Goldman's Defense - Hindsight is 20/20

Two documents in which Goldman responded to the SEC are now available at Alphaville.  They make some interesting points about the importance of hindsight that I suspect will be unpersuasive.

Just to recap - Paulson, now a fearsome hedge fund made famous by third successful call of the hosing meltdown, was just another player back in 2007 when they approached Goldman and sought their help in creating a vehicle that would let them go short some residential mortgage backed securities.

Goldman enlisted ACA as the investment portfolio manager; per the SEC complaint, Goldman then duped them into believing that Paulson was a long investor.  ACA then accepted a lot of input from Paulson in putting together a bond portfolio which ultimately swooned, to Paulson's profit and ACA's surprise.

But Goldman makes some valid points.  Among them:

Who The Heck is Paulson?

...while Paulson‟s investment strategy and success are well known today, nothing in the record establishes that Paulson‟s involvement would have been significant in early 2007 to anyone involved in the 2007-AC1 transaction. All participants in the transaction understood that someone had to take the other side of the portfolio risk, and the offering documents clearly stated that Goldman Sachs might lay off some or all of the short exposure to the portfolio that it had taken on. A disclosure that the relatively unknown Paulson was the entity to which Goldman Sachs transferred that risk would have been immaterial to investors in April 2007.

A Receding Tide Strands All Boats

...there is no basis to suggest that the portfolio would have performed any differently or that the economic outcome for the participants would have changed in the least had Paulson‟s role and interest been more transparent. The portfolio that ACA originally selected had the same characteristics as the Reference Portfolio, and both experienced virtually the same poor performance in the face of the subprime meltdown.

In early 2007 market participants were surely aware that opinions were divided on the outlook for the housing market; per today's Times, opinions were divided inside Goldman Sachs.  Paulson was what - a firm that would be famous in two years for calling the market turn?  What would that mean in 2007?

And the notion that Paulson had an uncanny knack for picking bonds about to collapse may simply be hype - plenty of other bonds bought in utter good faith also collapsed, and it may be that, as Goldman says, any portfolio ACA put together would have fared poorly over the next few years.

Good points but... if that is all true, then why not tell investors and/or ACA about Paluson's role?

Their response also circles back to a point I had mentioned in passing earlier - is this really all the SEC has?

...there is no basis for a finding that Goldman Sachs made any alleged misrepresentations about Paulson‟s role with the negligence required under Section 17(a), much less with the scienter mandated by Section 10(b). The Staff has pointed to two ambiguous statements contained in an e-mail from Goldman Sachs that it contends caused ACA to infer that Paulson would be an equity investor.  As an initial matter, it is difficult to reconcile such an inference with the Staff‟s theory that Paulson tried to influence ACA to select dozens of riskier Baa2-rated securities, which would have raised questions about Paulson‟s true economic interests for any sophisticated market participant. The record, in all events, contains no evidence that Goldman Sachs caused ACA to infer that Paulson had an equity position. Nor does the record support the conclusion that any confusion by ACA as to the nature of Paulson‟s involvement in 2007-AC1 changed how ACA selected the Reference Portfolio.

It may come out at trial that ACA had formed a pretty accurate sense of Paulson's intentions but was unfazed.  The SEC complaint includes a no-context email in which Tourre, the Goldman deal manager, described a meeting between ACA, Paulson and himself as "surreal".  How conclusive is that?  The meeting could have been surreal because Paulson played along as a bullish investor and ACA was duped; it could have been surreal because Paulson pretended to be bullish and ACA pretended to believe him; it could have been surreal because, rather than lions and lambs lying down together, Tourre was watching bulls and bears sit together and negotiate a mutually agreeable portfolio, knowing one side or the other was likely to be crushed.  Who can tell, from the SEC snippet?

And despite the ghastly ex post outcome it is not as if ACA lacked expertise or confidence in selecting bonds.

Goldman includes these bold words:

If this matter is litigated, Goldman Sachs is confident that a fuller record – including its own discovery of all transaction participants – will underscore that no one in fact considered Paulson‟s role important and that no one was misled.

Good point - what were the ACA people saying to each other and what will they say on the stand?

Eventually, Goldman argues that there is no crime without intent:

[t]o prove scienter with respect to a non-disclosure, it is not enough to simply show that the defendant was aware of an undisclosed fact that a court later determines is material. Rather, a plaintiff must show that the defendant must have been aware of both the materiality of the undisclosed fact and that its nondisclosure
would likely mislead investors.

I think this is where they have a problem.  Goldman can rationalize Paulson's involvement in the portfolio selection process as immaterial, but if the SEC can make a case that Goldman took steps to misdirect ACA about that role, the actions will refute the rationalizations.

HOW DUMB ARE THESE GUYS?  Goldman notes that the ACA people were active in evaluating the proposed portfolios:

Finally, ACA‟s purported belief that Paulson was an equity investor would have been neither reasonable nor credible if one accepts the major premise of the Staff‟s theory that Paulson proposed literally dozens of weaker securities that were systematically rejected by ACA.  If this premise were true, then a market participant as sophisticated as ACA would have quickly recognized this trend, and questioned at least in its own mind what Paulson‟s economic interest was. Certainly, the credibility of ACA‟s purported interpretation will be subject to vigorous attack in a contested proceeding.

I have no idea what ACA people will say on the stand.  However, the SEC brought the suit, so they must have a bit of confidence.  Well, I say that - the final vote was 3-2 in favor of proceeding.  Yike - what we don't need right now is a weak, politically motivated case.  C'mon, bring on a slam-dunk!  That said, Obama gets the headlines he wants now and this case won't go to trial for months or years.

ANOTHER HINT OF TROUBLE IN PARADISE:

From p. 32 of the first Goldman response is this footnote:

The Staff has also asserted that certain internal ACA documents state that Paulson intended to invest in the equity tranche of the 2007-AC1 transaction. Copies of those documents have not been provided to Goldman Sachs.

I don't recall seeing those in the complaint.  Was the SEC bluffing?

Comments

[Janet]

this site has degenerated from a place where intelligent and informed people would exchange information, to a social networking place

I know I contribute to this problem. At the end of the day though all the exchanged information and great thoughts will need boots on the ground to help get America back on track. Some of us social types are your boots on the ground.

[Ranger]

BTW, http://www.realclearpolitics.com/articles/2010/04/20/the_eradication_of_trust_105234.html>here is today's glaring example of just how lost the Dems/Left are on economics. Its a longish screed, but this is the part that relates to the thread topic:

There's obviously no reason to trust Wall Street. Theoretically, the only reason for the financial system to exist is to service the economy -- and the American people -- by channeling capital to its highest and best use. The charges filed last week against Goldman Sachs illustrate the extent to which capitalism's precepts have been turned on their head by financiers who believe the economy exists to service them.

Someone needs to refresh Eugene Robinson on how Adam Smith's "invisible hand" works. The whole point is that each person in the market works for their own personal best interest, and that is how the market produces an effciency at distributing resources. It's not an 'altuistic' endeavor, and trying to make it such, simply destroys its effectiveness and competative advantage over other systems.

[Old Lurker]

Janet, it is not a bug, it's a feature.

[Cecil Turner]

Or potential political targets painting the concentric circles on their own backs?

I dimly remembered and was looking for that story, thanks. I'd note GS is far less in the Dem camp this year than in 2008 (only about 2 for 1 vice 4 for 1), but if the trend is to further support the GOP, it'd provide another strong incentive to throw 'em to the wolves.

Here's a plausible take on it:

The SEC lawsuit was filed against Goldman Sachs on Friday. Democrats make political hay on Monday. President Obama will speak in New York on Thursday.

The Goldman suit reads like Rahm Emanuel/Jim Messina campaign magic. Practical politics needs a precipitating event, one that's choreographed for Q ratings.

[Melinda Romanoff]

Ranger-

Adam Smith is an anathema to them. They prefer Sirkin, circa 1968.

I will willing send my copy, to you, for your new doorstop.

[scott]

The poker analogy is right on. It is certainly a sham suit but why would one party in one of these deals assume the other partys goal is to make money?

They must not. I wouldn't and I've only been thinking about it for an hour. Does the SEC interview the loser and he says " I was robbed"?

It seems a very simple case of material disclosure. Kind of like a holding call in the NFL. They could call one on virtually every down. Who made money and who lost and ethical arguments seem to me to be irrelevant.

[hit and run]

Cecil:
I'm with Patrick on this one. The camaraderie is all good, but I come here for the information and mental stimulation, not the social stuff. Having both is great, but if one pushes out the other

I think that the tipping point for JOM in the pushing out of one for the other occurred when two gents met in Alaska for a beer, being served by the waitress who carried herself with the poise and confidence of a seasoned athlete.

Kidding.

[Porchlight]

to a social networking place where establishing relationships is the soup of the day.

I am definitely guilty of this. Which is why (other than today) I try to stay off threads like this one when I have zero to contribute.

[Captain Hate]

Someone needs to refresh Eugene Robinson on how Adam Smith's "invisible hand" works.

You're assuming Eugene understood them in the first place; isn't that what's called "facts not in evidence"?

[Danube of Thought]

I mean, Greg Craig? Doesn't that seem like a wink right there?

No. Trust me, while I am at the opposite end of the spectrum from Craig politically, he's a true pro as a lawyer and he will show undivided loyalty to his client.

[Ranger]

It would be hard to find a decent human being who would disagree with the view that Goldman’s methods were morally questionable. And it is here, in the interstices between the law and morality, that the pressure for reform starts to build up irresistibly.

Well, if you are going to go about making everything that's immoral illegal, let fun begin. Silly me, I thought the whole problem that Dems had with the 'religious right' was that they wanted legislate morality.

I personally feel its immoral for anyone to talk about how much society needs to help the poor, and then give next to nothing to charity. Lets make a law that every registered Democrat has to give at least 10% of their gross income to charity. Failure to do so results in a $10 fine for every $1 short they are for the year.

[Rick Ballard]

Cecil,

Take another layer of skin off the onion and you come to Citi/JPM being "better connected" than GS via Weill/Dimon with Rubin/Summers as an appetizer. Dimon was Igor to Weill's Dr. Frankenstein in stitching ZombieCiti together and JPM has done rather well in its role as designated corpse robber for Bear Sterns and WaMu.

You can't assess the selection of GS as whipping boy without examining the "princes" who were spared.

I agree with you about the politics and the Republicans would be wise to redraft and polish up Title VII from the regulation bill while pointing at Madoff and Stanford rather than wasting a second "defending" GS.

[Ranger]

the Republicans would be wise to redraft and polish up Title VII from the regulation bill while pointing at Madoff and Stanford rather than wasting a second "defending" GS.

Posted by: Rick Ballard | April 20, 2010 at 11:30 AM

Exactly so. If anything, the Republicans should go hammer and tong after GS while at the same time showing how this case proves no need for new regulations. What they were doing (if proven) violated existing law. How would anything in the new regulation package have changed the outcome or allowed charges to be brought faster. The problem was not an empty regulatory tool box, but regulators who simply refused to open the tool box when their friends (often well connected Democratic doners) were involved.

[Pagar]

From Sistertoldjah-Something to keep in Mind:
"One of the biggest frauds ever perpetrated on the American people in history is the common misconception – fostered by lying Democrats and their handholders in the MSM – that it was Republicans who were the most responsible for not only enabling and aiding in the financial crisis of 2006-2009 but for also being “against” any efforts to halt such things from happening in advance. It’s simply not true. Out-going Senator Chris Dodd, a beneficiary of his and his party’s “just say no” attitude towards GOP financial reform efforts, is out front and center once again pretending to be the hero of the “little guy” with his “bipartisan” financial reform bill which will solve nothing. The GOP must stand firm against this phony “reform” effort and remind people that the last people you want to “fix” these problems are the very ones who got us into this mess in the first place."

[Thomas Collins]

I have found the back and forth on the SEC action against Goldman informative, and I believe Patrick R. Sullivan's comments have added substantially to the Goldman threads. However, I must express strong disagreement with the view that the social networking aspects of JOM are inhibiting the intellectual back and forth. One feeds on the other. In addition, although the discussion of the technical aspects of the securities laws is of course essential to a thread on the Goldman matter, I welcome comments from folks who haven't studied the securities laws and want to express their general opinions. Often general opinion posts bring to light policy aspects that an exclusive focus on the merits of the SEC action might overlook.

So, Janet and Porchlight, I hope you'll post away on this thread with any social networking or general comments that suit your fancy.

[Pagar]

Well that didn't turn out too well.

[Charlie (Colorado)]

Don't let the doorknob hit you in the ass.

Actually, do.

[Ranger]

BTW, wasn't Corzine a senior VP at GS before running for the Senate?

I seem to recall that he was incharge of their internet IPO operation, where friends of GS were given the option to buy IPOs at the intial listing price. That allowed the friends of GS to then dump the stock in a matter of hours at massively inflated prices (because everyone wanted every new internet IPO) for huge profits on stocks that never lived up to their hype.

[Thomas Collins]

In fact, as I ponder scienter and materiality, I might not even object to a Michelle Obama fashion update (although a Joanna Krupa one would be preferable). :-))

[rse]

TC-

Well said.

[Melinda Romanoff]

Ranger-

Corzine was CEO, at one time, with H. Paulson as his #2 in 1994.

[MarkO]

I shall ponder the 18 year old Elizabeth Taylor.

[Sue]

Well, I'm not apologizing for bantering with Rick about unicorns. PRS wasn't talking about the socializing in this exchange:

Diamond:

my first inclination, like all lefty law professors, was to think, aha, Gotcha Goldman, but then my brain started working and I have started to re-think this.

PRS:

Not a lot of that going around here.

From his earlier posts, I don't think he likes being disagreed with and when someone does, the aren't thinking. You have a whole lot of securities people on this thread and so far there have been several varying degrees of whether GS did anything, whether it was wrong, whether it should have been brought to suit, etc. And very little socializing.

[BBC and CNN INternational]

Goldman Sachs, When did you stop beating your wife?

[nathan hale]

And Rubin merged the two companies, HNG and another, and selected Ken Lay, respected former government official, and successful
oil man in Texas as CEO. Didn't the latter push to have his ward protected, during the 2001-2002 brouhaha, and he moved on to peddle
subprime across the seas, for Citigroup Europe.

[Ranger]

Corzine was CEO, at one time, with H. Paulson as his #2 in 1994.

Posted by: Melinda Romanoff | April 20, 2010 at 11:48 AM

Even better to illustrait my point. If you want to talk about immorality, what GS was doing during the building of the internet bubble was as bad as it gets. Cranking out IPOs on companies that had next to nothing except an internet buzz, and then letting their friends make 200 to 300% profit for holding the stock for a few hours, and GS took its cut right off the top and a second cut when the brokered the sale of the IPO shares to the dupes. As a result, less knowledgeable investors got stuck with stocks at hugely inflated prices that never produces either dividends or value appriciation after the first day of the IPO.

GS and its institutional friends made out like kings and never left any skin in the game. Those 'not in the know' got crushed when the tech bubble burst. Quite a nice racket, and perfectly legal. And yet, Corzine was welcomed with open arms into the Democratic party without a blink of an eye.

[anduril]

Well, if you are going to go about making everything that's immoral illegal, let fun begin. Silly me, I thought the whole problem that Dems had with the 'religious right' was that they wanted legislate morality.

There is a well recognized middle ground.

There's a moral dimension to virtually any law you wish to name, even tax laws (it's a moral duty to contribute to the support of society, etc.) However, that does NOT translate into "making everything that's immoral illegal." As acute a moral thinker as Aquinas maintained that the state should not attempt to outlaw all immorality, only the more serious types of immorality (murder, theft, etc.) The reason being that there is a point at which the cure becomes worse than the disease. The point of representative government is to discuss these issues on a case by case basis and come to agreed solutions--or rectify past misjudgments.

That said, it's hard to argue against the contention that some of the Wall St. shenanigans have had very serious repercussions. To that extent, Varadarajan is certainly correct to observe that

it is here, in the interstices between the law and morality, that the pressure for reform starts to build up irresistibly.

As for Dems and the legislation of morality, it's all about differences in moral visions. Dems virtually ALWAYS rely upon moral arguments for their proposed legislation. The problem is that there vision of human nature, and thus of morality, is seriously flawed. There's no escaping morality in life, public or private.

[Charlie (Colorado)]

Anduril, the thing about TV's argument is this:

* everyone involved knew there would be counter-parties, people taking the short side of the bet. It's EXACTLY like betting the over-under on a sports line: you know someone it taking the other side of the bet. The casino may do a few bets that they cover directly, but if no one is buying the over, they stop accepting the under.

* everyone setting the thing up knew that the exact portfolio behind the instrument was being put together with the counter-parties' input, because they were also involved.

The "material disclosure" that SEC complains about is that John Paulson was one of the short-side parties and the other people didn't know. But then, before this happened, John Paulson was just some guy. See this Newsweek piece from last year:

In a span of just three years, hedge-fund manager John Paulson went from practically unknown to practically unparalleled.

What's more, I wonder if Goldman could legally have revealed the counterparties. At least when I was working on Wall Street, people went to great lengths to make sure what they were trading was kept secret, lest someone front-run them.

The thing is, it really looks like the gist of the SEC complaint is that Goldman should have let people know Paulson was a counterparty, because Paulson was going to make a lot of money on the transaction in the future.

[Captain Hate]

Any website with regular posters will have some "social" aspect. The only exception to that in my limited experience is the Volokh Conspiracy, probably because the contributers are overly concerned with the concept of billable hours.

[caro]

Though kinda with Sue, I am reading every word of this thread. The social networking aspect helps me with evaluating each post. The intellectual power here is always astounding and this topic brings out a lot of knowlegable lurkers.

Narciso, I really wish you could be drawing your connecting charts on a blackboard. I try to do it in my mind.

[BR]

Janet, I've noticed in the presence of great beings, one feels good. (Take Clarice, for example.) If anyone ever tries to make you feel invalid, know their measure.

[Melinda Romanoff]

BR-

If I ever do the latter, I expect to get jumped on, and have. (or thwacked, but we know who does that.)

[jimmyk]

The social networking aspect helps me with evaluating each post.

Interesting comment in light of the discussion here. That's the essence of the complainers' gripe: They now say they wanted to know with whom they were dealing in order to evaluate the assets. I think in both cases it's a shortcut.

[Melinda Romanoff]

And if you think I'm grouping myself with the smart group, nuh-huh, nothing doing. Can't untie their shoelaces up there.

[matt]

anybody see or hear Barney the Hamster going off on Fox News this morning? He got very upset when the whole Freddie Mac/Fannie Mae scandal was brought up.

His willingness to come on Fox attests to his inviolable position. Her should have been tarred and feathered for his miscreance.

[Ignatz]

This notion that Paulson was an unknown in 2007 was challenged by PRS himself on an earlier thread. He was unknown to the non investment, non real estate part of the world but not within it.
Seems to me the only question that matters is, did GS actually mislead anyone on his role in the transaction. If they did they have a large problem, if not they probably don't.
Since ACA actually chose the specific securities in the CDO and apparently had the power to and did choose securities outside of the group Paulson selected, less than complete disclosure of his role seems pretty thin gruel.

[Melinda Romanoff]

rse linked to Andy McCarthy earlier on the GS stuff earlier, but this latest one by him puts it all to rest for me.

Go and gander, it's all a political push for the bill.

[anduril]

Charlie, I think the SEC contention is a bit more pointed. They seem to be saying that Goldman should have revealed that the purpose of Paulson's involvement was to tailor make an offering that couldn't lose (for him). Goldman's defense is twofold, I think: 1) on a more or less theoretical level, everyone SHOULD have been able to evaluate the offering on its merits, so Paulson's involvement was irrelevant, and 2) in actual fact there WERE knowledgeable people betting against Paulson (apparently including Goldman).

Those aren't negligible arguments, but I think they rely on overestimating the true scope of investor "sophistication" and underestimating the degree of herd mentality involved in Wall St. Part of Paulson's calculation, I strongly suspect, involved relying on the herd mentality of even supposedly sophisticated institutional investors. Thus, TV's argument would be that one should never underestimate the importance of any information--that perhaps the Paulson info might have given investors the wake up call they obviously needed.

The other aspect is the argument over what markets are and are for: are they simply casinos or is the reality more complicated, since their alleged purpose is the efficient allocation of capital. If markets really serve a serious societal function--including helping non-sophisticates to provide for their retirements--no one should be surprised at the calls for reform. If Wall St. is nothing but a casino, then GS's defense is compelling, but otherwise it's...less than totally compelling. The burden of proof being 51%.

I'm guessing GS will look to settle somewhere along the line, is already making some quick calculations. I wouldn't be surprised to see the SEC go along with that.

[PDinDetroit]

I question the timing.

[peter]

I agree, Melinda. The icing on the cake for me is that all the letters to the Editor of today's Times are in favor of the suit. It's a Democratic Party maneuver.

[jimmyk]

Goldman should have revealed that the purpose of Paulson's involvement was to tailor make an offering that couldn't lose (for him).

There's no such thing (outside of pure arbitrage). Paulson was choosing what he believed to give him the best chance at turning a profit. ACA et al chose based on the same objective. What also seems lost in all of this is what the prices were. If the underlying mortgages were viewed as very risky, then Paulson would have been paying a lot up front for the default protection.

The other aspect is the argument over what markets are and are for: are they simply casinos or is the reality more complicated, since their alleged purpose is the efficient allocation of capital.

Those aren't mutually exclusive.

[JeanD]

I'm sure this is just a happy coincidence, but yesterday morning I began hearing radio ads from AARP urging everyone to contact their reps in support of the new financial industry regulations. The ads feature a folksy jingle about the banks "breaking all the rules" and taking our money to bail them out, and how we won't let them fleece us again.

Add that to the timing of this GS suit, and the President's campaign swing this week to talk up the bill, and it becomes hard to avoid the conclusion that the GS suit is just some tinder for the fire. Having the executive branch gain even greater control over the economy because the public demands it...priceless.

They get the bill and the power, the attorneys get the bucks, and GS gets a slap on the hand.

[anduril]

I can see a compelling moral case here, however...

The complicating factor is government involvement, going way back, which influenced investor behavior in a clearly non-benign way. The underlying assumption of government bailouts led "sophisticated investors" to take unreasonable risks. It's hard to work up sympathy for that sort of sophistication, but if the markets operate for the overall good of society then we have a problem. And government, not just GS, is a major part of that problem.

McCarthy has a pretty good column in defense of GS today--I cited TV as a kind of counter argument with McCarthy in mind. I like this graf from McCarthy's full length article:

Paulson figured out that the government had tried to turn the dream of home ownership into a right of home ownership through a series of extortionate devices such as the Clinton-era amendments to the Carter-era Community Reinvestment Act; the Clinton-era crackdown on “redlining,” which saw the government accusing banks of racially invidious practices for failing to make loans to people who couldn’t afford to repay them; and a Bush-era delusion called the American Dream Down Payment Act, which was in fact a down payment on compassionate conservatism’s dream of creating an additional 5.5 million minority homeowners by 2010 — a dream that turns out to have come at a nightmarish cost of hundreds of billions of dollars, and counting.

Conservatives, as opposed to RINOs, need to bear that in mind.

[Extraneus]

Considering the maneuvering apparently taking place in order to get this passed, does anyone have a link to an unvarnished summary of the bill?

[Jane]

Caro,

I'm glad to see you made it home in one piece. Anduril I suggest you start a blog where you can bold everything important all day long and ban social networking.

Harrumph!

[Old Lurker]

Don't fret, Jean. GS will be well paid for the slap.

[Rick Ballard]

jimmyk,

You said "it's the sum of actions by market participants that result in prices, and those prices convey information." and I would agree wholeheartedly wrt short interest, options, put/call ratios etc. but where was the information concerning the deal in question going to be assembled and conveyed? If a CDS repository had existed and had CDS pricing been readily available for examination by the players perhaps the bubble wouldn't have grown so large but there was no repository that covered more than a small fraction of the 'deals' that were sprouting like mushrooms on a manure pile.

Mel linked a Tavakoli technical piece that was very good. Here's a Forbes interview with her that is more accessible. Her points regarding the CRAs furnishing garbage information to "sophisticated" investors were made in 2003. AFAICT, she was right on target.

[nathan hale]

Does it matter, Ex, we've seen with the healthcare bill, that most of the benefits
are not in the bill, that the cap n trade bill is ephemeral. What we do know is that
this the kind of bill that Mother Iselin
could have dreamed up, (yes the Manchurian
candidate allusion is intended)

[Melinda Romanoff]

Rick-

I think I love Janet Tavakoli.

[jimmyk]

where was the information concerning the deal in question going to be assembled and conveyed?

A fair question, and I don't know in this instance. I had the impression that a fair number of CDS prices were public information. But if not, that's an argument for improving the information and trading technologies, not penalizing trades made by consenting adults.

[Rick Ballard]

jimmyk,

Markit was established in 2001 and brought the ABX out in 2006 so some price discovery was available. This deal wouldn't have made it to Markit listing because it was a hybrid of a hybrid. There was undoubtedly some information being passed between the "major" players in CDS through the actual CDS contracts but it doesn't appear to have been sufficient to have warned Bear Stearns or WaMu or Countrywide or Wachovia or AIG etc. of their impending demise.

I agree with you re 'consenting adults' - as long as they don't use the public fisc to cover their bets when their bookie goes bankrupt.

[Charlie (Colorado)]

This notion that Paulson was an unknown in 2007 was challenged by PRS himself on an earlier thread. He was unknown to the non investment, non real estate part of the world but not within it.

Ignatz, read the whole Newsweek article, then comment. It's not that he was utterly unknown -- but he was, in Wall Street terms, just another guy and not known as a particular power player. No big wins, no front-page stories.

AFTER he had a big win, he was a power.

[Charlie (Colorado)]

I can imagine that a creative trial lawyer, with a lot of people saying "those Wall Street guys should all be in jail", could overcome the 51 percent boundary, and I can imagine GS thinking it's going to be cheaper to settle.

It's really hard for me to credit the notion that the people making up the counterparties in this kind of deal -- major Wall Street firms involved in a multibillion dollar valued instrument -- were too stupid to figure out something like "there are counterparties betting on the short side of this".

[jimmyk]

as long as they don't use the public fisc to cover their bets when their bookie goes bankrupt.

Absolutely, Rick. That's why there's a part of my that is overwhelmed by schadenfreude.

[Clarice]

A front page article in the Wash Po reports that GS and the SEC were in discussions for months and GS refused to settle. The company claims it was blindsided by the suit. This also suggests to me that the suit or its timing has a political cast to it. Of course, at this point I trust nothing anyone in this administration does.

[Rick Ballard]

Clarice,

Ritholz just declared Goldman Guilty! and Goldman has deregistered Fabulous Fab. I'm leaning toward the hook being in the contemporaneous memoranda re the meeting between ACA and Fabrice.

There is no question in my mind re the case being political - take a look at Ritholz's call for the resignation of the Republican appointees. He's an economist with an axe to grind, not a securities attorney but he's "showing the way" just like the NYT.

[anduril]

I'm only part way through Tavakoli, but already I'm thinking, if I'm GS I sure as hell don't want this woman talking in front of a jury. Also, a lot of what she's talking about goes to the question: just what is a "sophisticated" investor? I can see the SEC using her to say that every bit of info was crucial. If I'm GS I don't think I want this to wind up in front of a jury. Is a judge really gonna through this out on summary judgment? Tough call.

[Ignatz]

--Ignatz, read the whole Newsweek article, then comment.--

Thanks for the unsolicited advice.
Perhaps you could do a little more reading yourself and a little less assuming before you give any more of it.
I didn't even read your 12:05 comment and wasn't referring to the Newsweek article you cited nor did I mention anything about Paulson's "power". My point was he was not unknown at the time of Abacus. PRS had mentioned that Paulson was known as a short on these deals and he was; that's all I said and all I meant to say.