*Understanding Goldman story

It's not that easy to follow, but Heidi Moore sums it up quite nicely on Slate's Big Money:

Here's what the SEC alleged: That Goldman Sachs helped create a type of security based on subprime mortgages that was designed to fail, and didn't tell investors the details in any of the documents it used to sell the thing. That's a big offense. Here's how it worked: A giant hedge fund that was a big Goldman client paid Goldman to create the security, one of several that bore the name Abacus. The hedge fund picked out the contracts on bad mortgages it wanted in there. Then the hedge fund bought insurance against Abacus in case it failed--which, of course, the hedge fund must have known it would, because the hedge fund created it. Goldman Sachs then sold the hedge fund insurance against Abacus in the form of credit-default swaps. The hedge fund paid Goldman rich fees of $15 million for the alleged deal, a good bargain considering the hedge fund made $1 billion on those credit-default swaps, according to the SEC. Investors, however, took it on the chin. Abacus just kept failing and losing money: Goldman's deal closed in April 2007, and by January 2008, 99 percent of the subprime mortgages it contained had been downgraded.

The hedge fund in question was Paulson & Co., which has been extensively cited (often in glowing terms) as one of the few firms that saw what was coming and bet against the subprime crash. But the SEC's case implies that Paulson wasn't just recognizing something that most investors weren't.

He allegedly gamed the system, lumping bunches of contracts on toxic subprime mortgages together in order to bet against them and then keeping his involvement secret with the help of his bankers. Readers of Gregory Zuckerman's immaculately reported book, The Greatest Trade Ever, won't be surprised: on page 179, Zuckerman describes Paulson's extensive meetings with banks including Goldman, Bear Stearns and Deutsche Bank to "ask if they could create CDOs that Paulson & Co. could essentially bet against. Ironically, it was Bear Stearns that rejected the offer: "[Bear Stearns trader Scott Eichel] worried that Paulson would want especially ugly mortgages for the CDOs, like a bettor asking a football owner to bench a star quarterback to improve the odds of his wager against the team...he felt it would be improper." Eichel told Zuckerman, "It didn't pass our ethics standards; it was a reputation issue, and it didn't pass our moral compass.

*Here's Paulson's response. In a nutshell, the firm says it was not involved in any of the actions that Goldman is alleged to have committed.

More by Mark Lacter:
American-US Air settlement with DOJ includes small tweak at LAX
Socal housing market going nowhere fast
Amazon keeps pushing for faster L.A. delivery
Another rugged quarter for Tribune Co. papers
How does Stanford compete with the big boys?
Those awful infographics that promise to explain and only distort
Best to low-ball today's employment report
Further fallout from airport shootings
Crazy opening for Twitter*
Should Twitter be valued at $18 billion?
Recent stories:
Letter from Down Under: Welcome to the Homogenocene
One last Florida photo
Signs of Saturday: No refund
'I Am Woman,' hear them roar
Bobcat crossing

New at LA Observed
On the Media Page
Go to Media

On the Politics Page
Go to Politics
Arts and culture

Sign up for daily email from LA Observed

Enter your email address:

Delivered by FeedBurner

Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
The multi-talented Mark Lacter
LA Observed on Twitter and Facebook