4 ms·

I'm no expert on the matter but I believe the problem is that GS misrepresented one side of the trade. So having a short and a long side to the trade isn't an i

I'm no expert on the matter but I believe the problem is that GS misrepresented one side of the trade. So having a short and a long side to the trade isn't an issue - the problem is that GS misrepresented Paulson's hedge fund as an independent recommender of the long side when that same fund was in fact shorting the securities (and GS clearly knew about this). If a truly independent party had recommended the long side of the trade then there wouldn't be a case.

bushido 16y ago
The real issue as people have been summing up is: "The Abacus Fund bought risky mortgage loans and literally bet that they (and the homeowners who held them) would default to the detriment of investors and consumers." The abacus fund was the name of the Fund that John Paulson setup. Let me get the facts out of the way: 1) It is not possible to have a long and short position in the same instrument on the same account simultaneously. ... unless of course it was calls vs puts. but while they are both options they are separate instruments as you can go long/short/offset on calls or puts for a complete trade without using the other. i.e. sell call and buy them back to offset. 2) Of course they could have used another instrument to do this. that is going Long on the futures while buying puts. and that would be illegal. oh wait! thats called hedging. thats not illegal. 3) Of course again if the fund was hedging there is no fraud possible since the money would be with the fund, hence with the investors. 4) If the opposite position was in another account, another fund, or whatever that is also not illegal. Though NOW since these were not hedges they had to be naked shorts. But wait thats not possible, aren't there hundreds of articles that say Goldman, Paulson, Lehman, MS etc etc etc lost tons of money by buying into CDOs... 5) But that would mean, that these were in fact hedged trades! 6) Of course there is also the fact that banks, investment advisors, etc are obligated to tell all their clients what their other clients are doing, now in cases like this that would include internal propitiatory trading desks. OH WAIT! thats illegal too... Whats the effing case again? That they sold mortgages that the investors wanted to buy (unless they were forced to do so under pressure/on gun point... without a choice.... that would definitely be illegal)? That they hedged? That the investors who had the money and sensibility to invest in these risky exotic securities, did not know that they should have hedged against their trades? That its common knowledge that every transaction needs to have a sound exit strategy, and factor in the worst case scenario (hence the hedge), in this case it would be that the investors and consumers could default? Since, if this case has any base, can we expect Full disclosure of Speculation, Investment activities of citizens to get included with emails to the Patriot Act? Oh wait... where did I get that idea from! Since banks can now be taken to court for not disclosing this information, can we add this requirement to lawyers too? Ok back to the topic.. what I think of this case is: For every vague law GS has been blamed to break there is at least one not at all vague law that clears them, the fact of the matter is that this case is not at all about lawful merits, but rather political gain by creating an emotional and moralizing case that will be won even without wining the real case. By using word like literally betting against homeowners etc. enough said.
- jballanc 16y ago
  This is an excellent summary of what happened. This is also an excellent example of the Randian philosophy that is so rampant on Wall Street. To wit: "I'm smart, you're dumb, so I win, you loose." Matt Taibbi had a nice summary of this recently: http://www.guardian.co.uk/business/2010/apr/24/will-goldman-prove-greed-is-god http://www.guardian.co.uk/business/2010/apr/24/will-goldman-... Of course, the problem with this attitude is that it actively works against the establishment of a Pareto efficient system, and I think we're seeing the results of that with the most recent economic downturn. I don't know enough about the laws to say whether your assertion that no laws were broken is true or not. All I can say is that I hope some laws were broken. If not, then this does not speak well of the US's ability to regulate itself in such a way that benefits the nation, rather than benefitting a select few.
- jfager 16y ago
  The 'effing case' is that Goldman told the long side investors that ACA independently assembled the reference portfolio when Paulson actually played a significant role in putting it together. How does that not constitute fraud?
  - fleitz 16y ago
    ACA did put it together independently. Paulson sent a list of suggestions which ACA was not required and did not include in the way Paulson wanted.
    - jfager 16y ago
      Not true. ACA was being paid by Goldman to put this thing together, who in turn was being paid by Paulson. As long as Paulson wasn't satisfied with the portfolio, Abacus wasn't going anywhere. The fact that they didn't accept his first list without changes does not imply that he didn't directly influence and sign off on the final package.
  - bushido 16y ago
    You're correct. Paulson did suggest 123 bonds that he thought should be included in the CDO. And since Paulson was considered smart by ACA he did have an "expert" influence on the final offering. BUT. ACA as an independent portfolio selection agent only selected 55 of those. And only those 55 were used. But since the first 123 were selected by Paulson we should ignore this fact. Since we have already dismissed that ACA independently selected the portfolio, we shopuld also dismiss the fact that ACA's parent company invested $900 million in the CDO, because they believed in the validity of their choices. But then again how is that in any way saying that they approved of the contents of the CDO. Since we have established this,let me try and convince some law firms to start a class action against all colleges, universities, b-schools etc for giving students multiple choice questions, to try and influence their judgement that the answer can be something other than the right one. Not exactly the same case as Paulson, ACA and Goldman, but its soooo close!

bushido 16y ago

The real issue as people have been summing up is: "The Abacus Fund bought risky mortgage loans and literally bet that they (and the homeowners who held them) would default to the detriment of investors and consumers." The abacus fund was the name of the Fund that John Paulson setup. Let me get the facts out of the way: 1) It is not possible to have a long and short position in the same instrument on the same account simultaneously. ... unless of course it was calls vs puts. but while they are both options they are separate instruments as you can go long/short/offset on calls or puts for a complete trade without using the other. i.e. sell call and buy them back to offset. 2) Of course they could have used another instrument to do this. that is going Long on the futures while buying puts. and that would be illegal. oh wait! thats called hedging. thats not illegal. 3) Of course again if the fund was hedging there is no fraud possible since the money would be with the fund, hence with the investors. 4) If the opposite position was in another account, another fund, or whatever that is also not illegal. Though NOW since these were not hedges they had to be naked shorts. But wait thats not possible, aren't there hundreds of articles that say Goldman, Paulson, Lehman, MS etc etc etc lost tons of money by buying into CDOs... 5) But that would mean, that these were in fact hedged trades! 6) Of course there is also the fact that banks, investment advisors, etc are obligated to tell all their clients what their other clients are doing, now in cases like this that would include internal propitiatory trading desks. OH WAIT! thats illegal too... Whats the effing case again? That they sold mortgages that the investors wanted to buy (unless they were forced to do so under pressure/on gun point... without a choice.... that would definitely be illegal)? That they hedged? That the investors who had the money and sensibility to invest in these risky exotic securities, did not know that they should have hedged against their trades? That its common knowledge that every transaction needs to have a sound exit strategy, and factor in the worst case scenario (hence the hedge), in this case it would be that the investors and consumers could default? Since, if this case has any base, can we expect Full disclosure of Speculation, Investment activities of citizens to get included with emails to the Patriot Act? Oh wait... where did I get that idea from! Since banks can now be taken to court for not disclosing this information, can we add this requirement to lawyers too? Ok back to the topic.. what I think of this case is: For every vague law GS has been blamed to break there is at least one not at all vague law that clears them, the fact of the matter is that this case is not at all about lawful merits, but rather political gain by creating an emotional and moralizing case that will be won even without wining the real case. By using word like literally betting against homeowners etc. enough said.

jballanc 16y ago
This is an excellent summary of what happened. This is also an excellent example of the Randian philosophy that is so rampant on Wall Street. To wit: "I'm smart, you're dumb, so I win, you loose." Matt Taibbi had a nice summary of this recently: http://www.guardian.co.uk/business/2010/apr/24/will-goldman-prove-greed-is-god http://www.guardian.co.uk/business/2010/apr/24/will-goldman-... Of course, the problem with this attitude is that it actively works against the establishment of a Pareto efficient system, and I think we're seeing the results of that with the most recent economic downturn. I don't know enough about the laws to say whether your assertion that no laws were broken is true or not. All I can say is that I hope some laws were broken. If not, then this does not speak well of the US's ability to regulate itself in such a way that benefits the nation, rather than benefitting a select few.
jfager 16y ago
The 'effing case' is that Goldman told the long side investors that ACA independently assembled the reference portfolio when Paulson actually played a significant role in putting it together. How does that not constitute fraud?
- fleitz 16y ago
  ACA did put it together independently. Paulson sent a list of suggestions which ACA was not required and did not include in the way Paulson wanted.
  - jfager 16y ago
    Not true. ACA was being paid by Goldman to put this thing together, who in turn was being paid by Paulson. As long as Paulson wasn't satisfied with the portfolio, Abacus wasn't going anywhere. The fact that they didn't accept his first list without changes does not imply that he didn't directly influence and sign off on the final package.
- bushido 16y ago
  You're correct. Paulson did suggest 123 bonds that he thought should be included in the CDO. And since Paulson was considered smart by ACA he did have an "expert" influence on the final offering. BUT. ACA as an independent portfolio selection agent only selected 55 of those. And only those 55 were used. But since the first 123 were selected by Paulson we should ignore this fact. Since we have already dismissed that ACA independently selected the portfolio, we shopuld also dismiss the fact that ACA's parent company invested $900 million in the CDO, because they believed in the validity of their choices. But then again how is that in any way saying that they approved of the contents of the CDO. Since we have established this,let me try and convince some law firms to start a class action against all colleges, universities, b-schools etc for giving students multiple choice questions, to try and influence their judgement that the answer can be something other than the right one. Not exactly the same case as Paulson, ACA and Goldman, but its soooo close!