Goldman Says CDO Insurer Knew Paulson Was Short

Jan 14 2013 | 2:07am ET

The insurer suing Paulson & Co. and Goldman Sachs over a collateralized debt obligation knew perfectly well that the hedge fund was shorting it, the bank said.

In a court filing on Friday, Goldman said that ACA was aware that Paulson was shorting residential mortgage-backed securities at the time of the 2007 CDO, Abacus-2007-AC1. The bank added that ACA Financial Guaranty, the insurer, “cherry-picked” the evidence it offered in its lawsuit.

Among the evidence left out was a May 2007 phone call between a Morgan Stanley bond trader and an ACA executive.

“These guys, the hedge fund, they are—they’re shorting this stuff right now, huh?” the executive, a vice president, asked.

“Yup… They’re shorting this stuff right now,” the trader said.

Later, the trader told the ACA executive, “These guys have been one of the biggest shorts in the market…. I think they have still yet to take a long position.”

“Right,” the ACA executive responded.

In its lawsuit, ACA alleged that Goldman misled it about Paulson’s role in selecting the securities that went into Abacus, and about whether Paulson was investing on the long side. ACA added Paulson to the lawsuit recently.

Goldman says the call “utterly eviscerates any purported belief ACA may have then had that Paulson was a long investor.”

Not so, ACA’s lawyer said. Marc Kasowitz cited another call, between a Goldman executive and an ACA employee, in which the latter described Paulson’s stake as “100% equity.”

“Goldman Sachs’s specific misrepresentation to ACA about Paulson’s ‘100% equity’ interest in Abacus trumps any anecdotal market ‘color’ by a third-party,” Kasowitz told The Wall Street Journal. He added that the Friday motion was a mere “stalling tactic” and an attempt by Goldman to relitigate its failed motion to dismiss in April.


In Depth

Debunking Conventional Investment Wisdom

Feb 8 2017 | 3:22pm ET

Due diligence in the hedge fund world has long involved some combination of the...

Lifestyle

'Tis the Season: Wall Street Holiday Parties Back In Fashion

Dec 22 2016 | 9:23pm ET

Spending on Wall Street holiday parties has largely returned to pre-2008 levels...

Guest Contributor

The Future of Private Equity: New Opportunities, New Challenges

Feb 3 2017 | 6:41pm ET

The private equity industry’s astonishing rebound since the financial crisis has...

 

From the current issue of