Hedge fund firm Paulson & Co.has maintained that its role in the Abacus collateralized debt obligations (CDOs) sold by Goldman Sachs from 2005-2007 was "appropriate and conducted in good faith," according to a company letter sent to investors on Tuesday and obtained by CNBC.
Paulson also said "it did not structure or originate" the Abacus-2007-AC1 investment vehicle which is at the heart of the Securities and Exchange Commission's suit against Goldman; rather, the product was Goldman Sachs’ own, created in 2004.
The SEC filed a civil suit against Goldman on Friday, accusing the Wall Street investment bank of misleading investors by not disclosing that Paulson's hedge fund "heavily influenced" securities for the deal and then shorted—or bet against—them. Goldman denied the allegations (click here to read Goldman's response.) Paulson was not charged in the SEC lawsuit.
Ron Geffner, Former SEC Enforcement Attorney & Head of Financial Services Group at Sadis & Goldberg LLC, said the jury is definitely still out.
"In determining the influence Paulson may have had on the selection of the Abacus portfolio, it is necessary to investigate all of New York-based monoline bond insurer ACA Financial Guaranty Corp.'s research files and notes," Geffner said. ACA was the collateral agent for the Abacus CDOs.
"The SEC's complaint relies in large part on emails. Emails alone are not telling of the entire conversation," he added.
But one of the nation's foremost corporate governance experts, John Coffee, Director at the Columbia Law School, said while it may be too strong a statement to say Paulson had imposed a portfolio "designed to fail," it did pick over 60 percent of the portfolio and vetoed others.
"That seems a disproportionate influence that could still be material," said Coffee.
Paulson: We Weren't Viewed as Experienced Mortgage Investor
The letter also went on to state that his firm was not viewed as an experienced mortgage investor prior to late 2007, and that "many of the most sophisticated investors in the world" were "more than willing to bet against us."
"At the height of our participation in the market, our purchases of protection on CDO tranches represented less than 1 percent of the estimated $400 billion total CDO issuance," the letter read.
Sean Egan, Managing Director of independent ratings firm Egan Jones, said rating agencies should take some of the blame. After the reference collateral was selected by ACA, both Moody's Investors Service and Standard & Poor's assigned "AAA" rating to the CDO.
"The real tragedy is that long investors were sold investments rated at or near "AAA" which were in fact the junkiest of the junk," Egan said.
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