Sunday, April 18, 2010

Goldman Sachs, SEC & The Greatest Trade Ever

The New York Times: April 16, 2010
The focus of the S.E.C. case, an investment vehicle called Abacus 2007-AC1, was one of 25 such vehicles that Goldman created so the bank and some of its clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

As the Abacus portfolios in the S.E.C. case plunged in value, a prominent hedge fund manager made money from his bets against certain mortgage bonds, while investors lost more than $1 billion.

According to the complaint, Goldman created Abacus 2007-AC1 in February 2007 at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst. Mr. Paulson is not named in the suit.

Goldman told investors that the bonds would be chosen by an independent manager. In the case of Abacus 2007-AC1, however, Goldman let Mr. Paulson select mortgage bonds that he believed were most likely to lose value, according to the complaint.

Goldman then sold the package to investors like foreign banks, pension funds and insurance companies, which would profit only if the bonds gained value. The European banks IKB and ABN Amro and other investors lost more than $1 billion in the deal, the commission said.

Wall Street Journal: OCTOBER 31, 2009

It was the fall of 2007, financial markets were collapsing, and Wall Street firms were losing massive amounts of money, as if they were trying to give back a decade's worth of profits in a few brutal months. An investor named John Paulson somehow was scoring huge profits.

His winnings were so enormous they seemed unreal, even cartoonish. His firm, Paulson & Co., would make $15 billion in 2007.

Mr. Paulson's personal cut would amount to nearly $4 billion, or more than $10 million a day. That was more than the 2007 earnings of J. K. Rowling, Oprah Winfrey and Tiger Woods put together. At one point in late 2007, a broker called to remind Mr. Paulson of a personal account worth $5 million, an account now so insignificant it had slipped his mind.
The Wall Street Journal’s Gregory Zuckerman in his book, “The Greatest Trade Ever” wrote:

Paulson & Co. had bet against about $5 billion of CDOs and made more than $4 billion from these trades—including $500 million from a single transaction—according to the firm’s investors and an employee of the firm. One of the biggest losers, however, wasn’t any investor on the other side. It was the very bank that worked with Paulson on many of the deals: Deutsche Bank. The big bank had failed to sell all of the CDO deals it constructed at Paulson’s behest and was stuck with chunks of toxic mortgages, suffering about $500 million of losses from these customized transactions, according to a senior executive of the German bank.

These were some of Paulson & Co.’s largest scores.

Mr. Paulson bought a $41 million home in early 2008 in Long Island and he lives with his wife and two daughters on the Upper East Side of Manhattan.                                            The New York Times.

Latest Updates: Live Blog on SenateLatest News

Huffington Post: AIG Story.

Newsweek, The Guardian

Others Posts:

NHS & the Repeal Of The Glass-Steagall Act

To Intervene Or Not: A Colossal Failure Of Common Sense.

Corruption: Three Doctors and a Professor.

NHS: Business Model? Spare Us Please!!!

Dr Am Ang Zhang is the author of The Cockroach Catcher.

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