In my
last post on this topic, I went through the SEC’s complaint against Goldman
Sachs and assessed the strength of the allegations. At 11:00 am yesterday, Goldman Sachs held its first quarter
2010 earnings call. Naturally, the
SEC complaint came up, both in the firm’s opening statements, and during the
Q&A session. Their statements
shed some light on several missing or unclear facts in the case, and give an
indication of their likely defense on some charges.
Below are short quotes from the opening statements of Gregory
Palm, GS General Counsel, that I find relevant to the case, followed by my own
interpretation of the relevant portions from the Q&A. You can access the
full transcript here.
1.1 1. ACA Chose and Had Every Reason To Choose
Well
The
first relevant point that I believe Palm makes in his opening statement is that
ACA, rather than Paulson, did, in fact, exercise independent judgment in
choosing the ABACUS portfolio.
Moreover, ACA, as the largest single investor in the deal, was
financially incentivized to choose the portfolio and to choose well.
From Palm’s opening
statement:
In the process of selecting the referenced portfolio, ACA
which was both the portfolio selection agent and overwhelmingly the largest
investor evaluated every proposed security. Although ACA received input from
both Paulson and IKB, ACA had sole responsibility for determining and did
determine the final portfolio and was paid a fee for performing that role. ACA
used proprietary models and methods of analysis to develop its own independent
view of the relative riskiness in each security. To that point ACA rejected more than half of the
securities suggested by Paulson. (all emphasis mine)
However, there is some push back on this point in the
Q&A from Michael Mayo of CLSA.
Mayo essentially boils down the SEC complaint to two points made on page
12: “One, Paulson helped to select the portfolio and two, Paulson was going
short.” So, he asks, tell us why
the SEC is wrong.
Palm responds:
In very simple terms the portfolio here was not selected by
John Paulson. The portfolio here was selected by ACA. ACA had the
responsibility to do that. They were paid to do it. They did do it and they
were the largest investor in this transaction overwhelmingly. They certainly
had every incentive to do it. As I indicated in the prepared remarks way more than half of the portfolio are
things they suggested . . .
But Mayo quickly notes the issue here:
At what point does materiality kick in? If John Paulson had
suggested all of the securities in the portfolio and ACA selected them all
would that then be material? If he selected one and they selected one that wouldn’t
be material. If he selected all maybe that would be material. At what point do
you cross the threshold?
2. 2. Who Chose – And Even The Contents – Are Not
Material
Palm responds with an argument
that he first introduces in his opening statement: it didn’t really matter who
chose the portfolio – it was essentially just a bet on the housing market and
that bet turned out to be wrong, so “I believe it didn’t matter what was
selected here.”
From Palm’s opening
statement:
All of that being said, the particular securities in the
referenced portfolio were not ultimately a key factor in the performance of
this transaction. The entire pool of
DAA rated securities from the 2006 vintage performed similarly amidst an unprecedented market collapse.
In my next post, I’ll cover several more issues, including
what ACA did or did not know, and how much Goldman lost on the deal and why.
Related Posts:
The
Goldman Complaint