Are investors actually freaking out over John Paulson, following the Goldman charges?
Some actually are according to Cumberland’s David Kotok:
The revelations about Goldman Sachs, John Paulson’s hedge fund & Mr. Tourre constitute an on going saga. The price of GS stock suffers as more information is made public. One newest exposure is that five GS insiders sold stock in GS after the firm received a Wells Notice 8 months ago and before the SEC made the complaint public. There is some question about whether or not they traded on inside information since the nature of the detailed allegations in the SEC charges were supposedly not known to them and the notice of the SEC probe may have been routine and not material. (Wall St. Journal, April 24).
Another development that adds to the debate is a letter that John Paulson has sent to his investors. We are personally aware of three investors who have withdrawn or plan to withdraw funds from Paulson. They are concerned about how Paulson achieved his investment returns now that there is a question about the construction of the investments he used. In his letter, Paulson says he “suggested” securities to be used but the actual and final decision was made by ACA and that “Paulson’s role in the ABACUS transaction was appropriate and conducted in good faith.” Paulson reminds his investors that the securities were originally rated AAA by Moody’s and Standard & Poor’s ratings services.
At Cumberland, the view is that these Goldman story is a real negative for financial stocks:
So where does this ongoing saga eventually lead? For us the cliché “there is never just one cockroach” applies. We expect more allegations as the SEC continues to investigate ABACUS and other structures like it. We expect other firms will be named. The financial sector is now under attack and the attack occurs in the middle of the debate about the Financial Reform legislation. Much of that proposed legislation seems counterproductive to us. It will be costly to firms, it will inhibit new business formation and it will certainly alter the roles of existing agencies including the Federal Reserve.
Markets sense that a sea change may be coming. Financial stocks are trading on future expectations since the present earnings they are reporting were derived from yesterday’s results. Those earnings reflect an operating regime which is now in question. GS stock is a prime example. Earnings were huge; the market ignored them. The stock went down.
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