I'll leave it to readers to evaluate this on their own, but please do leave it in the comments section if you think this explanation is full of crap and explain why you think that. To me, it sounds like GS is saying that technically they didn't do anything illegal. It reminds me of when I was a soccer referee - we learned about the LETTER of the law versus the SPIRIT of the law. In other words, sometimes the ball bounces up and hits someone in the hands. By the letter of the law it may be an infraction, but by the spirit of the law it may not be, and doesn't always need to be called. Or maybe a guy on the other side of the field is in an offsides position but completely uninvolved in the play, so you don't need to blow the whistle. I think one thing that's emerged widely as a result of the financial crisis is that people have very little tolerance for behavior that violates even the spirit of the law, although it may be technically legal.
here's GS's response:
"Business Wire
NEW YORK -- April 16, 2010
The Goldman Sachs Group, Inc. (NYSE: GS) said today:
We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact.
We want to emphasize the following four critical points which were missing from the SEC’s complaint.
* Goldman Sachs Lost Money On The Transaction. Goldman Sachs, itself, lost more than $90 million. Our fee was $15 million. We were subject to losses and we did not structure a portfolio that was designed to lose money.
* Extensive Disclosure Was Provided. IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities. The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side.
* ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions. ACA had the largest exposure to the transaction, investing $951 million. It had an obligation and every incentive to select appropriate securities.
* Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SEC’s complaint accuses the firm of fraud because it didn’t disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.
Background
In 2006, Paulson & Co. indicated its interest in positioning itself for a decline in housing prices. The firm structured a synthetic CDO through which Paulson benefitted from a decline in the value of the underlying securities.
Those on the other side of the transaction, IKB and ACA Capital Management, the portfolio selection agent, would benefit from an increase in the value of the securities. ACA had a long established track record as a CDO manager, having 26 separate transactions before the transaction. Goldman Sachs retained a significant residual long risk position in the transaction
IKB, ACA and Paulson all provided their input regarding the composition of the underlying securities. ACA ultimately and independently approved the selection of 90 Residential Mortgage Backed Securities, which it stood behind as the portfolio selection agent and the largest investor in the transaction.
The offering documents for the transaction included every underlying mortgage security. The offering documents for each of these RMBS in turn disclosed the various categories of information required by the SEC, including detailed information concerning the mortgages held by the trust that issued the RMBS.
Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities ended in the reference portfolio or how they were selected.
The transaction was not created as a way for Goldman Sachs to short the subprime market. To the contrary, Goldman Sachs’s substantial long position in the transaction lost money for the firm."
-KD
41 comments:
This is similar to the fortune-teller case brought against the two Bear Stearns executives. The jury did not buy it because it is obviously bogus.
so, JCH, what exactly is bogus?
i think the main message is that 1) GS has no obligation in their mind to disclose who is on the other side of the trade. but that may be skirting the issue, because the SEC's point is that the person on the other side of the trade was instrumental to creating the trade and GS knew that, and THAT is why it needs to be disclosed. Not because it was the Mighty Paulson on the short side, but because it was the Mighty Paulson who was on the short side AND who created the portfolio
2) GS is saying that ACA independently created the basket, but that's KINDA a stretch, because they created it from a list that Paulson sent them... I have very little sympathy for ACA here, though, and feel like this is sour grapes from them. They knew EXACTLY what was in the CDO, because they built it. I don't think they should have any recourse or excuses. Their investment should depend on what's in the portfolio! not that they thought Paulson was the same way as them.
What happens in the trial is immaterial. The damage is done and the ramifications are ENORMOUS for Goldman. Far reaching. You cannot unring a bell.
They have an SEC fraud charge on them!!!!!
Pensions, IPO's, public money, foreign banks, all can take their deals elsewhere. Period.
Its like a rape charge - you can't take it back. They are guilty in the court of public opinion.
They are in the fee garnering business. They can't trade well enough to make up the upcoming loss of business that will go to JPM, Citi, Morgan Stanley etc...
This hurts, and I think kills, Goldman. They are Drexel-Burnham. In the 80's could anyone envision Drexel would be gone? I'm calling it.
No one wants anything to do with them - whether they get cleared or not.
I believe that the goodwill equity that they will lose from this will undermine an enormous part of their business.
Again they double dealt a major client. And probably went net short against it, but that will be tough to prove.
I like the fact that their first point is that they lost money on the trade. Excuse me while I channel Lily Tomlin briefly: "No matter how cynical I get, it's tough to keep up." As if the fact that they lost money means that they obviously didn't cheat.
yeah - i think the fact that they lost money is the LEAST relevant fact for them, although, it does indicate that they probably were NOT short the deal, which was a major concern. right?
Wow that was weird with my comment thing!
I agree, I think they are ok in a strict legal sense but certainly the spirit of good faith was bent about as far as it can go. Of course if you think GS is operating to help YOU or anyone but themselves out that is a whole other issue, and not relevant to this discussion.
Kid
An extended show trial on Washington (like a juicy rape trial) will hurt Goldman so badly it will be unimaginable. (email subpoena's testimonies - with only the juiciest bits making the news)
Remember, its not about legality - but perception.
The other investment houses will use this against them and slowly steal clients and deals away.
Them going with the "strictly legal" defense is a suicidal long term business decision.
A trial will not be good for them. Forget about whether they are guilty -this is bad.
They just shorted their stock and S&P when the SEC told them there were going to be charges a few days ago....
I don't really have any sympathy for anyone who buys a synthetic vehicle that is structured where one party needs to go long and the other short.
If you are not gaming the synthetic for your own benefit, then you should likely run from the deal under the assumption that someone else is.
ACA tried to cherry pick the portfolio on which they were going to go long... and had they won out on that bet, would we still think that GS cheated ACA and not Paulson?
-peterpeter
My only comment is that you don't have to defend GS. Your soccer analogy only distracts naive readers. Why not come out and say "yes GS screwed its clients, yes it was illegal, but this is how things work on Wall Street"? Being a contrarian on this matter doesn't make you right or smarter than the rest of the crowd.
SG,
if they shorted thier own stock after being told about this before it was released THEN we have GS dead to rights in all senses of the law. One can hope this is proven true. No way out of that one. No way.
Scharfy,
Agreed. They've just been handed a massive PR problem. Win or lose the court of public opinion is going to crucify them.
This is similar in some ways to Arthur Anderson. Anyone remember them? They happened to lose their case but even had they won (and it was close one given they had the a similar, doing the legal thing, just following orders defense), no one was going to use them as their auditor ever again...
SG - i hate to burst your bubble, but i think there's probably roughly zero percent chance that GS shorted their own stock ahead of this. I highly doubt they can even trade their own stock at all.
Troy - i'm not defending GS, I'm defending capital markets. Like PeterPeter said - there is no excuse for ACA here. at all. I'm trying to figure out what exactly was illegal here... a violation of trust? a violation of disclosure? part of the problem is that there probably aren't real specific rules for this. I'm guessing that it hadn't been anticipated that short investors would drive the creation of CDO portfolios, and that there aren't specific disclosure requirements regarding them.
There is one important fact: the assets in the portfolio are the same no matter WHO is on WHICH side of the trade, or who suggested the assets. This is an ESSENTIAL realization, and it's why there is no smoking gun - the buyers still need to do the work - they can't just say "no one told us who was on the other side" or "no one told us who picked these bonds." think about that. I'm adamant on that.
scharfy - we shall see, I guess. One of the reasons I never felt like brokers acting like assholes was a big deal is because it SHOULD BE self correcting - people should stop dealing with them!
Oh, bull sh*t! GS knew exactly what they were doing! Did any of those GS rascals offer to give back their bonus? Hell no! Screw'm
KD,
really now, say GS is playing dirty, who would or better could not deal with them? Now had they been allowed to fail a while back........
Moral Hazard rears the ugly head. No way out of this mess but real change.
GYC - are you trying to argue that clients are forced to trade with GS? i disagree. Clients choose to - but they don't have to. They do because they make money when they trade with GS. If not, they stop using them!
scharfy is arguing that this will turn clients off. it SHOULD, but I somehow suspect that it won't to the degree he thinks...
something is nagging at me that this is all a big political smokescreen to make it look like the Administration is cracking down, without really doing anything, and thus maintaining the status quo. make a big deal out of charging GS with fraud, fine them a billion or two, and call it reform...
KD,
I totally "wicked" disagree. GS has all the game in town; the only way to avoid them is to eliminate them. You really think say BAC can ignore GS? My 2 cents.
GYC - you are confounding and confusing two issues. The issue everyone is talking about is how GS rips off their own clients. that's a pretty easy one for clients to avoid -right? if you don't use GS, you can't get ripped off by them. simple. problem solved.
THEN, there is GS's dominance in trading. as long as they are acting legally there, nothing should be done. BAC competes with GS in the trading arena - but that's also because GS has a lot of clients! If the clients walk, GS's trading dominance ends. And if you think that there's no one else to execute with other than GS, well, I think you're mistaken.
Was there 0-9% equity tranche or not? If not, and Goldman confirmed with ACA there would be, then that's fraud.
Look. I think that Goldman went out of their way to misrepresent what would otherwise be a standard deal.
They did not disclose that Paulson was selecting the issue, because technically, ACA was (from handpicked garbage that Paulson put out there). It is a legal loophole, but most agree, very unethical.
The fees of 15 million on a 900 million dollar deal also imply that Paulson said "I'll pay up if you can move this shit."
For highly complex deals, a high degree of trust is there between all parties, and I think this damages Goldman incredibly.
Would you do a deal with Goldman if they showed you a batch of bonds, rated bbb, and did not disclose they were hand picked by hedge fund? (again technically by ACA...)
Investment banking is a competitive business and I think - flat out - this hurts bad. And the fact Lloyd Blankfein is not owning up to it and getting in front of the story, just adds fuel to the media fire.
KD,
I respecfuly disagree,;
I refer you to your own post about all the works inside. You get scalped by GS but if you ignore them you miss some % of that scalp. Plus GS heads sit at the helms of all things financial. Really think you can ignore them?
No quarrel, just thinking out loud.
We should do lunch, my treat!
I first want to let you know you are the #49 poker blog on google. Congrats, especially as I haven't seen a poker post in a long time (or maybe they are just diluted out by the other posts).
Anyway this is a bit unrelated to your post but I've been trying to come up with a proper analogy for the situation, given that I definitely think that the "like buying insurance on someones house and burning it down" is not a good comparison and is unfair.
I'm interested in people's thoughts as I think a better analogy would be if someone (Paulson) wants to build a house and use cheap equipment to do it. They hire an agent (Goldman and Fabrice, who I prefer to call "the Fab"), then try and sell it after the agent gets the insurance company (ACA) to value and agree to insure it.
Only here, they list the equipment they want to use before they build it to the insurance company and the insurance company chooses from that list the equipment they are allowed to use. If it just so happens they let them have a straw roof instead of a metal roof then that's on the insurance company. Now, a slight problem arises that the agent didn't tell the insurance company that they intended to sell the house but really what should that matter to the insurance company? If something bad happens and the house blows over cause it was built with straw, does it matter if the original builder owns it or the buyer? They still are on the hook for a lot of money. The thing here is I think ACA was either lazy or just as interested in the fees as Goldman was for the deal so they lowered their standards and got burnt. Simple. IKB also should of, as they were the sophisticated investor they hopefully were capable of this, made sure the RMBS in the deal were good. Everyone had the same information available. If Paulson could work out the RMBS backing it were crap, then IKB should have also. If they didn't do enough homework then that's on them. I am having a lot of trouble seeing what exactly GS did wrong here. Maybe I am just too cynical to begin with and it's hardwired into me to dbl check everything anyway but still. I don't even think the Fab is the devil here either. ACA's approval should of been independent of whatever the Fab said or whoever was long/short the deal. It seems people are trying to say that had ACA known Paulson was major short they wouldn't have approved or looked more closely at the RMBS but they should have been doing that anyway.
I understand your argument about the letter and the spirit of the law but I think your examples aren't apt for the situation and are the reverse of what happened here. We aren't talking about someone breaking the law and turning a blind eye because it has no bearing on the spirit. We are talking here about people not playing by the spirit of the law but perfectly fine as far as the letter of the law is concerned. This happens all the time. People in sport are lauded for being dirty players. People are lauded for getting the best price in negotiations by manipulating the other side but still not breaking the law. It's sad but most of the advantage we get in life is from breaking the spirit of the law while not actually breaking the law. It's unfortuante as it just ends up being a race to the lower equilibrium.
duffsamoa - i think that's a pretty good analogy and summary of the situation. I have another post coming today hopefully to address this.
GYC - i don't want to debate this anymore, because i think my previous comment said it all, but to repeat: no one has to trade with GS. i think people still will, because, like you say, people are greedy and GS gets results. If/When these people get burned, they have no one to blame but themselves. Felix Salmon once wrote "if goldman is your bookie, don't be surprised when you lose the bet."
KD,
I think thats good. It is like the poker table, I keep losing but always find my way back! HA!
> duffsamoa said... I've been
> trying to come up with a proper
> analogy for the situation...
>
While my area of expertise is equity markets, I am fairly sure that what follows is factually accurate (of course, the interpretation is quite subject to
differing views).
For a synthetic CDO, the underlying credit exposure is a credit default swap. The buyer gets the equivalent of insurance premiums, and the seller gets
payday if the credit defaults.
This type of vehicle always needs a buyer (ACA, GS, Pension and Hedge funds, banks) and a seller (Paulson) for it to come into existence, or the belief
by whomever is structuring it (GS) that the side they can't othewise dispose of will be the profitable side of the transaction (and they hold onto it).
Paulson during this time frame was a seller of these deals, as is at least now well documented in lots of articles and books. At the time, perhaps the
other large players did not know that it was Paulson who was selling, but by definition, they knew that there was a seller on the other side of the
transaction, and those sellers needed to be in the same league as the buyers (in terms of financial sophistication and deep pockets - you always knew the
other side was not some retail dumb ass day trader, at least if you took 5 seconds to think about the instrument you were buying).
That seller without being disclosed could either be GS, ACA or another institution.
In this instance, it would seem from what I've read so far that GS and ACA were actually net buyers, rather than sellers! Had the SEC found an instance
where either GS or ACA put together a synthetic CDO, marketed it to buyers and they themselves sold it (or at least had net short exposure to some
tranches if they sold others) without making said disclosure - I would think that would be fodder for the SEC.
However, GS if they really did lose $90M on Abacus must have believed that the combined portfolio Paulson and ACA selected was worth buying and not
selling (at least given their other related positions).
So, I think an apt analogy is a betting line on a game (which really is similar to a synthetic CDO since it is a pure derivative product), where the
bookee (GS) comes up with the game and betting line in conjunction with a major better (Paulson). The bookee then says that this betting line is the
Vegas line (i.e. makes everyone believe ACA on its own selected the portfolio without help from Paulson), and then takes a bet (on the losing side) along
with other betters (pension and hedge funds).
I would be far more sympathetic if GS or ACA had also been short the deal, and suspect that there are instances of that ilk out there (and given that
they might have been net long on related assets, that too could sometimes be benign, at least in intent if not appearance, as it's a reasonable intent
for a market maker to attempt to collect their fees while remaining net neutral on the products they are creating).
This is all the net result of a negative real interest rate environment, and the long positions seeking positive yield with a poor understanding of the
risks and their fudiciary responsibilities (in the case of pension funds and municipalities at least).
Quoting Barry Ritholtz who I think said it well:
"again, it seems we’re putting the burden back on the Big Bad Banks and absolving the clients as innocent victims. It was the CLIENTS – the pension fund
managers who bought this crap – the municipalities – who failed miserably in their fiduciary duties, and we need to stop holding them up as victims."
The vehicle created was nothing but a pure derivative for financial betting. Exactly what was being bet on was well disclosed to both the buyers and
sellers - just not quite who selected those assets.
-PeterPeter
.... continuing on ....
That a synthetic CDO could get a high score from a rating agency, or that pension funds could partake in it, is a much bigger issue for me than the
portfolio selection. These were financial bets - absolutely not investments, that allegedly sophisticated investors bought into.
With a likely buyer and seller on both sides, it is unreasonable to think that the bookee is not going to structure this kind of deal. The only reason
to pass is if you think you'd get stuck with the less valuable (risk adjusted) side of the bet once you have factored in your fee.
I have no love for GS - and after the Treasury bailout (funneled in part through AIG), I am somewhat giddy that they're now taking a hit. However, I
believe from what I've read so far that the SEC's claims against them are quite weak, and I do not like an environment in which the SEC sues parties just
because they are politically motivated to exact retribution, or to try to rehabilitate their own image.
-PeterPeter
PeterPeter - I think I was the one who wrote that quote that you attributed to Barry Ritholtz about holding the buyers of the crap responsible! It was in a comment thread on Barry's site... right?
Duffsamoa,
The problem with your argument is that it assumes perfect information is available and flows unimpeded. Equivalent to the theory of behavior taught all of us in Economics 101, ie in a perfect world... (which is the only place econ charts make any sense, discussion for another time.) Where we run into trouble is when one party, whether lazy or not, can't get access to information and needs that information to make an accurate decision. Since we can't "know" everything (risk) we do the best we can. This seems to be a case of a lie of omission. Still a lie. I support KD's assertion that if you know who and what GS is and stands for, you are free to not do business with them. The system is limited however. The problem I believe is endemic to the system and not just to GS. As other posters have pointed out, it's not so easy to just cross GS of the list. It's a short list. The SEC and the government in general, specifically under the dolt known as george w bush, has been seen as way to cozy with the Street and GS in particular. Way, way, way, too many ex GS employees in positions of influence in the Federal Government. This suit is an attempt to address that perception.
Daniel aka anon because I can't remember my log in info...
daniel - i disagree pretty strongly with that. there is no assumption of equal information in capital markets, and by all means - if you can't get the information you need, DO NOT DO THE TRADE! you don't do the trade and then complain afterward that you didn't understand it.
the excuse "there's nowhere else to go" is, quite frankly, bs. It's like saying that you have to trade with the devil. fine - then don't be surprised when you get burned.
> PeterPeter - I think I was the
> one who wrote that quote that
> you attributed to Barry Ritholtz
> about holding the buyers of the
> crap responsible! It was in a
> comment thread on Barry's
> site... right?
Yikes. Many apologies! You are 100% correct. My bad.
-PeterPeter
KD wrote:
> the excuse "there's nowhere else
> to go" is, quite frankly, bs.
> It's like saying that you have
> to trade with the devil. fine -
> then don't be surprised when you
> get burned.
This is especially the case with a synthetic CDO! It is one thing to be upset about the dealer markeup in the traditional bond market, but when you complain about the lack of players in a space that is creating a 100% derivative on toxic assets, my retort is that things would be far better off if there were *zero* players, rather than the selected few that currently exist.
Noone needs to trade with GS on these types of products, and most of the people who have should lose their jobs rather than bitch squeal.
-PeterPeter
I should have been clearer. Of course there isn't perfect information. And with trading, there is no expectation that there should be, hence risk.
I didn't say there was nowhere else to go. Did you read? I said the list was short. And limited. Is that not true? Are there an infinite number of investment banks with which to do business? Come off it. You keep making the point that there are easy alternatives and the system just isn't. And doesn't work that way. And you know this.
Daniel - it doesn't matter how short the list is, or if GS is the only person on it. listen to this point carefully: NO ONE HAS TO DO THESE TRADES. that's it. full stop. I never said anything about easy alternatives.
A couple of other thoughts to percolate on: How do you know whether or not you have enough information to make a decision? Excess liquidity will find or fund a bad idea. I think that's true. The Street is very good at figuring out which of its clients are smart and which of them are stupid and treating them accordingly. I think that's true as well. This specific example seems to reflect both these tenets.
No one has to do these trades. Absolutely true. Point granted. Chosen People one, Oldest Church zero. Though I'm fallen, Catholic by birth only. Does that still count? Anyway, what do we do then about regulation with respect to something that doesn't have to occur? This debate seems to have come down to well there is no foul because what caused the foul didn't need to occur. I'm at a loss as to how to deal with that to be honest.
Daniel
daniel: one point of the post i'm working on right now is that even if GS is guilty, that doesn't absolve the buyers (ACA) of their responsibilities. Regardless of GS's guilt, ACA didn't do their work and got hosed as a result of it. I don't know how else to explain it, but if you aren't prepared in the capital markets, you can get your face ripped off. people might not like that, but it's a truth.
so maybe there is a foul - but even if the foul hadn't occurred, I don't think it would have made a difference. ACA's valuation of this portfolio should depend on the assets in the portfolio. The valuation doesn't change based on who is on the other side of the trade, or who chose the underlying assets (yet, ACA picked all of them!)
but anyway. i'm getting off track. you ask: "what do we do about regulation" ?
YOU CANNOT REGULATE AWAY LOSS OR LAZY INVESTING. ACA was lazy, incompetent, or negligent here - no matter how you cut it. they failed to accurately evaluate the assets. if it was so easy for Paulson, how come ACA couldn't figure it out?
that's another hard fact. you can't regulate away losers in capital markets.
that's why i hate it when people make the losers into victims. what happens then? they stay in business to make more losses and make the same mistakes again. Now, this conversation always evolves into "well the banks were bailed out - and they shouldn't have been!" yes - I completely agree with that. But as the saying goes, two wrongs don't make a right - so lets stop compounding the error. Bailouts suck. let's stop bailing people out of their own incompetence. This one is also hard because everyone (Especially me) resents the fact that the banks were bailed out.
Daniel wrote:
> No one has to do these trades.
> Absolutely true. Point
> granted .... what do we do then
> about regulation with respect to
> something that doesn't have to
> occur?
IMO - either nothing, or make it illegal for those parties who the public cares about (i.e. pension funds and muninipalities) from participating in the casino bets.
I would like to see suits brought by pension funds and the municipalities against their respective fund managers and the ratings agencies, which would hopefully help curtail similar behavior in the future.
-PeterPeter
thank you PeterPeter's comment at 12:53pm. i agree completely, but i was rambling on in my response. If we can't admit that there will be people who lose, then we need to protect people from themselves.
and i definitely think that if anyone should be sued and held liable, it's the ratings agencies, and yes, the pension fund managers who seem to have been grossly negligent.
One real question is - what benefit to society has accrued from this type of nonsense? Look at how many folks are unemployed and homeless as a result. This is financial terrorism.
If it really mattered to ACA that
Paulson was suggesting the securities, then why didn't ACA ask
him point blank what his interest in the transaction was? They had
several meetings. According to the
SEC, Paulson did not lie, and ACA
thought he was a long investor. So
apparently, ACA never actually asked him what his interest was.
Talk about lazy investing!
"So, I think an apt analogy is a betting line on a game (which really is similar to a synthetic CDO since it is a pure derivative product), where the bookee (GS) comes up with the game and betting line in conjunction with a major better (Paulson). The bookee then says that this betting line is the Vegas line (i.e. makes everyone believe ACA on its own selected the portfolio without help from Paulson), and then takes a bet (on the losing side) along with other betters (pension and hedge funds)."
@PeterPeter
I like the betting line anaology here but I feel you have left out some key points.
1) The bookee doesn't just start telling people that the line is the "Vegas Line." They actually would have asked whatever authority it was who authorises whether or not something is "the vegas line" and have them decide whether or not the bet fits their criteria and the price was right. The authority clearly have right of refusal on this.
2) The bookee would have given the "vegas line" authority a couple of different lines which they can choose from. So they clearly had choice in the matter. Again if they don't like what they saw they could have walked away.
3) To top it off, the "vegas line" authority like the bet so much they ended up taking part of one side of it.
If the bookee here just started saying the bet was "the vegas line" without authority to do so, then that would be fraud. That is not in any way what happened with the abacus deals.
@Daniel
I'm in agreement with Kid on this. I don't think there is an assumption of perfect information. Basically as I see it, IKB and ACA would have had the same information available to them that Paulson did. If they didn't at first, they could have asked for it. If they didn't then it shows, in my belief, that they were outsmarted by Paulson who did look at more relevant data. As Kid states, if they couldn't get the info they wanted, that would be a pretty large impetus to not get in on the deal.
Anyway, I guess this is getting a bit off what the actual issue here is. Whether or not "The Fab" had material information and did not pass that onto ACA or IKB. Personally, I don't consider whether Paulson was long or short material, if only because that had no bearing on the expected performance of the list of RMBS he put forward to ACA and hence their evaluation of the RMBS. If the RMBS were so crappy that the deal was bound to blow up then ACA didn't do a good job in picking that up. Saying if they knew whether Paulson was long or short would have changed their evaluation just shows their sloppiness in evaluating these things.
What I think happened was that, while the RMBS may have been crappy, ACA's models were crappier.
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