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…
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.'
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.
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
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.
February 2, 2007: Paulson, Tourre, and ACA meet at ACA's offices. Tourre emails a Goldman colleague.
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.
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.)
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.
Business Insider Emails & Alerts
Site highlights each day to your inbox.