Wednesday, April 21, 2010

SEC May Not Have A Case Against GS?

CNBC reports that Paolo Pellegrini, John Paulson's associate, testified to the government that he informed ACA Management (the one who assembled the Abacus CDO in question) that his firm would be shorting (betting against) it.

Testimony Could Undercut SEC Charge Against Goldman
(4/21/2010 CNBC)

"The government has testimony from a Paulson & Co. official that could contradict its own claims against Goldman Sachs, CNBC has learned.

"Paolo Pellegrini told the government that he informed ACA Management that Paulson intended to bet against, or short, a portfolio of mortgages ACA was assembling.

"If true, the testimony would go directly against government claims that ACA did not know Paulson was hoping the collateralized debt obligations would fail, and subvert charges that Goldman breached its duty by not informing ACA of Paulson's position.

"CNBC has examined documents in which a government official asked Pellegrini whether he informed ACA CDO manager Laura Schwartz about Paulson's position in the portfolio, named Abacus 2007-AC1.

""Did you tell her that you were interested in taking a short position in Abacus?" a government official asked Pellegrini, referring to the name of the CDO portfolio.

""Yes, that was the purpose of the meeting," Pellegrini responded." [The article continues.]

CNBC, a financial news network, is unabashedly pro-Wall Street, particularly Goldman Sachs. But if Pelligrini did tell ACA of his firm's intent, and the government didn't even mention that in the complaint, the SEC's case does look weak.

CNBC's Steve Liesman in the accompanying video to the article says Pellegrini told the government that he shared with ACA the outline of how his firm picked the underlying mortgage securities - with low FICO scores and high loan-to-value ratios.

If ACA (who assembled the CDO), the rating agencies (who slapped AAA-rating), and the investors (British and German, by the way) thought the CDO with that kind of profile was a good investment, they have zero sympathy from me.

I suppose the SEC could still say that Goldman Sachs didn't tell the investors that someone was taking the short side, even if Paulson's firm did tell ACA who assembled the CDO.

What I find much more troubling and what's hardly reported so far is the way CDS (credit default swaps) on debt securities are priced and indexed. But that will be another post.

So what is the point of the SEC's lawsuit against Goldman Sachs?

It has surely made this guy happy, among so many, that the justice is finally being done. Praised be the government.


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