Update: Goldman Sachs Indicates ACA Management Was Largest Long Investor in ABACUS

That was quite an interesting press release issued by Goldman Sachs (GS) after the closing bell tonight. All day today investors concluded from the details of the SEC’s fraud charges that Goldman worked with Paulson and Co. to weaken the composition of the ABACUS transaction in some fashion, perhaps in an effort to boost the odds that Paulson would profit from taking the short side of the trade. The SEC seemed to indicate, judging by the fact that it charged the Goldman employee in charge of the deal for lying, that someone from Goldman told ACA Management that Paulson was actually making a $200 million long investment in ABACUS. Goldman’s latest press release seems to tell a much different story. The side that makes their case the best could potentially make the other side look a bit foolish here.

What did Goldman claim tonight? First, they state that their firm lost $90 million on the transaction, as it had a net long position that soured when the CDO went bust. Next, Goldman denies that their employee ever told ACA that Paulson was taking a long position in ABACUS. That directly contradicts the SEC’s claim that ACA was told Paulson was going to be long alongside them, which if true, would seem to imply that ACA was fooled into thinking that collaborating with Paulson while structuring the CDO would not be problematic for them.

Another Goldman claim in the release seems to be the most important, in my view, if it is accurate. Goldman says that the single largest long investor in ABACUS was, believe it or not, ACA Management (with an investment of $951 million). If ACA truly was the largest long investor in the CDO, they had every incentive to structure the deal correctly (and Goldman is quick to point this out). In such a scenario, why would ACA ever allow Goldman and/or Paulson to hand-select mortgage securities for the CDO that might jeopardize their investment?

Now, it will take a lot of time to determine whether Goldman’s defense is true or not. However, their press release seems to make a bit more sense. If ACA was the firm that selected the portfolio, and also was the largest long investor in the CDO, the ABACUS deal goes from looking like a huge conflict of interest (as it did earlier today) to having interests aligned quite nicely. If you were the largest investor in a deal, it makes sense that you would want to be the firm that got to approve the mortgage securities that were included in it.

Did ACA consult with Paulson and Co. as well as other firms while structuring the deal? The Goldman press release essentially admits this to be true. Should those discussions have been disclosed in the CDO’s marketing materials? Maybe. But as long as ACA had the final say, it really does not seem to be a big deal.

After all, would it be considered fraud if a Wall Street analyst recommended clients buy stock in Company XYZ, but before doing so consulted numerous sources, including Company XYZ’s CEO? Would that single discussion with the CEO need to be disclosed in the analyst report in order to assure that investors knew that one of the analyst’s sources for the research was biased in their assessment of the company’s prospects? Of course not.

Like I said, we cannot take Goldman at face value at this point, just as we cannot take the SEC at their word either. After all, the SEC recently brought insider trading charges against high-profile Dallas Mavericks owner and high-tech entrepreneur Mark Cuban — and lost. If most of what Goldman has said in this latest press release can be proven, it looks like the SEC’s case this time around might not be a slam dunk either.

Full Disclosure: Peridot Capital was long shares of Goldman Sachs at the time of writing, but positions may change at any time

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One Thought on “Update: Goldman Sachs Indicates ACA Management Was Largest Long Investor in ABACUS

  1. shepherd on April 18, 2010 at 10:05 AM said:

    Chad,

    One thought. Saying you lost $90M and were net long at the time of collapse is not convincing to me. It seems to indicate that they were also hedged short and the 90M is only the long part of the deal. Even if they lost an net 90M, you’d still have to know more. It could have been an unrelated trade.

    I don’t know enough about to comment about the specific law here. However, I have seen up close what a totally baseless lawsuit can do to a financial firm, and it’s not pretty.

    A lot of folks outside Wall Street frankly hate Goldman and have a very conspiratorial mindset towards it. Whatever the facts, this is the right storyline for them. From now on, any rock that can be turned over on the slightest pretext will be. There may not be the slightest bit of truth to any of it, but I’d guess a vast storm of allegations, lawsuits, investigative reports, and PBS specials are coming. The people doing them may not understand the facts, and may not care about them. But they’ll put things in a way that people will understand. And that’s bad.

    If you’re a fiduciary heading to your board or investment committee–and these aren’t always the savviest financial minds–and you say, “We’re doing this on the advice of Goldman,” eyebrows might get raised. All you need is one ignoramus on the committee who says, “Ain’t those them bastards I heard about on the news,” and goodbye Goldman. I’ve seen it happen.

    It also gives tremendous firepower to competitors. Goldman used to start ten yards ahead of everyone else in developing new business. Now they’re going to find out what it’s like to play catch up.

    Of course, Goldman is a tough customer to tangle with and they’ve handled the opening steps in this dance very well. It’ll be interesting to watch.

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