Opinion

Felix Salmon

Zuckerman defends Paulson

By Felix Salmon
April 21, 2010

Bess Levin has a Q&A today with John Paulson’s biographer Greg Zuckerman:

Do you think even if Goldman had disclosed what the S.E.C. says it should have, regarding Paulson’s role, the investors would’ve made the same decision on it?

Yeah, I don’t think many investors would have had a second thought about taking the other side of a trade of John Paulson’s back in 2006 or early 2007. He was seen as a tourist investor dabbling in real estate, and some people thought he was out of his league—even Goldman Sachs thought he was out of his league. Josh Birnbaum, a top trader at Goldman, sat across from Paulson in his office and warned him about what he was doing.

Goldman is all about—or saying it’s all about—the clients being number one, and now because of all this, people, investors, are questioning that commitment. But Paulson was a Goldman client. So they were still working in one client’s best interest. Sometimes you have to play favorites, right?

Yeah, I mean, you could argue that if John Paulson had lost a billion dollars on this deal, that he should have complained that he’s a client of Goldman Sachs, and he wasn’t warned that a sophisticated, huge German bank which does credit analysis on a daily basis was on the other side of his transaction.

I’m beginning to think that we really need to hear from the people at ACA who were involved in the transaction — and ideally look at contemporaneous emails from them as well. It’s entirely within the realm of possibility that they thought Paulson was an idiot to short this stuff, and that they reckoned they were making lots of money off him by taking the other side of the trade.

But that’s not what the SEC alleges, and it’s worth remembering that the SEC has been looking into this deal since the summer of 2008, and got 8 million pages of documents on it from Goldman Sachs alone. The SEC says clearly and unambiguously that Goldman misled ACA into believing that Paulson was long, rather than short. So I do wonder where this idea is coming from that ACA actually knew Paulson was short.

Because if what Zuckerman is saying is true — if it wouldn’t have made the slightest bit of difference to inform ACA that Paulson was short — then why on earth didn’t they do that? Hell, why didn’t Paulson do that, if Goldman didn’t want to? This suit would develop a gaping hole and would probably never have been brought if Pellegrini or anybody at Paulson had simply mentioned, in the meeting with ACA in Jackson Hole, that they intended to fund the entire structure. The fact that they didn’t is prima facie evidence that they thought that such disclosure would have made a difference after all.

As for the argument that Paulson could have complained about Goldman’s actions if he’d ended up losing money, that’s simply ridiculous and I don’t understand why Zuckerman is giving it any credence at all. This was a reverse inquiry: the whole deal was Paulson’s idea. Goldman just made it reality, and it genuinely didn’t make the slightest difference to Paulson who was on the other side of the trade.

And yes, it did make a difference to ACA who was on the other side of the trade, if that person was Paulson in particular — precisely because it was always Paulson’s deal, and Paulson had enormous control over what securities went into it. It’s one thing entering into a wager with someone about an outcome neither of you can influence — it’s something else entirely to enter into a wager with someone when the outcome is even partially under your counterparty’s control. If ACA knew that it was betting against Paulson, then Paulson’s role in picking the contents of the deal would have looked very different indeed.

Goldman, of course, had a duty to be honest about the deal; the only reason that Paulson isn’t being charged here is that he had no such duty. But they both lied to ACA, if lies of omission count as lies. And the attempted defenses of Paulson are far from convincing.

Comments
15 comments so far | RSS Comments RSS

“if it wouldn’t have made the slightest bit of difference to inform ACA that Paulson was short — then why on earth didn’t they do that? Hell, why didn’t Paulson do that, if Goldman didn’t want to? ”

This exact point was addressed TODAY in a front page story quoting Paolo Pelligrini

http://bit.ly/d7X7xZ

“Paolo Pellegrini told the government that he informed ACA Management that Paulson intended to bet against, or short, a portfolio of mortgages ACA was assembling. ”

and then:

“Did you tell her that you were interested in taking a short position in Abacus?” a government official asked Pellegrini, referring to the name of the CDO portfolio.

“Yes, that was the purpose of the meeting,” Pellegrini responded.”

none of this may make a difference in the GS lawsuit – the point is perhaps that GS is supposed to make this disclosure, not Paulson – but i can’t believe people are STILL trying to argue that ACA was duped, that they didn’t know what was going on, or that they would have acted differently.

you know what would have made ACA act differently? IF THEY HAD ACTUALLY ANALYZED THE BONDS IN THE PORTFOLIO!!!! (like John Paulson did!)

i’d LOVE to see the ACA emails on the subject – because i’d lay any price that they offer ample proof of ACA’s gross negligence and violation of their fiduciary duty.

Posted by KidDynamite | Report as abusive
 

“it’s something else entirely to enter into a wager with someone when the outcome is even partially under your counterparty’s control.”

what on earth do you mean, Felix? did John Paulson make it so that people couldn’t pay their mortgages? because THAT is what determined the outcome of this wager. Paulson had no control over the outcome of the wager. BOTH parties had plenty of control in determining what the wager actually was.

yes – i’m well aware that Paulson provided a list of bonds to chose from. and it’s a fact that ACA had FINAL SAY regarding the construction of the portfolio.

sorry to continually comment on each of these posts, Felix, but you’re really off base here.

Posted by KidDynamite | Report as abusive
 

Instead of prosecuting somebody like Paulson, the SEC should go after all of the advisers and fund managers who invested their clients money in mortgage-backed securities. Those people were criminally negligent, effectively telling their clients that loaning money to people who had zero probability of making it through even five payments was a good investment. At the very least, they should be banned from working in the field for life.

So Paulson asked Goldman to create bonds based on mortgages that never should have been financed. I think it is pretty likely that the people on the other side of his bets had access to the same information on the mortgages. Why would he be guilty of anything?

I still don’t see what Goldman is guilty of, either, other than being a national parasite. They actually took the losing side of Paulson’s bets, so it’s ridiculous to say they had an obligation to warn their clients, because they were just as incompetent (I’m guessing that when Goldman has to publicly choose between being guilty of fraud or acknowledging being a sucker, they will choose the latter, since they are still profitable.

Posted by OnTheTimes | Report as abusive
 

kiddynamite

Some questions I have are … was the reference to Paulson as a Transaction Sponsor a correct term or loose and broad purposefully with intent to mislead. Was Pellegrini introduced as the independant investor Paulson who just happened to have made the list of toxic bonds in Abacus? Was that ever revealed? Or was he introduced as a different entity entirely?

Do fundamental fiduciary principles allow for stacking bets and conflict of interest transactions? How is that putting the client’s interest first?

Felix isn’t way off base. There is simply too much deflection and misuse of terms but just wait until the lawyers get hold of this… no one will be able to understand a word they are saying…

Posted by hsvkitty | Report as abusive
 

Another key question: Is there an equity component to such a CDS, and did Paulson own it?

Posted by spistol | Report as abusive
 

Sorry, meant to type CDO, not CDS.

Posted by spistol | Report as abusive
 

KD, are you a Goldman PR bot? your comments on this blog make sense only given the a priori assumption that GS did nothing wrong.

Posted by N.Mycroft | Report as abusive
 

Even if ACA knew that Paulson was short, what about IKB? If IKB wasn’t told, then there’s still a potential disclosure issue here.

Posted by o_nate | Report as abusive
 

“As for the argument that Paulson could have complained about Goldman’s actions if he’d ended up losing money, that’s simply ridiculous and I don’t understand why Zuckerman is giving it any credence at all.”

Zuckermans’ argument is not that it would be reasonable for Paulson to complain if he lost out; it is that it is equally ridiculous for the supposedly sophisticated investors who took the other side to complain now that they lost.

Posted by MattJ | Report as abusive
 

hwskitty – Paulson has NONE of the duties that GS has. GS has NO fiduciary duty. ACA does, however, have fiduciary duty to their investors, which I agree with OnTheTimes they violated blatantly with gross incompetence. I obviously can’t be sure, but it appears that Pellegrini sat down face to face with ACA as a representative of Paulson’s hedge fund.

Nmycroft – on the contrary. even if GS is guilty of fraud, PAULSON did nothing wrong; especially in light of even MORE disclosure today (which i mentioned above) that ACA either knew or should have known exactly what was going on. There is indeed a party here guilty of violating their fiduciary duty – and it’s ACA.

spistol – one SEC allegation against GS is that GS misled ACA into believing that Paulson would be the long equity investor, which it appears he wasn’t. again – even if GS is still guilty of fraud on this point (because they gave less than full disclosure), the bottom line is that ACA knew or should have known that Paulson wasn’t long (as evidenced in the news out today from Pelligrini), and is blatantly negligent. Their after the fact whining is a sick attempt to deflect blame.

o_nate: I agree, but this post is about ACA.

everyone should go back and read the first paragraph of “OnTheTimes” comment above.

i have never worked for GS, Paulson or any of the other involved parties.

Posted by KidDynamite | Report as abusive
 

this deal closed in late April, 2007.

this article is from March 2007:

http://www.businessweek.com/investor/con tent/mar2007/pi20070308_900631.htm

as is this one:

http://www.bloomberg.com/apps/news?pid=2 0601103&sid=agHGvijV55fM&refer=us

anyone claiming that they didn’t know what side of the trade Paulson was on is ignorant, incompetent, or both.

Posted by KidDynamite | Report as abusive
 

“I’m beginning to think that we really need to hear from the people at ACA who were involved in the transaction — and ideally look at contemporaneous emails from them as well. It’s entirely within the realm of possibility that they thought Paulson was an idiot to short this stuff, and that they reckoned they were making lots of money off him by taking the other side of the trade.”

I’m guessing that ACA has not only been heard from, but that ACA is in fact the prime complainant to the SEC that started this matter. Without ACA as a cooperative informant, the SEC could not have even considered going ahead with this, precisely because they could submarine the whole case by saying exactly what Felix speculates they might possibly say. Guaranteed, they are on board with the SEC and quite pissed, which is also why you haven’t heard from them

Posted by maynardGkeynes | Report as abusive
 

KD said: “the bottom line is that ACA knew or should have known that Paulson wasn’t long (as evidenced in the news out today from Pelligrini), ”

First, the “news” from Pelligrini is a second-hand statement about what he’s supposed to have said in his deposition. We know nothing of the context or what else he said in his deposition.

Second, we know nothing about how this “news” got out — it could have been people very close to GS trying to push back in public.

Third, we know nothing about the timing of when Pelligrini was supposed to have informed ACA that Paulson had no equity stake. It is entirely possible that Pelligrini told somebody at ACA in the middle of the process, but it’s also possible that he was the only one who did so, that others at ACA didn’t know what was up and that Tourre didn’t set them straight.

We know far too little about what Pelligrini said at this point to make many judgments about the usefulness of that “news.”

Posted by spistol | Report as abusive
 

kidynamite, Goldman would beg to differ that it has no fiduciary duties. The reason why I mentioned it, is it was on the bottom of their letter to the SEC that it was following fundamental fiduciary principles by not divulging client information to their umm… client.

Posted by hsvkitty | Report as abusive
 

I am still so confused how the guy who writes a book about Paulson’s greedy guts deals says Paulson is innocent of all wrong-doing and defends Goldman and says the SEC case is weak, so many media/people believe that they must not be guilty so it is now over?

Pelligrini says he told ACA that Paulson was shorting. But at any time was Paulson misrepresented as an independent third party that designed the portfolio? it looks as though Paulson is also defending themselves by defending Goldman.

Just who did Pelligrini tell. Just the one woman? and what did he say and what written proof is there of this or was it divulged over a few beer? What constitutes the telling if there is no documentation to the fact? Is this the way ‘highly sophisticated traders’ mean to do business?

It seems that the media is backing away from pressuring Goldman, but with 8 million pages of crap to go through, there is evidence of wrong-doing that triggered the charges. And being there were more then a few similar deals made other then Abacus, how many others were as unethical.

There were billions of dollars given in bonuses to brokers for money that was ‘foreseen’ but not yet ‘realized’, so doesn’t Goldman have a fiduciary responsibility to its shareholders for having given bonuses for cooked books?

I guess if being an ‘investment’ bookie is legal, then crafty accounting is also OK. Goldman said it wasn’t crooked to it’s shareholders Apr 7, and said it didn’t bet against its own clients, then I guess it must be a great monolithic untouchable that should be left alone to do business as usual.

And all of the fellow firms (God bless all the institutions doing God’s work!)say Goldman should just cut their losses and take a big hit and pay the fines, even though they are innocent. Sadly, it’s because they know they will be next.

Good lord, if nothing else, isn’t his another wake up call that reform is necessary?

Posted by hsvkitty | Report as abusive
 

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