Abacus’ Smoking Gun

We have already heard that Paulson was involved in the selection of the securities that went into Abacus. His interest was clearly in seeing the portfolio fail as he intended to take a very large short position against it (which resulted in famous profits during the financial crisis). Goldman has relied on the concept that ultimately ACA, the PSA, had final say over the selection of the securities and thus Paulson’s involvement was neutralized by this “independent” third party.

However, if Tourre is correct and Paulson was allowed to influence the selection of the PSA this obliterates the idea that ACA was in any way “independent.” Considering Paulson’s interest which was known to Tourre and Goldman at the time, he would naturally select a PSA that would be amenable to assisting him in furthering his own interests.

The bottom line is none of this – Paulson’s involvement in selecting the PSA and the components of Abacus – was ever disclosed to the buyer of the product (IKG). It seems to me that one can hardly argue that this, the compromised independence of the PSA and the close involvement of Paulson that was clearly contrary to the buyer, is immaterial to the transaction.

As I tweeted earlier today, these guys are making even Somali pirates look good.

UPDATE:
Goldman CEO, Lloyd Blankfein says that ACA bought 90% of Abacus and worked with Paulson in creating the product. He also said that it was assumed that all parties involved should have known each others’ interest even if it wasn’t explicitly disclosed.

However, it is still likely (the details have yet to fully emerge) that Paulson selected ACA for his own interests (they were the most gullible?). It is also possible that ACA, at the time of the creation of Abacus, might have even believed that Paulson intended to take the other 10% of the product rather than subsequently short it, as the SEC complaint alleges.

Still, even if ACA knew of Paulson’s interest, IKG, the actual buyer of the remaining 10% of the deal, was not formally informed via the offering documents that Paulson was allowed to influence the creation of Abacus to its buyers’ detriment and to his own benefit. And I still believe that this is hardly immaterial.