45 days after the end of any given quarter financial television programs and bloggers race to be the first to report the holdings of – insert name of big hedge fund here. They analyze the report to see what the hedge fund managers are buying and selling. However, the question remains – is there any real value in these filings for investors on the outside looking in? Continue reading
John Paulson, of the eponymous uber-hedge fund did an hour-long interview with the Financial Crisis Inquiry Commission. I listened to it (thanks to NYT Dealbook, although not sure where they got it from), and really, I got a kick out of it even though I think my carpal-tunnel is really flaring up now. Anyway, without further ado, here’s what the man behind the Greatest Trade Ever has to say about the Financial Crisis…
As my last post stated, the SEC – absent some sort of damning evidence we’ve yet to see – has its hands full proving Goldman’s lack of disclosure of Paulson & Co’s involvement in the Abacus CDO was material and amounts to fraud. They’re up against some interesting precedents, for example, TSC Industries Inc v. Northway, Inc, in which the judge’s logic went as follows, and found (see http://en.wikipedia.org/wiki/TSC_Industries,_Inc._v._Northway,_Inc.):
“If the test was too stringent, it would cause the dismissal of otherwise meritorious lawsuits; if it were too lenient, corporate officers would be inclined to overwhelm shareholders with such a large volume of information that truly valuable facts might escape them. He formulated the test as follows: an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. In other words, the court must determine whether under all the circumstances, the omitted fact would have assumed actual significance in the decision of the shareholder. Thus, materiality is a mixed question of fact and law.”
As I’ve argued, I don’t buy that full, explicit disclosure of Paulson’s involvement would have changed anything (excepting perhaps, as Steve Randy Waldman said, if IKB decided they’d be violating their mandate, but thats another conversation altogether).
I’ll try to post some more later,
I’ve been painfully busy this week so I was only able to get out my thoughts in a few tweets and comments on other blogs, forgive me. Felix Salmon, Kid Dynamite, Henry Blodget and others have all beat me to the punch, and largely, I share many of their thoughts, especially Dynamite’s most recent take (wherein he quotes Blodget).
I won’t rehash the charges as they’ve already been beaten to death by everyone else, however, I will say after reading the SEC’s complaint, the Abacus pitchbook, and Goldman’s defense, I’ve come to the following conclusions (I’m neither a lawyer or structured finance professional, so keep that in mind):
Not only do I not see how/why GS was under any obligation to disclose the party (parties) on the other side of the Abacus synthetic CDO transaction (see page 8 of the pitchbook), I can’t figure out how it’d matter if they had (more on this below). I also haven’t seen anything yet that explicitly says whether Paulson & Co. did or did not buy into the equity tranche of the deal. The SEC complaint seems to imply that they did not, however if that is, in fact, the case, I’m very curious why they danced around saying so clearly…
Also, as KD wrote (emphasis mine):
Note that no one is arguing the merits of GS’s disclosure (or lack thereof) here, but I am absolutely arguing that the disclosure shouldn’t have mattered IF ACA HAD DONE THEIR JOB. The underlying securities in the synthetic CDO are what they are, regardless of who put them on the list, or who takes the other side of the trade. They need to be evaluated based on risk metrics, cash flows, etc. The real issue is that ACA didn’t do this work to the level that they needed.GS may be guilty of insufficient disclosure – let’s just pretend they are. My point is that even given this failure to disclose, the buyers of the securities in question were grossly negligent in failing to properly assess the values and prospects of the synthetic CDOs, and they are trying to remedy their bad trade by diverting blame.