Goldman’s misleading statement on ACA

By Felix Salmon
April 19, 2010
last two. But since Goldman is making such a big deal of it, let's take a closer look at ACA's "investment" in the Abacus deal.

Here's Goldman, which doesn't seem to have put this latest statement up on its website:

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Goldman Sachs has yet another statement out on the subject of the SEC charges against it, which adds little to the last two. But since Goldman is making such a big deal of it, let’s take a closer look at ACA’s “investment” in the Abacus deal.

Here’s Goldman, which doesn’t seem to have put this latest statement up on its website:

ACA Capital Management was both the portfolio selection agent and the overwhelmingly largest investor in the transaction ($951 million, with the other professional investor’s exposure being $150 million)…

ACA, the Largest Investor, Selected and Approved the Portfolio.

And here’s the facts, as laid out in the SEC complaint, none of which have been disputed by Goldman:

ABACUS 2007-AC1 closed on or about April 26, 2007…

On or about May 31, 2007, ACA Capital sold protection or “wrapped” the $909 million super senior tranche of ABACUS 2007-AC1…

The super senior transaction with ACA Capital was intermediated by ABN AMRO Bank N.V. (“ABN”), which was one of the largest banks in Europe during the relevant period. This meant that, through a series of CDS between ABN and Goldman and between ABN and ACA that netted ABN premium payments of approximately 17 basis points per year, ABN assumed the credit risk associated with the super senior portion of ABACUS 2007- AC1’s capital structure in the event ACA Capital was unable to pay.

In English, it seems that Goldman Sachs held on to the super-senior tranche of the Abacus deal for a good five weeks while it was negotiating to lay off that risk to ACA and ABN Amro.

What that says to me is that ACA was not really an investor in the Abacus transaction in the way that IKB was; it certainly never bought any of the Abacus securities. Instead, it insured the super-senior tranche. (I’m unclear on how to account for the difference between Goldman’s $951 million and the SEC’s $909 million.)

If ACA Management had been working on this deal since January, and ACA Capital was always going to insure the super-senior tranche, why did Goldman wait so long after closing to close the wrap? It’s pretty clear that ACA Management, the entity which “Selected and Approved the Portfolio”, was in no sense the “Largest Investor” that Goldman is referring to.

There’s a real difference of fact here between Goldman and the SEC: While Goldman refers to a single entity called “ACA Capital Management”, the SEC talks about three different entities: ACA Management LLC, the CDO manager; its parent, ACA Capital Holdings; and the guarantor, ACA Financial Guaranty Corporation.

It’s also worth noting that when Goldman wrapped the super-senior tranche of the Abacus deal, it did so with ABN Amro, a too-big-to-fail bank, and not with ACA. ABN Amro then laid off that risk onto ACA, but was on the hook for all of it if ACA went bust. As, of course, it did.

Why didn’t Goldman simply wrap the super-senior tranche with ACA at the time the deal closed, and then go ahead and manage its ACA counterparty risk in much the same way as it claims to have managed its AIG counterparty risk? Probably because it sniffed out the cost of buying $1 billion of credit protection on ACA, and it was a lot more than the 17 basis points that it managed to get from ABN Amro by getting ABN to intermediate the wrap.

Goldman, then, seems to be conflating the concepts of insurance and investment — a point made well by Brad DeLong this weekend. And it’s conflating, too, the various different subsidiaries of ACA Capital Holdings. And it’s glossing over its own significant efforts to go through ABN Amro when wrapping the super-senior tranche, precisely because, it seems, it had worries about the creditworthiness of ACA. Once again, Goldman seems to be giving us much less than the whole truth. But that no longer comes as a surprise.

Update: As Sandrew points out in the comments, now that we’ve seen Goldman’s response to the SEC, we can see that ACA did buy $42m of the Abacus deal in security form. Probably because the investor, IKB, required that they have some skin in the game.


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I sure hope the SEC lawyers are good and don’t get done in by the bluster from GS. I had you pegged as a GS apologist but boy, was I wrong. Kudos on all your recent posts.

Posted by mister_x | Report as abusive

“Goldman, then, seems to be conflating the concepts of insurance and investment”

Maybe so, but they’re hardly alone. The entire industry referred to and still refers to sellers of CDS on super senior exposures as investors – they’re called synthetic investors to distinguish them from cash investors.

Also, I’m not sure what your line of thinking is with this: “Probably because it sniffed out the cost of buying $1 billion of credit protection on ACA, and it was a lot more than the 17 basis points that it managed to get from ABN Amro by getting ABN to intermediate the wrap.”

That’s 17bp to ABN on top of the 50bp to ACA, not the total cost to Goldman. Of course it was less than the ACA swap – for ABN there was “double default protection” – both the CDO and ACA had to fail for them to pay out. As to their motivation, GS claim in their formal defence to the SEC’s complaint (you can decide whether to believe it or not) that the reason they got ABN to intermediate was that ACA would not post collateral and ABN would (and did).

Posted by GingerYellow | Report as abusive

Basically, Felix, I’m not sure if we can believe a word we hear from Goldman any more. Which is a shame. It is so tangled in a web of deceit, it doesn’t really know which way to turn!

Posted by IanFraser | Report as abusive

I wonder if Goldman remembered to tell Warren Buffet about the Wells notice.

In any event, Felix seems determined to consider ABN/AMRO, ACA, and IKB and the hundreds of millions of dollars a year employees of those organizations poor unfortunate sheep that were gulled by big bad GS. Poor widdle bankers. They really did want to invest in wind power and flowers for children, while living on minimum wage, but GS convinced them to pay themselves millions and take the OPM to the casino.

Posted by rootless | Report as abusive

BTW it seems likely that GS’s strategy will be to scapegoat the “Fabulous” Fabrice Tourre, the 31-year-old Frenchman who is thought to have sought to defraud the bank’s customers by not telling them that noted short-seller John Paulson chose the 90 pools of mortgage assets in Abacus. Once Fab realises that he’s to be made the sacrificial lamb won’t he go to the SEC and sing til his lungs hurt? dget-goldman-lays-groundwork-to-scapegoa t-fabrice-tourre-but-keeps-options-open- 2010-4#ixzz0lZEZcajh

Posted by IanFraser | Report as abusive

Here’s the reconciliation of the $951 vs. %909.

Per the Goldman defense document (part I), ACA was both a direct investor in the Notes issued by Abacus 2007-AC1 (to the tune of $42M) and a super-senior protection writer (“investor/insurer” take your pick) for the reference portfolio (total notional amount subject to protection $909M). To quote the defense document, page 7 (14 of pdf):

“ACA acted as the Portfolio Selection Agent for the
2007-AC1 transaction, invested $42 million in the 2007-AC1 notes, and sold protection to Goldman Sachs on the $909 million notional amount super senior tranche of the transaction.”

Posted by Sandrew | Report as abusive

In regards to Sandrew’s point, are you going to correct this post Felix – - “It (ACA) certainly never bought any of the Abacus securities”?

Why would you use the term certainly in the first place? Any documentation you can link to or was the merely an unsubstantiated assertion on your part?

Posted by TinyOne | Report as abusive