Did ACA know Paulson was going short?
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Steve Liesman has got his hands on Paolo Pellegrini’s testimony to the SEC, and you can see why the Goldman case seems to be building up to the conclusion that ACA did know Paulson was going to short the deal:
In one part of Pellegrini’s testimony, a government official asked him: “Did you tell (Schwartz) that you were interested in taking a short position in Abacus?”
“Yes, that was the purpose of the meeting,” Pellegrini responded.
“How did you explain that to her?” the government official said.
“That we wanted to buy protection on traunches of a synthetic RMBS portfolio.” Pellegrini said.
Contrast the SEC complaint:
Had ACA been aware that Paulson was taking a short position against the CDO, ACA would have been reluctant to allow Paulson to occupy an influential role in the selection of the reference portfolio because it would present serious reputational risk to ACA, which was in effect endorsing the reference portfolio.
This is fascinating stuff, not least because there doesn’t seem to be any hint of it in Paulson’s letter. But if Pellegrini’s testimony turns out to be reliable, it surely constitutes a simple disproof of the SEC statement.
Once again, we’re left desperately wanting to see the full testimony, rather than the little bit cherry-picked by Liesman, or his source. The SEC promises that we’ll see just that — “in court at the appropriate time”. Which could just be a way of dragging this whole thing out and keeping the pressure on Goldman to settle the case, or could be simple confidence that seen in context, Pellegrini’s testimony doesn’t really end up being all that powerful.
If this does go all the way to court, the room is going to be packed on the days when Schwartz and Pellegrini testify. But in the meantime, it would be great if an enterprising journalist somewhere could get one or other of them on the record. It might clear up a very great deal of confusion.
Update: Also note the comment below from Mustard, who looked carefully at the dates involved:
Pellegrini likely did not know during his January 27th, 2007 meeting in Jackson Hole with ACA (paragraph 31 of complaint) that Goldman in its January 10, 2007 email to ACA (paragraph 47) had mislead ACA into reasonably believing that Paulson was taking the high-risk equity tranche of the synthetic CDO.
Thus Pellegrini’s statement to ACA that Paulson “wanted to buy protection on traunches of a synthetic RMBS portfolio” would have in his mind implied a short position, but to ACA – after the misrepresentation by Goldman – the statement would have suggested a hedge on Paulson’s supposedly intended high-risk equity position, not a naked short.
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If this case blows up in the SEC’s face can GS sue the SEC and will we taxpayers have to shell out more money to GS?
Pellegrini likely did not know during his January 27th, 2007 meeting in Jackson Hole with ACA (paragraph 31 of complaint) that Goldman in its January 10, 2007 email to ACA (paragraph 47) had mislead ACA into reasonably believing that Paulson was taking the high-risk equity tranche of the synthetic CDO.
Thus Pellegrini’s statement to ACA that Paulson “wanted to buy protection on traunches of a synthetic RMBS portfolio” would have in his mind implied a short position, but to ACA – after the misrepresentation by Goldman – the statement would have suggested a hedge on Paulson’s supposedly intended high-risk equity position, not a naked short.
I find it hard to believe ACA didn’t know what Paulson was up to, and always assumed they did. It seems like a mistake to for the SEC to have claimed ACA was duped when they were so intimately involved in the origination/structuring process. The party being defrauded it seems to me is IKB and maybe ABN Amro.
Hi Felix. To answers an earlier question, the equity seems to exist. From the Clearstream website, the ISINs would appear to be US00256YAE68 (144A) and USG0010AAE85 (RegS). At least the closing date matches.
Keep up the good work.
Just yesterday someone on FT Alphaville commented with a link to a story on Bloomberg in which it was obvious that Paulson & Co were bearish on the real estate market, this story was published sometime before the Abacus deal was finalized.
Well, there’s always a short side– the issue is that the deal was created by the short side, without the knowledge of the long side.
“To answers an earlier question, the equity seems to exist. From the Clearstream website, the ISINs would appear to be US00256YAE68 (144A) and USG0010AAE85 (RegS). At least the closing date matches.”
If this is true, then, the WSJ story has this wrong: They claim there was no equity piece.
This case will blow up in the SEC’s face sooner rather than later. The above article is the trickle that will lead to a flood. Whether that will occur in time to forestall the fin-reg bill currently in the Senate is questionable, but I doubt Mr. Obama cares – so long as the fin-reg bill is passed and he casts the banks, especially Goldman as the villains, that’s all he cares about. If he ever read the egregiously ignorant and uninformed posts on these pages, he’d realize that’s what most voters want too- a nice simple answer. Pity.
Goldman could put their whole rigamarole on YouTube, but it would still look like an assisted suicide by them and Paulson on ACA. Only question remains whether ACA was a willing victim, and what motivated them (or anybody else now, for that matter) to go on supping the lethal GoldAids.