The Paulson investor letter
By Chris ClairHere is the City has a copy of the letter John Paulson sent to investors. In it, he answers questions, from Paulson’s perspective, about the SEC’s civil fraud lawsuit filed against Goldman Sachs.
Paulson reiterates that his firm neither structured nor marketed the ABACUS deal. Paulson only suggested securities that ACA could include in the portfolio; the final decision was up to ACA. Even though Paulson has not been charged in the case by the SEC, because the agency contends it was Goldman that misrepresented Paulson’s role in the ABACUS deal to prospective investors, the Paulson investor letter reads as a defense of the firm.
As I pointed out yesterday, Paulson makes some good points, the most persuasive of which, to me at least, is the fact that Paulson had been openly shorting RMBS for some time, believing strongly that the housing market was poised to tank. There were plenty of people willing to take the other side of that trade, in other words bet that the housing boom fueled by the cheap-oil orgy of the past 60 years would continue indefinitely.
Paulson was right; everyone on the other side of ABACUS and similar deals was wrong. I still don’t think the bursting of the housing bubble and the subsequent credit crisis was a zero-sum game from an investing standpoint, but Paulson’s windfall goes a long way toward evening out the “winner” side of the ledger.
April 23rd, 2010 at 11:41 am
The whole financial industry is so secretive that journalists and bloggers who cover it will (sadly/obviously) never, ever, know what really goes on, and so the occasional sneak peek is refreshing from an educational standpoint, and it is fascinating stuff, especially if you can recall covering the tension that was building on Wall Street in the second half of 2007; by that time, several months had passed since the FAbacus deal closed and it was becoming painfully clear: the subprime/CDO threat was real — Citigroup, Merrill Lynch, hell, every bank (except Goldman) was taking charges to cover subprime related write downs, and yet this whole credit derivatives market still was not fully exposed as the hydrogen bomb it would ultimately turn out to be. Everyone on Wall Street and covering Wall Street wanted to know in early November of 2007 — what was in Goldman’s secret sauce? In November 2007 at the annual Guy Moskowski Goldman conference event Lloyd Blankfein said the bank had suffered no material mortgage losses and that the bank remained bearish on the mortgage market. No other bank was able to say they didn’t caught with some subprime related losses. That it now turns out that Goldman lost $100 million on the Fabacus deal — well it must not have been large enough to be considered material though in the scheme of things $100 million would seem large enough to qualify as at the very least an audible drop in the P&L bucket. The famous David Viniar-led meeting in which Goldman’s top minds and senior mortgage traders huddled together to decide to rein in their mortgage exposure took place in December 2006, and led to a 2007 of leveraged CDS hedges galore. Plenty of folks were willing to bet againt Paulson in spring of 2007 when FAbacus closed; Goldman was apparently not one of them.