Open questions about the Abacus deal

April 17, 2010
Abacus deal:

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There are a few questions I’d love to see answered about Goldman’s Abacus deal:

  1. How were the prices of the credit default swaps in the deal determined? We know how the names were determined: Paulson drew up a list, ACA whittled down the list and added some names of its own, Paulson vetoed a few of those names, and ultimately a final list of 92 names was agreed to by both Paulson and ACA. But did those names have prices attached to them at all times? ACA, as the fiduciary, had an obligation to extract as much money out of the buyers of protection as it could. Did it?
  2. Did ACA ever ask Paulson who they thought would be shorting these names? The first question that a professional investor should always ask before making a trade is “who is on the other side of this trade, and why”. Since ACA thought that it was working with Paulson to pick names which would perform well, it seems natural that at some point the question would arise as to who wanted to buy protection on them.
  3. If the SEC nails Goldman on its shady dealings with Paulson, are JP Morgan, Bank of America, Citigroup, Deutsche, and UBS all next in line with respect to their dealings with Magnetar? Or does Magnetar’s decision to go long the equity tranche on those deals help insulate it and its bankers from these kind of allegations?
  4. How often was a synthetic CDO sponsored by an entity which didn’t take any part of the equity tranche? Was Abacus unique in this respect?
  5. Did the equity tranche in the deal exist as securities? Was it funded?
  6. Where did Goldman’s self-reported $90 million loss on the deal come from? Was it from holding onto the (unfunded?) equity tranche?*
  7. Who were the lawyers who drafted the prospectus for the deal and determined that Paulson’s involvement did not need to be disclosed?
  8. Who were the lawyers who decided that Goldman didn’t need to disclose the Wells notice it got from the SEC? Given what happened to Goldman’s share price yesterday, it certainly looks in hindsight as though the investigation was material information.

Finally, Louise Story of the NYT is still reporting that “Goldman did hold some of the negative positions in this investment, which means they were on the other side from the people they were selling this to. They were betting through this investment that housing would get in trouble.”

That’s consistent with what she reported in December, about Fabrice Tourre’s boss, Jonathan Egol:

Rather than persuading his customers to make negative bets on Abacus, Mr. Egol kept most of these wagers for his firm, said five former Goldman employees who spoke on the condition of anonymity. On occasion, he allowed some hedge funds to take some of the short trades.

But it’s not consistent with what Goldman is saying, and the SEC complaint is vague about Goldman’s positioning. I’d love to know what the word “most” means here:

On or about August 7, 2008, RBS unwound ABN’s super senior position in ABACUS 2007-AC1 by paying GS&Co $840,909,090. Most of this money was subsequently paid by GS&Co to Paulson.

The NYT’s editorial today places a huge amount of weight on Goldman’s alleged short position, and seems to think that the alleged crime here has something to do with Goldman betting against the securities it was selling; Ryan Chittum, meanwhile, says that “press coverage was instrumental in this turn of events”, concluding that “fraud charges have finally hit Wall Street, and The New York Times was instrumental in digging it out”.

But the SEC was investigating the Abacus deal long before the NYT story appeared, and I worry that two separate issues are going to end up getting conflated here, to Goldman’s potential benefit. If Goldman can show that it was actually long Abacus rather than short it, that takes a huge amount of wind out of the NYT allegations, without really touching the SEC allegations. I suspect it makes a sense to concentrate on Goldman’s disclosures, here, or the lack thereof, rather than their positioning.

Update: Barry Ritholtz adds his own list of questions.

*Update 2: This seems to have been cleared up: Goldman held the 45-50% tranche. But if that’s the case, who  held the equity? Someone had to own Abacus, no?


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