Goldman claims when Paulson talked… no one listened

John Alfred Paulson, president of Paulson & Co...

Image by AFP/Getty Images via Daylife

John Paulson may be famous now as a rich and savvy (if morally compromised) hedge fund manager. But Goldman Sachs says Paulson was a nobody — a nobody! — when he came knocking at its door in 2007 to do a subprime mortgage deal. Unlike E.F. Hutton brokers, when Paulson talked, no one listened.

And that claim prove could critical to both Goldman and the hapless Fabrice Tourre in defending themselves against a civil suit slapped on them last week.

The SEC has charged that Goldman Sachs and the fab “Fab” hid John Paulson’s true investment strategy from an administrator assembling mortgages for a billion-dollar synthetic subprime deal. John Paulson had asked Goldman to put together the collateralized debt obligation so he could make a bet against the subprime mortgage market. The SEC says that Goldman and Tourre misled both the CDO manager and investors IKB Deutsche Industriebank and ABN — who were under the impression that the great and mighty John Paulson was going long the deal. If they had known that the CDO was actually a vehicle for him to short the market, they would have been unlikely to invest. It would have been like learning that Warren Buffett had suddenly turned negative on the investment.

But in a response to a Wells notice it received last spring, Goldman Sachs says that was not the situation in the least: Paulson was a no one at the time  Abacus 2007-AC1 was put together. Goldman seems to argue that this detail is quite important. If Paulson wasn’t the equivalent of Warren Buffett, then his views wouldn’t matter — because in a synthetic CDO, someone, by definition, is always shorting it. (Don’t ask me how or why; trust me on this detail.) If Paulson were the hedgie shorting the market, no biggie, Goldman implies. Lots of hedgies had been shorting the market for years — they were just too early to the party. Paulson had the good luck of timing things just right. Of course, this sidesteps the issue that Paulson was trying to insure that the deal was structured to fail — a point Goldman vigorously denies elsewhere in the Wells rebuttal.

But, for the record, in the spring of 2007 Paulson wasn’t nearly as well known as he is now. No one had written a book about how he made billions on the collapse of the housing market. That would come later.

This is how Goldman explained it to the SEC:

D. Paulson’s Economic Interests Were Not Material to Investors.

The Staff‟s theory appears to be that Paulson‟s role would have been significant  both to ACA in its role as Portfolio Selection Agent and to investors because – like Warren Buffett or E.F. Hutton – it would have raised a red flag that a prominent “short” strategist was betting against the portfolio.  Paulson‟s name and precise role were not material, however, particularly at the time of the transaction.

First, although Paulson‟s name and his successful strategy of shorting the  subprime RMBS market are now well known, they were not in April 2007.  Even Goldman Sachs witnesses testified that they had no knowledge of Paulson or its strategies at the time of the 2007-AC1 transaction.  (See Herald-Granoff Tr. 25; Kreitman Tr. 40-41.)  Indeed, the Staff does not contend that ACA had heard of Paulson prior to the 2007-AC1 transaction.  The fact that Paulson was unknown to ACA – which, as of May 31, 2007, had 26 CDOs valued at $17.5 billion under management – demonstrates that the fact of Paulson‟s involvement would not have been material.  Nor is there any evidence that IKB or ABN knew of Paulson at the time or would have changed their investment decisions one iota had they fully understood his involvement.  Certainly, those will be significant matters in dispute if this matter is litigated.

Goldman’s Sachs’ First Response to the Wells Notice, Sep 2009

And just for fun, a walk down memory lane with E.F. Hutton, which made this memorable commercial before it fell victim to its own scandal. Does anyone remember this tagline? “When E.F. Hutton talks, people listen.”

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4 thoughts on “Goldman claims when Paulson talked… no one listened

  1. Pingback: Tweets that mention Goldman claims when Paulson talked… no one listened - Nancy Miller - The New Wall St. - True/Slant -- Topsy.com

  2. Pingback: Tweets that mention Goldman claims when Paulson talked… no one listened - Nancy Miller - The New Wall St. - True/Slant -- Topsy.com

  3. None of GS’s statements address the fact that risky, subprime mortgages were given triple A ratings and marketed as if they were gold. Regardless of who originally instigated the derivatives, Goldman Sachs waded deep into this cess pool without apparent concern for its clients or investors.

  4. Pingback: Tuesday links: discount rate mismatch Abnormal Returns

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