© 2010 The New York Times
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NEW YORK, SATURDAY, APRIL 17, 2010
S.E.C. Accuses Goldman
Of Fraud in Housing Deal
Suit Says Bank Sold Mortgage Investment
Meant to Fail — Firm Issues Denial
By LOUISE STORY and GRETCHEN MORGENSON
Goldman Sachs, the Wall
Street powerhouse, was accused
of securities fraud in a civil lawsuit filed Friday by the Securities
and Exchange Commission,
which claims the bank created
and sold a mortgage investment
that was secretly intended to fail.
The move was the first time
that regulators had taken action
against a Wall Street deal that
helped investors capitalize on the
collapse of the housing market.
The suit also named Fabrice
Tourre, a vice president at Goldman who helped create and sell
the investment.
In a statement, Goldman called
the commission’s accusations
“completely unfounded in law
and fact” and said it would “vigorously contest them and defend
the firm and its reputation.”
The focus of the S.E.C. case, an
investment vehicle called Abacus
2007-AC1, was one of 25 such vehicles that Goldman created so
the bank and some of its clients
could bet against the housing
market. Those deals, which were
the subject of an article in The
New York Times in December,
initially protected Goldman from
losses when the mortgage market disintegrated and later yielded profits for the bank.
As the Abacus portfolios in the
S.E.C. case plunged in value, a
prominent hedge fund manager
made money from his bets
against certain mortgage bonds,
while investors lost more than $1
billion.
According to the complaint,
Goldman created Abacus 2007AC1 in February 2007 at the request of John A. Paulson, a prominent hedge fund manager who
earned an estimated $3.7 billion
in 2007 by correctly wagering
that the housing bubble would
burst. Mr. Paulson is not named
in the suit.
Goldman told investors that
the bonds would be chosen by an
Continued on Page B6
Monster Created by Wall St.
The bursting of the mortgage
bubble would have been bad
enough, but then the betting began, Joe Nocera writes. Page B1.
From Page A1
independent manager. In the
case of Abacus 2007-AC1, however, Goldman let Mr. Paulson select mortgage bonds that he believed were most likely to lose
value, according to the complaint.
Goldman then sold the package to investors like foreign
banks, pension funds and insurance companies, which would
profit only if the bonds gained
value. The European banks IKB
and ABN Amro and other investors lost more than $1 billion in the
deal, the commission said.
“Goldman wrongly permitted a
client that was betting against
the mortgage market to heavily
influence which mortgage securities to include in an investment
portfolio,” Robert Khuzami, the
director of the commission’s enforcement division, said in a written statement.
The lawsuit could be a sign of a
revitalized Securities and Exchange Commission, which has
been criticized for early missteps
in assessing the causes of the fiMichael J. de la Merced contributed reporting.
in assessing the causes of the financial crisis. The agency appears to be tracing the mortgage
pipeline all the way from the
companies like Countrywide Financial that originated home
loans to the raucous trading
floors that dominate Wall Street’s
profit machine.
At a conference in New Orleans on Friday, Mr. Khuzami indicated that he was scrutinizing
other deals involving mortgage
securities. “We’re looking at a
wide range of products,” he said
at a news conference. “If we see
securities with similar profiles,
we’ll look at them closely.”
Shares of Goldman Sachs
plunged more than 10 percent in
just the first half-hour of trading
after the suit was announced Friday morning. They closed down
13 percent, at $160.70, wiping
away more than $10 billion of the
company’s market value.
Investors sold other bank
stocks, as well, as rumors swirled
about which other firms might
become embroiled in the commission’s investigation. Next to
Goldman Sachs, Deutsche Bank’s
American shares had the steepest decline, falling 7 percent.
Goldman issued a second
Goldman issued a second
statement after the market
closed saying that the firm had
lost money on the deal in the
S.E.C. case and that it provided
investors with extensive disclosure on the deal. The firm said
the losses in the deal came from
the overall collapse of the mortgage market, not from the way
the deal was structured.
The accusations amount to a
black eye for the once-untouchable Goldman Sachs, a money
machine that is the epicenter of
Wall Street power. For decades,
its platinum reputation has attracted top investors and stock
underwriting deals.
Several of its former chief executives have gone on to high
public office, among them Henry
M. Paulson Jr., the former Treasury secretary, and Jon Corzine,
the former New Jersey governor.
(Henry Paulson and John Paulson are not related.)
In recent months, Goldman
has been defiant in the face of
criticism, repeatedly defending
its actions in the mortgage market, including its own bets
against it. In a letter published
last week in Goldman’s annual
2
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Betting Against Their Own Deal
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nytimes
THE ALLEGED FRAUD
The investment deal
The S.E.C. says
Goldman told
investors that ACA
Management chose
the mortgage bonds
in the Abacus
investment. In fact
they had been chosen
largely by the Paulson
fund, which was
betting against the
same bonds.
The complex deal is made up of a kind of
insurance — credit default swaps — that
pays out if mortgage bonds start to fail.
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Goldman Sachs created 25 deals under the
name Abacus to help it and some of its clients
place bets against the housing market. One of
them, created by Goldman and the Paulson
hedge fund in early 2007, is at the center of a
fraud complaint filed by the Securities and
Exchange Commission, illustrated here.
By January 2008, 99 percent of the portfolio
of mortgage bonds had been downgraded.
The investors lost $1 billion, most of it going
to the Paulson fund.
ACA
Management
Paulson
hedge fund
Hired to manage the deal
and was led to believe that
the Paulson fund was not
betting against the bonds, a
misconception Mr. Tourre
was aware of, according to
the S.E.C.
According to the S.E.C., the
hedge fund manager John A.
Paulson picked out the
mortgage bonds he thought
would perform poorly and
purchased insurance on them
from an Abacus vehicle. If the
bonds perform poorly, he got
a payout.
Source: S.E.C. complaint
report, the bank rebutted criticism that it had created, and sold
to its clients, mortgage-linked securities that it had little confidence in.
“We certainly did not know the
future of the residential housing
market in the first half of 2007
any more than we can predict the
future of markets today,” Goldman wrote. “We also did not
know whether the value of the instruments we sold would increase or decrease.”
The letter continued: “Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our
short positions were not a ‘bet
against our clients.’” Instead, the
trades were used to hedge other
notice several months ago.
The S.E.C. action is a civil complaint, but it could be referred to
criminal prosecutors who would
have to prove that individuals intended to defraud investors.
The S.E.C. focused on only one
Abacus deal in its complaint, but
Mr. Khuzami said in a conference
call on Friday that the commission continued to look at the rest.
All told, $10.9 billion of Abacus in-
THE NEW YORK TIMES
vestments were sold.
Mr. Tourre, the Goldman vice
president named in the lawsuit,
was one of the firm’s top workers
running the Abacus deals, selling
the investment to investors
across Europe. Mr. Tourre was
raised in France and moved to
the United States in 2000 to earn
his master’s degree in operations
at Stanford. The next year, he began working at Goldman, accord-
ing to his profile on the LinkedIn
social network.
He rose to prominence working on the Abacus deals under a
trader named Jonathan M. Egol.
Mr. Egol, who is now a managing
director at Goldman, is not
named in the S.E.C. suit.
Goldman structured the Abacus portfolios with a sharp eye on
the credit ratings assigned to the
mortgage bonds contained in
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s with extensive disclothe deal. The firm said
all collapse of the mortarket, not from the way
ccusations amount to a
ye for the once-untouchldman Sachs, a money
that is the epicenter of
eet power. For decades,
num reputation has attop investors and stock
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fice, among them Henry
son Jr., the former Treasretary, and Jon Corzine,
er New Jersey governor.
Paulson and John Paul-
cent months, Goldman
n defiant in the face of
, repeatedly defending
ns in the mortgage marcluding its own bets
it. In a letter published
ek in Goldman’s annual
J. de la Merced contribut-
DIANE BANDEREFF/ASSOCIATED PRESS
Employees in the lobby of the Goldman Sachs headquarters in Lower Manhattan on Friday. The
S.E.C.’s suit is a black eye for the firm, a money machine at the epicenter of Wall Street power.
report, J.
the
rebutted
critMichael
de bank
la Merced
contributicism that it had created, and sold
to its clients, mortgage-linked securities that it had little confidence in.
“We certainly did not know the
future of the residential housing
market in the first half of 2007
any more than we can predict the
future of markets today,” Goldman wrote. “We also did not
know whether the value of the instruments we sold would increase or decrease.”
The letter continued: “Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our
short positions were not a ‘bet
against our clients.’” Instead, the
trades were used to hedge other
trading positions, the bank said.
Goldman was one of many
Wall Street firms that created
complex
mortgage
securities
—
sion
continued
to look
at the rest.
known as synthetic collateralized
debt obligations — as the housing
wave was cresting. At the time,
traders like Mr. Paulson, as well
president
named Goldman,
in the lawsuit,
as those within
were
was
one of
firm’s
looking
forthe
ways
to top
betworkers
against
the overheated market.
theForinvestment
to investors
months, S.E.C.
officials
across
Europe.
Mr.
Tourre
was
have been examining
mortgage
bundles like Abacus that were
created across Wall Street. The
his
master’s degree
in operations
commission
has been
interviewat
The next
year, he
beingStanford.
people who
structured
Goldgan
at Goldman,
accordmanworking
mortgage
deals about
Abacus and similar instruments. The
commission advised Goldman
that it was likely to face a civil
suit in the matter, sending the
that it was likely to face a civil
suit in the matter, sending the
bank what is known as a Wells
notice several months ago.
The S.E.C. action is a civil complaint, but it could be referred to
criminal prosecutors who would
have to prove that individuals intended to defraud investors.
The S.E.C. focused on only one
Abacus deal in its complaint, but
Mr. Khuzami said in a conference
call on Friday that the commission continued to look at the rest.
All told, $10.9 billion of Abacus investments were sold.
Mr. Tourre, the Goldman vice
president named in the lawsuit,
was one of the firm’s top workers
running the Abacus deals, selling
the investment to investors
across Europe. Mr. Tourre was
raised in France and moved to
the United States in 2000 to earn
his master’s degree in operations
at Stanford. The next year, he began working at Goldman, according to his profile on the LinkedIn
social network.
He rose to prominence working on the Abacus deals under a
trader named Jonathan M. Egol.
Mr. Egol, who is now a managing
director at Goldman, is not
named in the S.E.C. suit.
Goldman structured the Abacus portfolios with a sharp eye on
the credit ratings assigned to the
mortgage bonds contained in
them, the S.E.C. said. In the Abacus deal cited in the S.E.C. complaint, Mr. Paulson pinpointed
those mortgage bonds that he be-
those mortgage bonds that he believed carried higher ratings than
the underlying loans deserved.
Goldman placed insurance on
those bonds — called credit-default swaps — inside Abacus, allowing Mr. Paulson to bet against
the bonds while clients on the
other side of the trade wagered
that they would make money.
But when Goldman sold shares
in Abacus to investors, the bank
and Mr. Tourre disclosed only the
ratings of those bonds and did
not disclose that Mr. Paulson was
on the other side, betting those
ratings were wrong.
Mr. Tourre at one point complained to an investor who was
buying into Abacus that he was
having
trouble
persuading
Moody’s to give the deal the rating he desired, according to the
investor’s notes, which were provided to The Times by a colleague who asked for anonymity.
In seven of Goldman’s Abacus
deals, the bank went to the American International Group for insurance on the bonds. Those
deals have led to billions of dollars in losses at A.I.G., which received a $180 billion taxpayer rescue. The Abacus deal in the S.E.C.
complaint was not one of them.
That deal was managed by
ACA Management, a part of ACA
Capital Holdings, which changed
its name in 2008 to Manifold Capital.
Goldman told investors the
mortgage bond portfolio would
be “selected by ACA Manage-
4
would perform poorly and
purchased insurance on them
from an Abacus vehicle. If the
bonds perform poorly, he got
a payout.
THE NEW YORK TIMES
ts were sold.
urre, the Goldman vice
t named in the lawsuit,
of the firm’s top workers
the Abacus deals, selling
estment to investors
Europe. Mr. Tourre was
n France and moved to
ed States in 2000 to earn
er’s degree in operations
rd. The next year, he beking at Goldman, accord-
ing to his profile on the LinkedIn
social network.
He rose to prominence working on the Abacus deals under a
trader named Jonathan M. Egol.
Mr. Egol, who is now a managing
director at Goldman, is not
named in the S.E.C. suit.
Goldman structured the Abacus portfolios with a sharp eye on
the credit ratings assigned to the
mortgage bonds contained in
DIANE BANDEREFF/ASSOCIATED PRESS
Sachs headquarters in Lower Manhattan on Friday. The
money machine at the epicenter of Wall Street power.
Capital Holdings, which changed
its name in 2008 to Manifold Capital.
Goldman told investors the
mortgage bond portfolio would
be “selected by ACA Management,” according to the deal’s
marketing document, which was
given to The Times by an Abacus
investor. That document says
Goldman may have long or short
positions in the bonds. It does not
mention Mr. Paulson.
ACA was not named in the suit.
That firm was led to believe that
Mr. Paulson was positive on
mortgages, not negative, and so
it did not see a problem with his
involvement, the S.E.C. said. Mr.
Tourre was aware of ACA’s misconception, the commission said.
In February 2007, Mr. Tourre
met with both ACA and Mr. Paulson, and he sent an e-mail message to a Goldman colleague acknowledging the awkwardness of
the situation. “This is surreal,”
Mr. Tourre wrote.
Nine days later, a Goldman colleague wrote Mr. Tourre and
said, “the C.D.O. biz is dead. We
don’t have a lot of time left.”
The Abacus deals deteriorated
rapidly when the housing market
hit trouble. For instance, in the
Abacus deal in the S.E.C. complaint, 83 percent of the mortgage
bonds underlying it were downgraded by rating agencies just six
months later, and 99 percent had
been downgraded by early 2008,
according to the S.E.C.
It takes time for such mortgage
investments to pay out for investors who make bets against them.
Each deal is structured differently, but generally, the bonds
underlying the investment must
deteriorate to a certain point before those who bet against the
bonds get paid. By the end of
2007, Mr. Paulson’s credit hedge
fund was up 590 percent.
Billionaire Wall Street Celebrity
RICK MAIMAN/BLOOMBERG NEWS
estor John Paulson beWall Street celebrity.
Ten years later, he started his
hedge fund with $2 million of his
own capital. During the technology-stock bubble of the late
1990s, Mr. Paulson took a negative stance on high-flying shares
and profited handsomely for himself and his clients.
By the end of 2008, Mr. Paulson’s assets under management
had risen to $36.1 billion. In an
early 2009 interview with The
New York Times, Mr. Paulson
talked about his success. “We are
very proud of our performance
last year,” he said. “We provided
an oasis of profitable returns for
our investors in a year where
there were few sources of gains.”
His investors, which included
pension funds, endowments,
wealthy families and individuals,
what he was up to and they supported him, considering it an ingenious way to grow the trade by
finding more debt to short,” Mr.
Zuckerman wrote. “After all,
those who would buy the pieces
of any C.D.O. likely would be
hedge funds, banks, pension
plans or other sophisticated investors, not mom-and-pop investors.”
Late last year, Mr. Paulson donated $20 million to the Stern
School of Business at New York
University and $5 million to
Southampton Hospital in Long
Island’s East End, where he
bought a $41 million home in early 2008. He lives with his wife and
two daughters on the Upper East
Side of Manhattan.
Amid criticism of investment
5
© 2010 The New York Times
NEW YORK, SATURDAY, APRIL 17, 2010
A Billionaire Wall St. Celebrity,
Now Cast in a Harsh New Light
By GRETCHEN MORGENSON and LOUISE STORY
On Friday, Moonyeen Castle, the
Three and half years ago, a
New York hedge fund manager
with a bearish view on the housing market was pounding the
pavement on Wall Street.
Eager to increase his bets
against subprime mortgages, the
investor, John A. Paulson, canvassed firm after firm, looking for
new ways to profit from home
loans that he was sure would go
sour.
Only a few investment banks
agreed to help him. One was
Deutsche Bank. The other was
the mighty Goldman Sachs.
Mr. Paulson struck gold. His
prescience made him billions and
transformed him from a relative
nobody into something of a celebrity on Wall Street and in Washington.
But now his brassy bets have
thrust Mr. Paulson into an uncomfortable spotlight. On Friday,
the Securities and Exchange
Commission filed a civil fraud
lawsuit against Goldman for neglecting to tell its customers that
mortgage investments they were
buying consisted of pools of dubious loans that Mr. Paulson had
selected because they were highly likely to fail.
By betting against the pool of
questionable mortgage bonds,
Mr. Paulson made $1 billion when
they collapsed just a few months
later, the S.E.C. said. Investors,
who bought what regulators are
essentially calling a pig in a poke,
lost the same amount.
Mr. Paulson, 54, was not named
Continued on Page B6
Revelations Cast a Harsh New Light on a Billion
From Page A1
as a defendant in the S.E.C. suit,
but his role in devising the instrument that caused $1 billion in
losses for Goldman’s customers
is detailed in the complaint. Robert Khuzami, the director of enforcement at the S.E.C., explained that, unlike Goldman, the
manager of the hedge fund, Paulson & Company, had not made
misrepresentations to investors
buying the security, known as a
collateralized debt obligation.
“While it’s unfortunate that
people lost money investing in
mortgage-backed
securities,
Paulson has never been involved
in the origination, distribution or
structuring of such securities,”
said Stefan Prelog, a spokesman
for Mr. Paulson, in a statement.
“We have always been forthright
in expressing our opinion as to
the quality of the underlying
mortgages. Paulson has never
misrepresented our positions to
any counterparties.
“There’s no question we made
money in these transactions.
However, all our dealings were
through arm’s-length transactions with experienced counterparties who had opposing views
based on all available information at the time. We were
straightforward in our dislike of
these securities, but the vast majority of people in the market
thought we were dead wrong and
openly and aggressively purchased the securities we were
selling.”
Still, the details unearthed by
the S.E.C. in its investigation
show a deep involvement by Mr.
Paulson in the creation of the investment, known as Abacus 2007AC1. For example, he approached
John Paulson selected
pools of dubious loans
to bet against them.
Goldman about constructing and
marketing the debt security.
After analyzing risky mortgages made on homes in Arizona,
California, Florida and Nevada,
where the housing markets had
overheated, Mr. Paulson went to
Goldman to talk about how he
could bet against those loans. He
focused his analysis on adjustable-rate loans taken out by borrowers with relatively low credit
scores and turned up more than
100 loan pools that he considered
vulnerable, the S.E.C. said.
Mr. Paulson then asked Goldman to put together a portfolio of
these pools, or others like them
that he could wager against. He
paid $15 million to Goldman for
creating and marketing the Abacus deal, the complaint says.
One of a small cohort of money
managers who saw the mortgage
market in late 2006 as a bubble
waiting to burst, Mr. Paulson capitalized on the opacity of mortgage-related securities that Wall
Street cobbled together and sold
to its clients. These instruments
contained thousands of mortgage
loans that few investors bothered
to analyze.
Instead, the buyers relied on
the opinions of credit ratings
agencies like Moody’s, Standard
& Poor’s and Fitch Ratings.
These turned out to be overly
rosy, and investors suffered hundreds of billions in losses when
the loans underlying these securities went bad.
Mr. Paulson personally made
an estimated $3.7 billion in 2007
as a result of his hedge fund’s
performance, and another $2 billion in 2008.
He was also treated like a celebrity by members of a Congressional committee that invited him
to testify in November 2008 about
RICK MAIMAN/BLOOM
The investor John Paul
came a Wall Street cele
the credit crisis. At the tim
of the lawmakers asked
had managed to set up h
tive trades; they seeme
interested in getting his
on how to solve the credit
A Queens-born grad
New York University
Harvard Business Scho
Paulson went to Wall S
the early 1980s just as the
bull market in history w
ing. He joined Bear Ste
1984 as a junior executiv
investment banking unit.
2
w Light on a Billionaire Wall Street Celebrity
le, the S.E.C. said.
aulson then asked Goldut together a portfolio of
ols, or others like them
could wager against. He
million to Goldman for
and marketing the Abathe complaint says.
a small cohort of money
rs who saw the mortgage
n late 2006 as a bubble
o burst, Mr. Paulson capon the opacity of mortated securities that Wall
obbled together and sold
ents. These instruments
d thousands of mortgage
at few investors bothered
ze.
d, the buyers relied on
nions of credit ratings
like Moody’s, Standard
’s and Fitch Ratings.
urned out to be overly
d investors suffered hunbillions in losses when
s underlying these secunt bad.
aulson personally made
mated $3.7 billion in 2007
ult of his hedge fund’s
ance, and another $2 bil08.
s also treated like a cey members of a Congresmmittee that invited him
in November 2008 about
RICK MAIMAN/BLOOMBERG NEWS
The investor John Paulson became a Wall Street celebrity.
the credit crisis. At the time, none
of the lawmakers asked how he
had managed to set up his lucrative trades; they seemed more
interested in getting his advice
on how to solve the credit crisis.
A Queens-born graduate of
New York University and the
Harvard Business School, Mr.
Paulson went to Wall Street in
the early 1980s just as the biggest
bull market in history was starting. He joined Bear Stearns in
1984 as a junior executive in the
investment banking unit.
Ten years later, he started his
hedge fund with $2 million of his
own capital. During the technology-stock bubble of the late
1990s, Mr. Paulson took a negative stance on high-flying shares
and profited handsomely for himself and his clients.
By the end of 2008, Mr. Paulson’s assets under management
had risen to $36.1 billion. In an
early 2009 interview with The
New York Times, Mr. Paulson
talked about his success. “We are
very proud of our performance
last year,” he said. “We provided
an oasis of profitable returns for
our investors in a year where
there were few sources of gains.”
His investors, which included
pension funds, endowments,
wealthy families and individuals,
were huge beneficiaries of his
strategy, Mr. Paulson added.
“They made four times as much
as we did,” he said.
Mr. Paulson and his investment program was the subject of
the 2009 book by Gregory Zuckerman “The Greatest Trade
Ever.” Mr. Zuckerman wrote that
Mr. Paulson did not think there
was anything wrong with working with various banks to create
troubled investments that he
could then bet against.
“Paulson told his own clients
what he was up to and they supported him, considering it an ingenious way to grow the trade by
finding more debt to short,” Mr.
Zuckerman wrote. “After all,
those who would buy the pieces
of any C.D.O. likely would be
hedge funds, banks, pension
plans or other sophisticated investors, not mom-and-pop investors.”
Late last year, Mr. Paulson donated $20 million to the Stern
School of Business at New York
University and $5 million to
Southampton Hospital in Long
Island’s East End, where he
bought a $41 million home in early 2008. He lives with his wife and
two daughters on the Upper East
Side of Manhattan.
Amid criticism of investment
strategies that profited from
mortgage defaults, home foreclosures and other miseries, Mr.
Paulson has also given $15 million to the Center for Responsible
Lending for a center devoted to
providing foreclosure assistance
to troubled borrowers.
At the time of the donation, Mr.
Paulson said of the center and its
work, “We are pleased to help
them provide legal services to
distressed homeowners, many of
whom have been victimized by
predatory lenders.”
3
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ment
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e people
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Continued
on
Page
7
The
adage
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lying
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adage
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ip and thestay
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helped
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xcuse
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orterrible,
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unsavory
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tract
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tract
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It
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savings,
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Reverse
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debt.
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other than John Paulson, the billionaire hedge fund
d so, reportedly,
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homeowners
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also
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nted
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outsubprime
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ors,”
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A.
Hirsch,
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The
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at
the
New
York
fewer
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the
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cash
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offor
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B
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In recent
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11,018.66,
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Oh,
and
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Friday, themaking
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andStock
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been
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Almanac.
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on
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bling
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By JAD
MO
synthetic C.D.O.’s made the crisis worse than
WASH
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Poor’s
500-stock
Ever
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it
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used
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Obama
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purported
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Ever
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about
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jor
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m
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ake
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ent
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y
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lar synthetic
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Commission
accused
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ofinvestors
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fl
Remember in the months leading
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orthe
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Lehman
Brothers
Conti
Continued
on
Page
7
debt.
tract
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mea
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r, who was
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cial
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sa
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ustment to the February already
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say.
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were
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rting
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Both
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the
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“Thisof
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rs
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w
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However
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said
Jennifer
things,
takes
time,”
said
—
and
hitting
a
brick
wall.
New
Lewis,
who
wrote
the
current
would
push
for
combustib
Lewis,
who
wrote
the
current
—
and
hitting
a
brick
wall.
New
would
push
for
combustible
main
strong
—
is
an
obvio
tting
a
brick
wall.
New
Lewis,
who
wrote
the
current
problem”
could
be
contained?
In
be contained?
In
Mr. Paulson’s involvemen
bers
are
to
builders,
they
are
e” could
to builders,
they
are
Mr.
Paulson’s
involvement.
Mr.
Paulson’s
involvement.
MARCH
Lee,
an
analyst
BMO H.
anand
analyst
Century,
a big
subprime
originabest
seller
“The
Big
Short,”
make
mortgages
debt
towit
go
seller
“The
Bigtechnology
Short,”
make H.
a big
subprime
originamortgages
and
debt
towith
go into
Mr. Lee,
Eisman,
on
thetechno
short
a big
subprime
best seller
“The
Big
Short,”
make
truth,
if the
only
problem
had
he
only
problemoriginahadwhen Century,
“Credit
derivative
very
small
improvements
when best
all
improvements
“Credit
derivative
technology
“Credit
derivative
Starts
626,000
Capital
Markets.
Capital
Markets.
tor,
went
bankrupt
in
early
April
it
clear
that
the
heroes
of
their
any
C.D.O.,
making
it
it
clear
that
the
heroes
of
their
tor,
went
bankrupt
in
early
April
any
C.D.O.,
making
it
more
likely
trade,
is
clearly
going
towh
b
bankrupt
in
early
April
been
the
actual
mortgage
bonds
it
clear
that
the
heroes
of
their
actual
mortgage
bonds
nst the context
con- set against the context of con- helped people disguise what they helped people disguise what they helped people disguisemor
Permits of
685,000
Builders
remain
gloomy.
Earli- that
Builders
gloom
2007, for instance.
Yet three
narratives
—
theup
handful
of peoit would
go Mr.
up in
flam
— the handful
of peofor instance.
Yetover
three
that
it would
go
in
flames.”
cated.
(And,remain
by
Lewis
themselves,
they
might
have
instance.
Yetover
three
narratives
—
the fall
handful
of
peoves,
they fall
might
have
struction’s
steep
the
last narratives
’s steep
the last 2007,
er
this
the National
Associer
this Mr.
week,
the Nationa
weeks
Goldman
synple
whoweek,
figured
out that
subWhich
is precisely
what
wholater,
had the
figured
out that
sublater,
the
synWhich
ishad
precisely
what
the
been
right.
the
peak
there
count,
Eisman
nevert
ter,
the
synple who
hadAt
figured
out
that
subht.
At
the
peak
there
several
years.
AtGoldman
the
height
of
the ple
ears.
AtGoldman
the
height
of the weeks
CHRIS KEA
CHRIS KEANE/REUTERS
CHRIS KEANE/REUTERS
Home
Builders
reported
of
thetic C.D.O.
deal,were
calleda Abacus
prime
mortgages
were
looming ation
S.E.C.
is Home
claiming.
But in
prime
mortgages
looming ation
thetic
C.D.O.
deal,
called
were
over
$1 trillion
in
subS.E.C.of
is
claiming.
But ina his
“helped”
a WallBuilders
Street
firrh
D.O.
deal,
called
primewell
mortgages
were
a Abacus
looming
l over
$1 trillion
inmillion
subboom,
more
than
two
million
more
than
twoAbacus
Home
construction
in
Matthews,
N.C.
Housing
starts
rose
in March,
third
inc
onstruction
in because
Matthews,
Home
N.C. Housing
construction
starts
inrose
Matthews,
in
March,
N.C.
theHousing
third
straight
starts
increase.
rose
in March,
the
third
straight
increase.
2007-ACI,
through,
because
disaster
— were
pushing
Wall
that
sentiment
among
builders
as that
sentiment
among
bu
quest
to
lionize
hisC.D.O.’s
centra
disaster
—went
were
pushing
Wall
2007-ACI,
through,
because
prime
and
Alt-A
mortgages
that
thethe
bonds
forstraight
the
quest
to
lionize
his
central
char,dwent
through,
disaster
—went
were
pushing
Wall
Alt-A
mortgages
that
homes
were
being
built
annually.
ere
being
built annually.
it was betting
subprime
mortStreet
hard
to give
them
a way
to measured
acter,
Mr.the
Zuckerman
rus
measured
by
its monthly
index
byway
its the
monthl
Street
hard to on
give
them a way
to
it
was
betting
subprime
mortwere
on
Wall
shorting,
S.E
acter, Mr.
Zuckerman
rushes
tting on subprime
mortStreet
hard
to on
give
aStreet.
way
to
uritized
on
Street.
Thesecuritized
increase
inthem
construction
ncrease
in Wall
construction
gage
bonds
that
already
existed
short
the market.
Maybe
synthetpast
what
by
allinrights
sh
short
theconsulting
market.
Maybe
synthetgage
bonds
that
already
existed
had
risen
to
19
April,
from
15 in had
risen
19
April,
fr
That’s
a lot,
tosignaling
be
sure
—
but
it es- sure
Mr. Paulson
did.)
past
what
by
allinrights
should
nds
that
already
existed
short
the
market.
Maybe
synthetlot,
to be
sure
—MFR,
butlikely
it es- with
with
the
firmsomething
MFR,
es- sure
“Although
signaling
something
sure
limboto
might
finally
consulting
firm
the
consulting
firm
MFR,
“Although
something
“Although
signaling
limbo
might
finally
be maklimbo
might
finally
be makthis
winter
was
most
likely
nter
was
most
rather
than
bundling
new
ones.
ic
C.D.O.’s
would
have
been
crehave
been
the back
most
shock
ic
C.D.O.’s
would
been
cre-It ing
rather
than
bundling
new
ones.
It better
was
a finite
number.
You
could
March.
March.
anthat
bundling
newcould
ones.tax
It timated
have
been
the
most
shocking
ic C.D.O.’s
would
been
creite
number.
on way
second
reading,
better
than
the
paralyzed
condiingBut
their
to
the
timated
that
ahave
better
than
the government’s
paralyzed
condithan
the
paralyzed
condiing
their
way
back
toconsiderable
the
market.
their
way
back
to
the
market.
a You
considerable
ahave
considerable
spurred
bythat
the
tax
by
the
government’s
didn’teven
even
have
totheir
goactivity
the
ated
even
without
their
urging,
inishis
ated
without
didn’t
even
have
totheir
goactivity
the
trouhave
only
much
exposure
as
have
toexposure
goactivity
to which
the trourevelation
in
book.
ated even
without
yrenas
much
as
passage
isn’t
quite
so fun
That
rise
ishis
roughly
That rise
roughly
eq
tions
that
prevailed
aequivalent
year
and revelation
Builders
have
to book.
compete
amount
ofhave
the
recent
was
tions
that
prevailed
atourging,
year
and
that
prevailed
atourging,
year
and Builders
Builders
to
compete
fortrounew
have
to
compete
for new
of
the
recent
was
of as
the
recent
was
credit
for
homebuyers,
which
is tions
homebuyers,
is amount
ble
of
repackaging
old
C.D.O.
butMr.
it seems
a
little
They to
but
it seems
a rock-bottom
little
unlikely.
They
ble
of
repackaging
old
C.D.O.
Mr.
Lewis,
for
hisside
part,
there
were
bonds
existence.
packaging
old
C.D.O.
but
it seems
a little
unlikely.
They
retoward
bonds
existence.
people
on
the
short
o
Lewis,
for
hisunlikely.
part,
to
moods
improving
fromremisermoods
improving
from
more
ago,
these
data
indicate
buyers
with
rock-bottom
ago,
these
data
indicate
ago,
these
data
indicate
buyers
with
reposwith
rock-bottom
reposa
result
of the
tax credit,
and
that buyers
of
the
tax in
credit,
and with
that amore
result
oftoward
the
tax in
credit,
and
that more
speeding
expiration
with
expiration
tranches
into
new
C.D.O.’s,
which
were
the
driving
forces.
were
the
driving
forces.
tranches
into
new
C.D.O.’s,
which
counts
a
dinner,
late
in thin
The
introduction
of synthetic
into new
C.D.O.’s,
which
were
the
driving
trades
truly
savvy
troduction
of synthetic
counts
amerely
dinner,
late
in the
able
to
dejected.
Angame,
index able
to were
merely
dejected.
A
that
home
builders
are
not
seeing
sessed
homes.
that
home
builders
are
not
seeing
home
builders
aresoon
not seeing
sessed
homes.
homes.
housing
starts
would
suffer sessed
starts
would
soon
suffer housing
starts
would
soon
suffer that
little
likelihood
offorces.
being
renewed.
lihood
of being
renewed.
was
also
asetback.
common
practice.
It
is above
important
to
note
that
evwas
asetback.
common
practice.
in
which
one
of
heroes
It is
important
to That
note
that
C.D.O.’s
changed
allsigned
that.
Unlike
asetback.
common
practice.
ors,
who,
unlike
sowhich
many
changed
that. Unlike
indramatic
which
onereason
of
heroes,
Steve
It also
is important
note
that
50,his
which
has
not
above
50,his
a
recovery
incaution
demand,”
a
dramatic
recovery
in demand,”
dramatic
recovery
in caution
demand,”
in evturn
That
inbyturn
That
inbyevturn
Deals
have
to beto
the aanother
Another
reason
for
ca
ave
to beallsigned
the another
Another
reason
for
is level
Another
for
is level
were
doing,”
said Janet
Ta
were
doing,”
said Janet
Tavakoli,
were
doing,”
said
Janet Tavakoli,
(Goldman
vehemently
de- in that
ery
synthetic
required
(Goldman
vehemently
de- al- he
Eisman,
is
seated
next
to
ery
synthetic
C.D.O.
a
“normal”
collateralized
debt
n has
de- al- would
did their
homework
and
h
al”
collateralized
debt
ery
synthetic
C.D.O.
required
Eisman,
is seated
next
to
a maninbeen
seen
since
the
boom,
seen
since
the
bo
he
said.
he
said.
said.
would
acthas
as
a required
considerable
end
of this
month
qualify,
act
asvehemently
a toconsiderable
acthas
as
a to
considerable
his
month
qualify,
that
most
ofof Tavakoli
the
incr
that
most
of
the
increase
most
ofC.D.O.
the
increase
in been
the
president
the
president
of
Tavakoli
Structhe
president
of
Tavakoli
Strucnied
any
allegations
of
wrongdoboth
investors
who
were
long
and
nied
any
allegations
of
wrongdowho
is
taking
the
long
pos
both
investors
who
were
long
and
obligation,
which
contained
the
allegations
of
wrongdosights
that
made
them
a
g
n,
which
contained
the
both
investors
who
were
long
and
who
is
taking
the
long
position
on
dicates
bullish
sentiment.
The dicates
bullish
though
can
take are
twofinally
more March
hey
caneconomy,
take two which
more
damper
on
the
economy,
which
on’09the
damper
on
the
economy,
which
While was
moreinhomes
are finally
March was
in sentime
multi-un
Whilethey
more
homes
While was
more
are finally
inhomes
multi-unit
con- March
multi-unit
con’10
tured
andthe
an
tured
Finance,
and
an
early
crittured
Finance,
and
anit
early
criting,
pointing
out
that
lost
$90
others
who
were
short.
That
is,
ing,
pointing
out
that
lost
$90
many
ofmoney.
the
C.D.O.’s
heear
is
others
who
were
short.
That
is,
bonds
themselves,
theitreports
synthetic
ting
out
that
lostdespite
$90
emselves,
theitsynthetic
deal ofFinance,
But
ris
others
who
were
short.
That
is,
many
of
the
C.D.O.’s
he
is
shortmonths
to
close.
o
close.
would
have
to
recover
despite
record
low
was
8,
set
in
January
record
low
was
8,
set
in
being
built,
there
are
reports
that
ave
to
recover
would
have
to
recover
despite
struction,
which
tends
to
being
built,
there
are
that
being
built,
there
are
reports
that
struction,
which
tends
to
be
volastruction,
which
tends
to
be
volammerce
ics
ofThey
many
ofto
the
structu
ics
many
ofto
the
that
ics of
many
ofbecause
the
that
million
onnot
the
particular
Abacus
there
needed
bestructures
investors
who
million
on
thebecause
particular
ing.
get
talking,
as
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contained
there
needed
to
bestructures
investors
who
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particular
ontained
credit-default
synthetic
C.D.O.’s
that the
there
needed
to
becredit-default
investors
who the
ing.ofmillions
They
get
talking,
the
THE
YORK TIMES
housing,
ofin
it.
the
of homes
inand
forecloJoshua
Shapiro,
anofin
economist
tile.
Single-family
home
it.Abacus
housing,
not
it.Abacus
the
millions
of
homes
foreclomillions
of
homes
forecloannot
Shapiro,
anofNEW
economist
tile.
Single-family
home
starts
ac- tile.
Single-family
home
starts
ac- 2009.
2009.
have
now
come
under
have
now
come
under
scrutiny.
have
now
come
under
scrutiny.
deal
that
is
the
subject
of
the
believed
the
“referenced”
bonds
deal
that
is
the
subject
of
the
swaps
—
derivatives
that
“referman
says
to
Mr.
Eisman:
believed
the
“referenced”
bonds
is
the subject
of the
derivatives
that
“referpushed
for
—
and
theirscr
ab
believed the “referenced” bonds
man says to Mr. Eisman: “I love
There
toswaps
be othe
There
appear
to short
be
other
S.E.C.
complaint.)
There
appear
to be
other
exwould
rise
in value,
and
others
S.E.C.
enced”
a particular
of
guys
likeappear
you who
short
m
would
rise
in value,
and
others
particular group of
mplaint.)
use
credit-default
t
would complaint.)
rise
in value, group
and others
guys
like
you
who
my exmaramples
of mortgage
this,
as Iwell.
Lah
amples
of this,
as Iwell.
Last
The
second
reason,
though,
is
who
believed
they
would
fall. Evamples
of this,they
as well.
Last
mortgage
bonds.
Once
synthetic
ket.
Without
you,
don’t
who
believed
would
fall. EvThe
second
reason,
though,
is
econd
bonds.
Oncethough,
synthetic
subprime
bond
reason,
is
who
believed
they
would
fall. Evket. Without
you,
don’t
have
week,
the
no
week,
Pro
the
that
synthetic
gave
eryone,
ontoPublica,
both
ofnonprofit
the“The
C.D.O.’s
became
popular,
Wall
week,
Pro
theofnonprofit
eryone,
onPublica,
bothC.D.O.’s
sides
the peoanything
toPublica,
buy.”bad
He
adds
that
synthetic
C.D.O.’s
peobecame
popular,
Wall
took anPro
already
situa
hetic C.D.O.’s
gave
peoeryone,
on
both
sides
ofgave
the
anything
buy.”sides
He
adds,
investigative
journalism
ple
like Johnunderstood
Paulson
a way
to
transaction,
investigative
journalism
outfit,
Street
longer
needed
to
feed
transaction,
that.
more
excited
that you geto
ple
likeno
John
Paulson
a way
to
investigative
journalism
outfit,
oohn
longer
needed
to feed
and made
it worse.
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a way
to
transaction,
understood
that.
more excitedunderstood
that you getthat.
that
reported
how
a are
big
Chicag
short
the
subprime
market.
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itafeel
like
dirty pool
the
beast
withit new
subprime
reported
howthe
big
Chicago
What
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itafeel
dirtyMr.
pool
you’re
the
more
traa
short
the
subprime
market.
t subprime
with new subprime
reported
how
big like
Chicago
market. Mr.
What
makes
feel like
dirtyMr.
pool
And right,
here
we
now,
you’remakes
right,
more
trades
Paulson’s
betMagnetar,
against
the
sub-&
hedge
fund,
Magnetar,
he
is
the allegation
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Paulson
loans.
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make
infinite
is
the allegation
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Paulson’s
bet against
the
sub-&
hedge
fund,
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you’ll
more produ
could
make an
infinite
s bet against
the
subhedge
fund,
helped
is the allegation
that an
Paulson
payingdo,
thethe
price.
you’ll
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more
product
for&
Company
Sachs
put
together
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Company
andsome
Goldman
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number
ofand
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on thefamously
bonds
that
of
betswhich
on thefamously
bonds that
prime
market,
which
famously
me.”
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andsome
Goldman
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together
synthetic
me.”
arket,
prime
market,
which
m
C.D.O.’s
— precisely
soin
that
it
already
existed.
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— precisely
so th
reaped
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firm
billions
inchoosprofits,
C.D.O.’s
— precisely
so in
that
it
heFirst
firmBusiness
billions inPage
profits, reaped
the
firm
billionsin
inchoosprofits, were
were
actively
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As aactively
reader,
it is hard
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were
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choosAs a reader,
it is hard
n
actively
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could
bet
against
Inbehis
wasthe
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ofthem.
awould
recent
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was
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subject
of awould
recent
book,
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bet
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Inbe
didthat
synthetic
C.D.O.’s
hy
did
synthetic
C.D.O.’s
love
that
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ithis
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love
rich as
ingAnd
the
bonds
be
bet
ing the
bonds
thatthem.
would
bet
ing
bonds
that
bet
nsubject
the
Federal
Reserve
book,
Mr. Zuckerman
seems
to to book,
“The
Greatest
Tradewere
Ever.”
Boy,
book, and
Mr. Zuckerman
eatest
Boy,
“The
Trade
Ever.”
Boy,to on
Mr. Zuckerman
seems
toon
become
popular?
One
reason
popular?
OneEver.”
reason
irony
and
foreboding.
Thegoing
guy
foreboding. see
The
on
— Greatest
knowing
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iscome
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econd
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2