April 30, 2010
Goldman Rephrased: What if Paulson Had Been Long?
In considering a thoughtful comment to my prior post on this issue, I took a look again at the SEC complaint to see if the argument changed my mind. In pertinent part, the comment says, "The prospectus basically says this entity is being set-up to allow investors to buy into synthetic CDO positions. It doesn't say the entity is being set-up so that a customer of GS can take a large short position and the investors are just a convenient way for GS to accomplish this." This view largely parallels the SEC complaint. I agree that is one way of looking at it, but it begs the question: Is Paulson's role material: (1) because of his actual role or (2) because of his role AND he planned to take a short position?
I have a hard time believing that if Paulson were long, this case would have any merit. (And, the fact that someone might take a short position on any portfolio, it seems to me, is a given.) If that is the case, why does it matter to investors relying on the flipsheet whether Paulson had influence one way or another. The investor was not relying on Paulson -- the investor was relying on ACA. Or perhaps it is material how ACA made their decision. Must it be disclosed if one of ACA's decisionmakers discusses some of the items at issue with his really smart wife? How about if he reads his horoscope daily and uses that as part of the process? I don't think so.
At the end of the day, Goldman and Paulson wanted (needed?) ACA. As the complaint notes, ACA recognized the significance of putting their name on the transaction and was comfortable with the portfolio (stating that the final portfolio "[l]ooks good"). ACA could have (and presumably would have) walked away if they didn't like the underlying transaction. It appears to me they had final say, which means they had the authority, not Paulson. To me, materiality should rest on authority, or at least some other showing that somehow ACA was actually or constructively unable to make a decision contrary to Paulson. The fact that they chose not to make a contrary decision is not sufficient to show Paulson's role was material in this context.
Perhaps ACA should have checked out the horoscope. Today's Taurus horoscope, anyway, might have been very helpful: "The people around you are mostly self-interested for the time being, so see if you can just rely on yourself for now."
April 30, 2010 | Permalink