The Abacus prospectus

By Felix Salmon
April 23, 2010
here you go! Enjoy all 196 pages of it, and let me know what you find: Matthew Goldstein has already found a Goldman conflict of interest on page 71 (page 77 of the PDF) -- the "Initial Collateral Security that is a CLO Security" turns out to be another Goldman product. Which is not obvious from the prospectus at all, since it isn't even named.

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I know you’ve been waiting for this one — here you go! Enjoy all 196 pages of it, and let me know what you find: Matthew Goldstein has already found a Goldman conflict of interest on page 71 (page 77 of the PDF) — the “Initial Collateral Security that is a CLO Security” turns out to be another Goldman product. Which is not obvious from the prospectus at all, since it isn’t even named.

ABACUS Offer Document

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Comments
13 comments so far

Wait? Where’s the $200m in equity? You mean that wasn’t in the final prospectus… but wait, does that mean they knew Paulson wasn’t investing in the deal? WHY DIDN’T THE MAMET-STYLE FLASHBACKS OCCUR AND ACA BACK OUT OF THE DEAL?

Posted by TinyOne | Report as abusive

On page 25, is Paulson the protection buyer in this deal?

The Protection Buyer or its affiliates and/or the Portfolio Selection Agent or its affiliates may have
information, including material, non-public information, regarding the Reference Obligations and the
Reference Entities. Neither the Protection Buyer nor the Portfolio Selection Agent will provide the Issuer,
the Trustee, the Issuing and Paying Agent, any Noteholder or any other Person with any such non-public
information. In addition, neither the Protection Buyer nor the Portfolio Selection Agent will provide the
Issuer, the Trustee, the Issuing and Paying Agent, any Holder of any Note or any other Person with any
such information that is public (including financial information or notices), except in the case of
information pertaining to one or more Credit Events with respect to each Reference Entity and one or
more Reference Obligation(s) of such Reference Entity in connection with which the Protection Buyer is
seeking payment of one or more Cash Settlement Amounts.

Posted by savo | Report as abusive

Appendix A kinda drives home the fact that this whole deal was just a bet, pure and simple. The $22mil notional for each entity in the reference portfolio was greater than the actual principal of most of the 90 RMBS bonds. Amazing.

How could ACA not see this?

Posted by mister_x | Report as abusive

It seems to me that IKB is out of the picture. There is no failure to disclose by GS re IKB. IKB knew the equity tranche was not offered/funded when it purchased the notes (long position on reference portfolio). it was unaware of Paulson and its role, but this could not have affected its investment / speculation.

The SEC case boils down to ACA and the work pre-issuance of the notes. Did GS misrepresent Paulson as a would be equity investor at that time? Yes, it would seem. Did it know Paulson would not invest in the equity at that time? Remains to be seen. Did GS have a duty to inform ACA that Paulson was not an equity investor? If they knew, yes, I would think.

Did this cause a loss for ACA? Very likely not. ACA agreed to the reference portfolio and agreed to bet long on it. When ACA made this bet it knew Paulson was not the equity investor as there was none. ACA’s bet was based solely on ACA’s view of the reference portfolio for which it cannot blame GS.

Maybe this is why there is a case for the SEC against GS for breach of duty, but no civil complaint from ACA against GS as there is no loss linked to such breach.

Posted by Gennitydo | Report as abusive

@savo, Goldman Sachs is the Protection Buyer counterparty to the ABACUS SPV. Goldman turned around and sold this protection to Paulson. Whether the latter transaction, which was known by Goldman months in advance, would have been material to ACA and/or IKB in light of Paulson’s involvement in ACA’s selection of the reference portfolio (as alleged by the SEC) is being hotly debated.

Posted by Sandrew | Report as abusive

Under “risk factors”

“The Protection Buyer or its affiliates and/or the Portfolio Selection Agent or its affiliates may have
information, including material, non-public information, regarding the Reference Obligations and the
Reference Entities. Neither the Protection Buyer nor the Portfolio Selection Agent will provide the Issuer,
the Trustee, the Issuing and Paying Agent, any Noteholder or any other Person with any such non-public
information.”
Why would anyone write insurance on a risk provided by a protection buyer who had material non-public information? In insurance law failure of the protection buyer to disclose all relevant information voids the contract. It would seem t that this contractual warning permits the devil himself to choose the assets with no possibility of a consequent civil action of fraud.

Posted by tomrus | Report as abusive

@TinyOne: That the ABACUS offering document clearly shows that no one subscribed to the equity tranche (or any tranche lower than A-2) is of no moment. Paulson is a hedge fund. There was no reason for them to purchase a funded equity (or other) tranche when they could have sold protection on an unfunded tranche via a bilateral swap with Goldman. If ACA believed Paulson was going long (one way or another), there’s nothing in this prospectus that would have necessarily dissuaded them of this belief.

Please note that I don’t really have a horse in this race. I’ve yet to see what I view to be sufficient evidence that Goldman misled ACA into thinking Paulson was long. So I don’t yet subscribe to Felix’s view that Goldman has committed a grave offense in misleading ACA. I’m just having fun trying to piece this together from the scraps of information as they become available, and doing my best to be intellectually honest in so doing.

Posted by Sandrew | Report as abusive

Thanks for the report.
http://themoneyparadise.blogspot.com/

Posted by themoney | Report as abusive

@Sandrew – the Fab’s email in the SEC complaint makes the SEC “case” seem to hinge on ACA thinking it was through direct investment… Otherwise there has to be much they are not disclosing in emails where GS communicated how Paulson’s exposure would occur. Anyway, hard to know without seeing full emails and not the snippets in the SEC complaint. Anyway, I think the prospectus is another indication that the simple narrative being promulgated by many like Felix that “Goldman Lied, Pensions Died” is much more complicated.

Also do you know whether in the Magnetar deals they were long the equity through selling protection on it or investing directly?

Posted by TinyOne | Report as abusive

Comments:

-looks like sequential payout on note interest and pro-rata on the prin.

-not sure if it is legal for more than one Goldman entity to be a counter
party in this…I am not a structured finance lawyer.

-garbage deal….nebulous deal, wide range of collateral types available for this shelf and for substitution. All of the collateral looks to be crap tranches of other deals that are backed by ARMS, and probably some option
ARMS. Would need to get a 10-K to really see what the collateral looks like, i.e wacs, wams, factors, geographic distribution of loans, etc. Also would want to see info from the trustee and servicer of the collateral for other credit information, loss history and substitutions.

-no information for all the b/c..and equity pieces, they have cusips, but no info. Usually you might see minimal prin and a notional rate for some
of these classes, if it is some type of IO. But no info on anything after A-2.

-A public, registered CLO (GWOLF 2007 -1A-A) is listed as the reference asset.Not sure if 192mm of reference assets is what percentage of that CLO.

-do not see any other credit enhancement (e.g. over-col lateralization, any loc, any mention of senior subordination, shifting interest…etc).

-appendix A lists cbals of reference assets, that are below assigned not notional amounts that they support (e.g. 22mm). Maybe the guys who structured this used
really high CPR/PSAs on the collateral, so that payment to the bond holders could be supported.

-bottom line, not how this deal obtained a AAA rating given the quality of the collateral and the lack of traditional credit support. The Put and the CDS must
have supported everything…in the eyes of S&P/Moodys.

-Also not sure at all if the market is liquid enough for Paulson to make a naked short on the deal. He must of had piece of the deal at a good book value. Also not sure how he could short the collateral. That gets into issues of the total size of GWOFL 2007-1 and collateral substitution issues by the servicer.

Posted by BriM | Report as abusive

“-not sure if it is legal for more than one Goldman entity to be a counter
party in this….”

this is what “unregulated” means.

Posted by Eastvillagechic | Report as abusive

Of the 90 ABACUS reference obligations there are 16 mortgage servicers involved w/ Wells Fargo predominant followed by OptionOne, Select Portfolio Servicing FKA Fairbanks Capital, Aurora, WAMU, Countrywide, Saxon, JPMC,Homeq, Wilshire Credit, Fremont, Ameriquest, Novastar, CitiMortgage and LongBeach . . . all of which have been subject of lawsuits alleging mortgage servicing fraud with multiple FTC actions for servicing fraud against SPS, servicing 9 of these entities. Monoline insurers also allege servicing malfeasance in recent suits, naming many of these same parties.

Given the culture of Wall Street, one in which if you disclose a fraud in an offering document, it’s okay to proceed with that fraud, I found ABACUS risk caveats relating to servicing quite enlightening. These are boilerplate for other CDOs as well.

Pg 30

“Credit risk arises from losses due to defaults by the borrowers in the underlying collateral or the issuer’s or servicer’s failure to perform.”

Pg 28

“Violation of certain provisions of these laws, public policies and principles may limit the servicer’s ability to collect all or part of the principal of or interest on a residential mortgage loan”

and then there’s this:

Pg 25

“The Protection Buyer or its affiliates and/or the Portfolio Selection Agent or its affiliates may have information, including material, non-public information, regarding the Reference Obligations and the Reference Entities.”

Looks like a lot of subprime shorts knew exactly what these servicers were up to. In terms of CDS payouts, default is a default…doesn’t matter how you come by it. Was this reference collateral selected on the basis of complicit servicers’ expertise in fabricating defaults?

If these reference obligations were selected and shorted with knowledge of subsidiary servicer complicity, this will turn out to be the largest insider trading scheme the world has ever seen.

Posted by MichelDelving | Report as abusive

@mister_x, This whole deal was more than just a bet. Pure and simple, it was a rigged bet from the get-go.
This deck was stacked so the shorts couldn’t lose.

@MichelDelving, Yes, servicers contribute greatly to reference collateral toxicity. Deal makers, traders and servicers are in cahoots. High time investigators get wise to this egregious alliance.

Posted by H.Maneur | Report as abusive
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