Goldman Sachs and the sub-prime facts

What’s going on across the Pond


But the word the SEC uses is not sting, it’s fraud. According to the government it was Paulson’s idea to short large chunks of the sub-prime market by purchasing credit default swaps. These swaps paid off in spades when the underlying loans went south. The CDO that Goldman peddled to IKB was created in early 2007 just as the sub-prime and US housing markets were beginning to show worrying signs of potential implosion.

The SEC believes that Paulson approached Goldman Sachs in search of something to short. The government believes Goldman Sachs gladly complied and set up IKB and other investors as fall guys. Paulson’s take on the deal was $1bn – about the same amount investors lost.

After the SEC filed its charges Goldman Sachs issued a statement saying the allegations were untrue and that it would vigorously defend the case. A day later the firm told the world it couldn’t have been the puppet master of such a fraud because it lost money on the same CDO – about $75m. It also made $15m in underwriting fees so one might argue that it only lost $60m.

But what’s so interesting about all this is that there are only two defendants in the case – Goldman Sachs and the manager who led the deal, Fabrice Tourre. Although Paulson made $1bn shorting the CDO called Abacus, he is not accused of any wrongdoing.

Then again, the law suit – not exactly a large document when you consider the losses involved – basically absolves Paulson of all sin. After all, John Paulson was merely the guy who built the gun, not the one who found the victim and pulled the trigger.

If you read between the lines you can guess that a former Paulson employee is the SEC’s stoolie.

How the case will play out in court is anyone’s guess. When it comes to white collar fraud the eyes and ears of jurists glaze over, especially when dealing with such complicated matters as CDOs and credit default swaps.