Goldman Sachs Charged With Fraud

WSJ has extensive coverage on the SEC civil filing against Goldman. This is one of the few bits of coverage I’ve read that correctly identifies the Abacus package as a synthetic CDO – in this case a bundle of CDSs insuring the worst of the worst subprime mortgages. In this SEC case, the worst of the worst credits were selected by John Paulson’s hedge fund. Excerpt:

(…) A 65-page marketing document for Abacus 2007-AC1 reviewed by The Wall Street Journal described the deal as a $2 billion synthetic CDO based on a pool of residential mortgage assets “selected by” another unit of ACA. The logos of Goldman and ACA were printed on nearly every page.

The lawsuit suggests “senior level management” at Goldman was aware of the Abacus transaction and Paulson’s connection to the deal. “Goldman is effectively working an order for Paulson to buy protection on specific layers of” the deal’s “capital structure,” according to excerpts of a 2007 internal memo included with the suit. The Goldman committee that was sent the memo included senior-level management, the SEC said.

According to the SEC, Mr. Tourre misled ACA officials about Paulson’s role, saying the firm had invested $200 million in hopes the CDO would rise. ACA and Paulson chose the 90 pools of mortgage assets used to create Abacus, the SEC said.

In a statement, Goldman said it “never represented to ACA” that Paulson was investing in hopes the values would rise. People close to the firm said officials saw no need to disclose to investors that Mr. Paulson had a hand in creating the portfolio or was taking a bearish position.

The core of the SEC charge is that Goldman did not disclose in the CDO marketing docs that Paulson was closely involved in the selection of the dodgy credits that he wished to short via the CDS bundle.