SEC charges Goldman Sachs with fraud

Reports about John Paulson's genius have been frequent of late:

Amid a sea of hedge funds posting big losses last year, money manager John Paulson wound up a big winner.
While other hedge funds fell, John Paulson wound up a big winner. Here's how some see this situation:

WITH A LITTLE HELP FROM THIER FRIENDS AT GOLDMAN?

SEC charges Goldman Sachs with Fraud

Paulson Advantage Plus fund racked up a gain of 37.6% net, according to a letter he sent investors. His other funds posted gains of between 7.9% for his international fund and 24% for his Advantage fund, the letter noted.At a time when merger arbitrage funds were collapsing amid a slew of broken deals, Paulson said its merger funds produced positive returns, largely because of a more defensive strategy, which involved among other things reducing allocation to hostile deals.

In the Paulson Advantage funds, Paulson prospered by betting that two government-sponsored entities, Fannie Mae and Freddie Mac , were overvalued.  Paulson told investors that if goodwill was excluded, assets were marked to market, deferred taxes were eliminated and non-performing loans were properly reserved for, then Fannie and Freddie were insolvent. "We felt it was inevitable that Freddie and Fannie would eventually fail, requiring a government bailout that would likely wipe out the equity," Paulson told investors.

DID HE DO ANY MORE THINKING THAN BERNIE MADOFF WHO GAVE LECTURES CONCERNING THE "WIZARDLEY" INTRICACIES OF THE MADOFF FUNDS THAT ALLOWED HIM TO OUT PERFORM THE STOCK MARKET FOR MANY YEARS! MADOFF DID NOT WORK ALONE AND He PAID OUT $BILLIONS TO FEEDER FUNDS THAT PUT MONEY UNDER HIS MANGEMENT.

"This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another," Chris Whalen, a bank analyst at Institutional Risk Analytics, said in a note
to clients.
The SEC's civil fraud complaint alleges that Goldman allowed hedge fund Paulson & Co. -- run by John Paulson, who made billions of dollars betting on the subprime collapse -- to help select securities in the CDO.  Goldman didn't tell investors that Paulson was shorting the CDO, or betting its value would fall. When the CDO's value plunged within months of its issuance, Paulson walked off with $1 billion, the SEC said."The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, director of the Division Enforcement for the SEC.

Khuzami said the case was the first brought by a new SEC division investigating the abuses of so-called
structured products such as CDOs in the credit crisis. He said the investigation continues but declined to
comment further.  "We continue to examine structured products that played a role in the financial crisis," Khuzami said in a phone call with reporters. "We are moving across the entire spectrum of products, entities and investors that might have been involved." The SEC alleged that Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing the deal, known as Abacus 2007-AC1. Khuzami said Paulson wasn't charged because, unlike Goldman, which sold the securities to investors, it didn't have a duty to fully disclose conflicts to other investors.

The CDO is a financial instrument backed by pool of assets, typically loans or bonds. In this case, the instrument in question is a so-called synthetic CDO -- which is backed not by actual loans but by a portfolio
of credit default swaps referencing residential mortgage-backed securities.

While many CDO deals performed poorly, particularly in the latter stages of the housing bubble, the Abacus CDO at the center of this case blew up particularly quickly. Within six months of the deal's closing, 83% of the residential mortgage-backed securities in the portfolio had been downgraded, the SEC said. Within nine months, 99% had been downgraded.

Ron Geffner, a former SEC enforcement attorney who is now a partner with Sadis & Goldberg in New York...said the case would hinge on variables including the objectivity of the portfolio designer, what was communicated to investors, what fiduciary duties Goldman may have had and how sophisticated the investors were.

In a span of just three years, hedge-fund manager John Paulson went from practically unknown to practically
unparalleled. After a series of smart bets against the housing market made Paulson's hedge fund billions of
dollars—including days where it made more than $1 billion—he earned a place alongside George Soros and Warren Buffett as an oracle of investing. In his new book, "The Greatest Trade Ever", Gregory Zuckerman, a reporter at The Wall Street Journal, examines how the unlikely team of Paulson and assistant Paolo Pellegrini—as well as a few other investors—bucked conventional wisdom and saw through the housing hype...

Michael Lewis has a new book that tells about quirky investors who minted fortunes by making unpopular, calculated bets on a financial meltdown.   Check out Lewis talking to Charlie Rose:

http://www.charlierose.com/view/interview/10911

Another take:
Hedge fund billionaire John Paulson made a killing thanks to the real estate bubble. ... he personally pocketed $3.5 billion shorting the subprime in 2007.  By latest count, he's worth $12 billion (almost triple what it was in 2008). As Goldman Sachs gets put on the hot seat for helping him out, could Paulson's swollen fortune be in jeopardy?

While Goldman Sachs is stuck defending its once-sterling reputation from the SEC's accusation of fraud,
Paulson has thus far emerged seemingly unscathed. Goldman calls the SEC's charges "completely unfounded in law and fact".   Meanwhile its shares have been skydiving on a downward spiral ( $12 billion of shareholder value).

The SEC alleged that Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing the deal, known as Abacus 2007-AC1.

Malfeasance?  It seemswe go through one of these episodes every few years. But it changes nothing.
Just change a few names, a few products, shake, stir, rinse it, wash it, repeat it. Tell the sheep to send their money in and keep contributing to pension plans because the only way to retirement security is by handing your money to the experts.

Wall Street’s enduring philosophy  Laissez-faire is all well and good until something goes wrong.