And now for the rest of the story, as Paul Harvey liked to say.
Today’s post is a follow on to my post from last Friday, August 16. At that time, Goldman Sachs, GS, was being charged by the SEC in a civil suit for failing to disclose John Paulson’s (Paulson Companies) participation in a CDO fund invested in sub-prime mortgages. This failure constitutes fraud if it is intended to deceive. The failure might be found a technicality in court of there was no intent. The SEC is hungry for a scapegoat for the banking crisis. GS, which went through the crisis almost unscathed, is an attractive target in the mind of the Obama Administration both because it is large and because it profited during the crisis. Getting GS would satisfy some of the populist blood-lust of Obama’s public, even at the expense of the overall economy, as it hurts banks which just now on the mend.
But, as is often the case, this might be much ado about nothing. I thought as much last week and now the details are appearing that prove this point.
The first big new piece of information comes from an article written in the Wall Street Journal on Monday. In this article is a portion of an interview with Paolo Pellegrini who was the deal maker for John Paulson on the contested CDO case.
With this release the story became a little clearer the last couple of days. It turns out that Obama’s government might be trying to deceive the public itself. The SEC covered up, or at least did not make public, the fact that they had an interview with Pellegrini of the Paulson company. In that interview it was revealed by Pellegrini there were discussions directly with ACA at the time of the selection of the CDOs and that ACA was made aware that Paulson would be taking the opposite side of the transaction (going short) which ACA needed to get the deal done. We also found this week that the SEC vote was partisan, (3) Democrats to (2) Republicans in favor of filing the lawsuit with Obama appointee, Mary Schapiro, casting the tie breaking vote.
Here is a little background on Pellegrini’s role in the deal, from WSJ on April 19, Monday:
The main contention of the SEC in bringing the civil charges against Goldman is that it deceived “the public” when it failed to disclose its client, Paulson Companies, was taking a short position in the sub-prime CDO deal, while Paulson had a hand in selecting the mortgages. Now it is revealed, that ACA, the “third party”, was in fact the first party and the primary buyer of the CDOs it created, around $950M of the $1B. Goldman bought $90M itself. And, in fact, it sought out Pellegrini from the Paulson Companies to do the deal, not the other way around. So it seems this was a one-on-one deal and both the buyer and seller were in conversation about what comprised the deal. So, there was complete and full disclosure.
This blows a very wide hole in the SEC’s case and in fact, brings a huge question mark to the motives for bringing the charges. These potential political motives are now under investigation by the Congressional watchdog committee run by CA Rep Darrel Issa, top Republican on the Congressional Oversight Committee.
Steve Liesman of CNBC is on top of this case. Here is more detail from a piece on Wednesday morning:
Also, this testimony (from Pellegrini to the SEC) reinforced the key point I have been making: ACA knew that Paulson was taking a short position. ACA was looking for someone to take the other side of the deal which is why they chased down Pellegrini on vacation in Jackson Hole to have meetings. They let Pellegrini suggest mortgage packages (NASDAQ:RMBS) to get Paulson on board the deal. Also, ACA was the primary buyer of the CDOs and so there was complete disclosure directly to the buyer as to whom was the seller.
The SEC case looks like it may be going down in flames and there is a good chance there will be discovery of political motivations behind the accusations. Should be fun to watch.
Disclosure: No Positions