On Saturday I read Felix Salmon’s article on the Fabacus deal, one in which Salmon explains nuances and complexities that I just had not been able to understand no matter how hard I tried. So I read his piece and then re-read it, and then read it again, until I understood the deal from the perspective of Goldman and from Paulson and from an investor (ACA in this case) hungry for yield yet still attune to downside risk and expecting fair treatment.
Salmon’s walk off line was indeed a killer, and it’s what kept me circling back and back again:
“Here, then, is arguably Goldman’s biggest lie of omission: it never told ACA that the equity tranche didn’t exist. If it was being a true and honest broker, it should have done. End of story.”
But most intriguing was Salmon’s use of the ABACUS pitch book’s structural diagram to underscore the cluesâ€”to whether Goldman was or was not trying to pull a fast oneâ€”embedded within the credit-linked note’s ontology. The key concept to latch on to when you read the post is the “Super Senior Amount” which is not what a septuagenarian pays for coffee at McDonald’s but rather a separate entity/point of reference/arrangement that is both distinctly a part of ABACUS and yet apart from it, as pictorially the SSA has no chart line tethering it to the main event, ABACUS, in much the same way humans, as spine possessing vertebrates, are not ontologically linked to giant squids. However, since we all came up from gobs of molecules we’re cousins. In pitching the deal, Salmon explained, Goldman carved out a special place for SSA:
“If you’re ACA, looking at this structure, you know that as the deal is being put together, you’re negotiating to insure the Super Senior Amount which exists in this picture as a semi-fictional entity outside the structure and inside a grey dotted box. In other words, while you know it’s not a formal part of the Abacus structure, you also know that it exists.”
Through Salmon’s effort, it’s now apparent that there was a side car attached to this vehicle, with its own license plate, SSA. And there was still yet another side, grey boxed reference point/side car: the First Loss Amount.
Back to Salmon’s walk offâ€”Goldman did not tell ACA there wasn’t an equity tranche connected to the SSA/FLA components of this transaction, in which parties bought and sold default protection. As a buyer of the protection, Paulson cleaned up. But as far as the first loss amountâ€”there was no equity investor there to endure the first losses, as was the standard practice. Not Paulson, not Goldman.
ACA in doing its homework should not have assumed that there was, but this evidently had been the case with a similar deal put together with Magnetar, one that had closed just prior to the creation of ABACUS and its cousins, the grey SSA/FSA sidecars.
So in the end, it may not come down to whether Goldman told ACA that Paulson was going long the equity tranche tied to this deal. He couldn’t have. It did not exist.