Sunday, April 18, 2010

Comment On Sec Challenges With Materiality Of Goldman Charges

A comment I posted to a Wall Street Journal article, "SEC Faces Challenges With Goldman Case" by Kara Scannell:
As a first step, the SEC will have to show that Paulson's involvement and shorting was material information to investors. I do not see it.

Paulson had no control or non-public information about the individual default rates of the mortgages. His involvement was to suggest more mortgages in the few states with the biggest housing bubble and with borrowers with lower fico scores. The mortgages in the pool and the selection criteria are disclosed in the offering documents. Furthermore, there is nothing to indicate that ACA did not have a final say about mortgage inclusion as the independent adviser.

Sophisticated investors at the time knew generally, that Paulson was shorting the residential mortgage market, as were other investors. Paulson's shorting did not begin with this offering and he had lost money shorting during the earlier stages of the housing bubble.

The fact that Paulson asked for Goldman to put together a portfolio to short against is not material. The fact that Paulson asked for more mortgages in bubble states with high risk borrowers is also not material since the mortgages are disclosed in the offering documents and by definition subprime mortgages are high risk borrowers and most likely in hot real estate bubble markets.

In fact, given Paulson's poor track record in shorting at the time, knowledge of his involvement probably would have led to more interest in the portfolio than less.

Paulson's involvement and shorting does not change the risk or expected returns of investing in subprime mortgages and the mortgages were fully disclosed by Goldman.

Investors who invested in the Goldman portfolio would have done so at the time even knowing Paulson was shorting it and asked for its creation.

Remember, all the parties involved were questioned by the SEC after they had all lost money investing in subprimes. Of course, they are going to say it was not their fault and Goldman misled them by not telling them of Paulson's involvement. They are just trying to protect their reputations by saying it was Goldman's fault.

This case will never go to trial. A judge will dismiss the complaint as a matter of law for a lack of materiality.

1 comment :

  1. Interesting and important information. It is really beneficial for us. Thanks