Zuckerman defends Paulson

April 21, 2010
Bess Levin has a Q&A today with John Paulson's biographer Greg Zuckerman:

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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.

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