The Complete Story Of What Really Happened Between Goldman, Paulson, ACA, IKB, And ABN

Let’s take a step back from debating the points of SEC vs. Goldman.

After all, you can’t really understand the debate unless you know what happened.

We’ve broken down the whole story to present a timeline of who did what and when.

Then judge for yourself after reading…


2004/2005: Goldman creates a structured products correlation trading desk

The purpose of the desk is to create products based on a client's needs.

Goldman's services allow the client to invest in those products or to short them or a combination of both.

Mortgage lenders sell the contracts that require homeowners to pay them regular mortgage payments. They sell them (usually) to institutional investors like banks.

The investor party then owns a bunch of homeowners' debt, in the form a collection of bonds that are backed by the mortgage payments the homeowners will make on their houses. AKA residential mortgage backed securities or RMBS.

Now there exists a contract between the investor party and the mortgage lender. The contract is a derivative called a 'credit default swap.'

The buyer of a CDS pays a premium to the seller to assume the risk

John Paulson believed these contracts would ultimately be worthless

If the mortgage borrowers cannot pay their mortgage, no money is paid to the institutional investor, who now owns their debt. But the institutional investor still loses money on their investment.

Paulson also believed that the investors were not prepared for the possibility that the RMBS they had purchased would become worthless.

A Paulson employee explained the trade in an email in January 2007.

January 2007: Paulson asked Goldman to bundle these CDS contracts

Paulson wanted Goldman to bundle together the contracts between the investors and the lenders. He would short them, essentially buying insurance in case the contracts became worthless.

Then the trade started take shape.

January 2007: A Goldman VP, Fabrice Tourre sets out to create ABACUS, a collateralized debt obligation (CDO)

The value of the payout depends on the performance of the CDO's collateral, the obligation to pay the debt of the investor

Investors in the ABACUS CDO would lose their investment. Paulson would enter into a CDS agreement with investors in the CDO.

In the event that the contracts became worthless, Paulson would receive insurance payments for their value. The investor would provide these payments.

~January 2007: Goldman employees email saying it might be hard to find a party to manage the RMBS inside the CDO

~January 2007: Goldman hires ACA to manage the CDO, ABACUS

January 8, 2007: Tourre meets with Paulson & Co reps and ACA at Paulson's office

January 8, 2007: ACA emails a Goldman rep

January 9, 2007: Goldman emails ACA

Goldman includes in the email the 'Paulson Portfolio,' a list of 123 RMBS selected by Paulson.

ACA emails back saying they are on board.

Pg. 9 of the SEC filing against Goldman.

January 9, 2007: Goldman emails ACA

January 10, 2007: Tourre emails ACA

January 12, 2007: ACA emails a Goldman rep

January 16, 2007: Tourre receives that email as a Fwd from another Goldman employee

Mystery date: Tourre told ACA that Paulson invested $200 million in ABACUS

In their press release explaining their charges against Goldman, the SEC says, 'he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS.'

We don't find evidence of Tourre's telling the SEC Paulson was $200 million invested in ABACUS.

January 22, 2007: ACA emails Tourre and others at Goldman

January 23, 2007: Fabrice Tourre emailed a friend

January 27, 2007: ACA reps meet with Paulson in Jackson Hole, Wyoming

January 28, 2007: ACA summarizes the meeting in an email to Tourre, Tourre responds

February 2, 2007: Paulson, Tourre, and ACA meet at ACA's offices. Tourre emails a Goldman colleague.

February 2, 2007: ACA emails Paulson, Tourre, and others at Goldman

February 5, 2007: Paulson emails ACA and Tourre

Paulson deletes eight RMBS recommended by ACA, leaves the rest, and states that Tourre agreed that 92 bonds were a sufficient portfolio.

Pg. 11 of the SEC filing against Goldman.

February 5, 2007: ACA emails internally

February 7, 2007: Tourre emails a Goldman colleague(s) that using ACA will help GS market ABACUS

February 11, 2007: Goldman partner emails Tourre saying the CDO biz is dead

Also in 2007: Goldman was shorting CDOs on its own

The dates are disputed but it was sometime around 2007 that Goldman realised mortgage bonds were worthless and began trading against CDOs.

Andrew Davilman traded against CDOs similar to ABACUS in 2007.

February 12, 2007: In a meeting, ACA approves the firm's participation in ABACUS

February 19, 2007: Goldman sends ABACUS marketing documents to German bank IKB

March 12, 2007: Goldman demonstrates understanding of the marketing advantages of using ACA

~February 26, 2007: ABACUS is created

Paulson and ACA came to an agreement on a reference portfolio of 90 RMBS for ABACUS 2007-AC1 on or around Febuary 26, 2007.

Pg. 11 of the SEC filing against Goldman.

See the marketing materials for ABACUS 2007 AC-1.

~March 12, 2007: Goldman upper management approves ABACUS 2007-AC1

March 12, 2007: Goldman internal communication refers to Paulson's role in ABACUS

~April 26, 2007: Goldman finalises a 178-page offering document for ABACUS

~April 2007: IKB invested $150 million in ABACUS

IKB invested both in Class A-1 Notes ($50 million) and Class A-2 Notes ($100 million).

IKB would pay Paulson almost all of its $150 million investment if the contracts became worthless. (Less Goldman's fee.)

Pg. 17 of the SEC filing against Goldman.

~April 26, 2007: ABACUS closed to investors

~May 2007: A Dutch bank, ABN, assumed the credit risk of ABACUS

ACA insured their trade. In case ACA couldn't pay Paulson, AKB would.

Pg. 18 of the SEC filing against Goldman.

End of 2007: ABN is acquired by RBS

End of 2007/early 2008: ACA experiences severe financial difficulties

ACA Capital must unwind approximately $69 billion worth of CDSs.

ACA Capital is currently operating as a run-off financial guaranty insurance company.

Pg. 19 of the SEC filing against Goldman.

In the end: Paulson makes ~1 billion

IKB pays Paulson almost all of its $150 million investment if the contracts became worthless. (Less Goldman's fee.)

On or about August 7, 2008, RBS unwound ABN's super senior position in ABACUS 2007-AC1 by paying GS&Co $840,909,090. Most of this money was subsequently paid by GS&Co to Paulson.

Pg. 19 of the SEC filing against Goldman.

What do you think? Did Goldman commit fraud?

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