And see also Goldman's defense documents and Eleanor Bloxham's thoughtful post in her brand new blog, with a point I have not seen elsewhere:
this is not the first time Goldman has been sued by the SEC in a matter related to the information provided to investors. This fact could be important to this case — and for the Goldman Sachs board’s deliberations....In April 2003 the SEC settled with Goldman over conflict of interest charges. The settlement stated that the ”final judgment orders Goldman Sachs to implement structural reforms and provide enhanced disclosure to investors“.Whether they complied with this order may be a key element of this case. Take a look, too, at this discussion of Goldman in Rolfe Winkler's Capital Zoo blog post about the discussion of Goldman in the appendix to Yves Smith's book, ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.
Goldman not only knew about Paulson's CDS position, it sold it to him. It then misled ACA into believing that Paulson's interests were aligned with its own and, by extension, it misled IKB into believing that ACA was an "independent collateral manager" when in fact Paulson gave ACA the bonds to put into the deal. Remember, Paulson as the perceived equity investor basically had the power to determine which bonds were included. Yet its undisclosed CDS position meant it wanted the most toxic bonds possible. [Footnote: A particularly damning piece of the SEC's complaint: "34. On February 5, 2007, an internal ACA email asked, "Attached is the revised portfolio that Paulson would like us to commit to - all names are at the Baa2level. The final portfolio will have between 80 and these 92 names. Are 'we' ok to say yes on this portfolio?" The response was. "Looks good to me. Did [Paulson] give a reason why they kicked out all the Wells [Fargo] deals?" Wells Fargo was generally perceived as one of the higher-quality subprime loan originators."]
Essentially Paulson was insuring for full value a house deliberately designed to collapse. One he'd paid nothing to build. Goldman should have had the integrity not to do the deal in the first place. At the very least, investors should have been made aware.
Nell Minow - Editor
