACA.

Also as many have pointed, knowing that there is other party to the deal is again completely different than that the same party – which is net short on underlying securities – was involved in picking up the master list from which ACA was constructed.

Goldman said third party picked up the list. Was Paulson the third party in this case when he had had bought the protection from Goldman?

It is hard for us to make the call here without understanding the legalities and all details. We can only speculate on the Politics of the announcement.

In the end if SEC is indeed able to make it stick to Goldman, that will be probably one of the greatest political prizes for Obama Administration. But that can at the best happen in a year or two by which time the impact of this is all determined by political consequences only.

I shudder to think the kind of ultimate Legal Team Goldman will attempt to erect here. They are going to fight this tooth and nail and I am not convinced federally paid lawyers will have the gumption to stand unless some motivated & equally brilliant / competent legal experts come forward for the Fed defense.

Posted by umeshgeeta | Report as abusive

If the SEC is truly serious about “ripping Goldman a new one”, it won’t matter how many high powered attorneys they hire. They are clearly as guilty as sin. There is no rationale logical defense. What they did was fraudulent on its face.

What SHOULD happen is that the Justice Department should use the RICO statutes and question/investigate every one at Goldman who had anything to do with these transactions……and the management folks need to be thoroughly investigated to see who profited in ANY way from the obvious fact that they were putting together a collection of toxic assets DESIGNED to tank so the short seller would make obscene profits. The people that bought this crap thought that the seller was dealing in good faith and the opposite was true.

If there was a corporate death penalty, Goldman deserves it for this……and there had to be some level of collusion for all of this to happen.

If there truly is no legal basis on THIS one for a criminal prosecution; then all of these laws need to be revamped so that it becomes criminal for the financial “services” industry to lie, cheat and steal.

To pin a billion dollar scam on one low level idiot/scapegoat who was too exuberant in his texting would be a total farce.

Posted by Nick7777777 | Report as abusive

Felix, why wasn’t Paulson charged separately? There is something odd here.

Posted by driver_8 | Report as abusive

I think there is one point missing in this analysis. ACA lost 900 million dollars on this transaction. Clearly, they were not working together with GS to screw over the long investor and help the short, as they *were* a substantial part of the long investing side. So it makes no sense to say that ACA was not incentivized to pick the the right portfolio of bonds. GS is putting together two parties, a long and a short side. Both parties had full access to information on the collateral, the credit quality, etc. If this is wrong, then most market making activities in which you bring together a buyer and a seller is wrong. This is no different than if you are a bond trading desk, someone comes to you with a bond that he wants to sell because he thinks it is going to drop in value, and the bond trader finding someone on the other side to buy it. That is how financial markets function. The only difference is that this is a derivative transaction, and much more complex for people to understand.

Posted by macdog | Report as abusive

Salmon is still off on this. It’s not helping to make so many errors, as his stuff gets quoted all over and it’s wrong.

“the entirety of the Abacus deal was chosen not by ACA’s professionals at all, but rather by Paulson”

ACA had control over the portfolio. They were allegedly misled on the directionality with which they should have considered Paulson’s input, and that may turn out to be violation, but these were guys that thought housing was going up and were the ones with the responsibility for vetting the deal. ABACUS was being sold to people that thought housing was stable. This quote from the flipbook is a clear disclosure.

“Goldman Sachs will enter into a CDS with the Issuer to buy protection on Reference Portfolio losses related to the Class A through Class D Notes.
- The Collateral Securities and/or Eligible Investments will be available to make payments to Goldman Sachs in the case of writedowns or other Credit Events occurring on the Reference Portfolio, which in each case incur writedowns on the Class A through Class D Notes.
- Goldman Sachs will cover all upfront expenses of the Issuer through an upfront payment under the CDS.
- Goldman Sachs will cover all ongoing expenses of the Issuer through periodic payments under the CDS.”

Posted by mattmc | Report as abusive