I recently read an online report of comments made by Warren Buffett about Goldman's fortunes in the aftermath of the recent SEC complaint. Ignoring the theory that the SEC's effort against Goldman is directly linked to Goldman's lobbying efforts and their diametric opposition to the views of SEC brass and the White House, I was frankly shocked at the number of people who, reading nothing but the New York Times (that prominent purveyor of truth), decided that Buffett was lying to enhance his investment potential. This, in the face of the fact that Buffett makes more money while Goldman is in trouble because it impairs its freedom to call Buffett's high-paying Goldman preferred shares. In other words, the truth appeared to be that Buffett, in defending Goldman, was speaking against his pecuniary interest.
But who cares about the truth when there's an old meme to flog?
In the interest of advancing the quest for truth, I thought it worth posting a link to the other side of the story – Paulson's response to the SEC allegations. Since it's Goldman and not Paulson being threatened by the SEC, Paulson's reply comes in the form of a letter to investors. Still, I thought Paulson's reply was interesting.
In short, Pauson's willingness to take the short side of a subprime mortgage CDO didn't confer on Paulson the power to stuff it with specially-selected garbage. The buyer had previously bought the same securities in other packagings and knew full well what it was buying. Moreover, the asset manager that DID have the power to pick what was being used to structure the investment actually reviewed the investments, picked some, rejected some, then sent the whole off to a rating agency which then exercised its own judgment in rating the investments. Paulson wasn't pushing crack on naïve children, he was selling cigarettes to adults under a sign (that he himself had erected) that read "Cigarettes Are Bad For Your Health. $3/Pack." The buyers were sophisticated investors who, looking at the available information, decided Paulson was wrong and they were willing to take him to the cleaners over it. The only problem with the transaction was, in truth, that Paulson was right.
Buffett probably has it right: Goldman and Paulson aren't the bad guys in the subprime implosion. They saw a market and didn't do anything to poison it, they simply played it. In Paulson's case, he played it while openly criticizing the investment thesis of those playing the long side of the subprime bet. The irony? The SEC's claims aren't about a CDO but an artificial CDO created to offer products to buyers after the real investments had all been sold. The derivative was based on real investments, but needed a counterparty to take the risk on the side opposite the buyer. Paulson's position as the counterparty wasn't secret, and the buyers knew they were buying something no longer available on the market. The buyers were so hungry for subprime investments that they were willing to pay a premium to Goldman to home-brew a substitute.
Paulson's fund is now such a large owner of ACAS that he must report as an insider.