Did ACA know Paulson was going short?

April 22, 2010
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 short the deal:

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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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