Paulson & Co. Says Role in Goldman Deal Was Appropriate

Date: Wednesday, April 21, 2010
Author: Bloomberg

Paulson & Co., the hedge fund that made $15 billion betting on the decline in subprime mortgages in 2007, said its role in helping to design a mortgage-linked deal sold by Goldman Sachs Group Inc. was “appropriate and conducted in good faith,” according to a letter sent to investors.

The Securities and Exchange Commission sued Goldman Sachs for fraud on April 16, saying it failed to disclose that Paulson & Co. helped choose securities for a so-called synthetic collateralized debt obligation and then wagered that it would collapse. Goldman Sachs told clients the securities included in the deal were selected by ACA Management LLC, an independent third party, according to the regulator.

“We have always been forthright in expressing our opinions, and we never misrepresented our positions,” John Paulson, the firm’s founder, wrote in the letter dated April 20. “All our dealings were through arms-length transactions with experienced counterparties who had opposing views based on all available information at the time.”

Paulson & Co. has not been accused of any wrongdoing and was not named in the suit. The SEC said that it didn’t sue the firm because it was Goldman Sachs’s job to disclose to investors how the CDO was constructed.

Several Paulson & Co. investors, including Geneva-based 3A SA, which farms out money to hedge funds, said they weren’t concerned by the firm’s involvement with the CDO.

Even so, Paulson, 54, has been reaching out to clients to answer questions. On April 19 he spoke to a group of investors by telephone, according to two people who were on the call. He is also holding a conference call for all investors today, according to an e-mail that accompanied the letter.

Mortgage Investor

Armel Leslie, a spokesman for Paulson & Co., declined to comment on the letter, which was reported earlier by the Wall Street Journal.

Paulson & Co. wasn’t involved in the marketing of the investment, called Abacus 2007-ACI, and didn’t have authority over selecting the portfolio of residential mortgage-backed securities on which it was based, Paulson said in the letter.

ACA decided to include 55 securities that Paulson suggested for inclusion in the CDO and rejected 68, the letter said, citing the SEC complaint. ACA also added an additional 35 other securities.

In 2007, Paulson said that many investors were eager to wager that the value of mortgage securities would continue to rise.

“When we expressed our concerns about the mortgage markets, many of the most sophisticated investors in the world, who had analyzed the same publicly available data we had, were fully convinced that we were wrong, and more than willing to bet against us,” he wrote. He added that at the time, Paulson & Co. was not known as an experienced mortgage investor.

Profitable Trade

Paulson & Co. is the world’s third-biggest hedge fund, with $32 billion in assets, thanks in large part to its bet that subprime mortgages would tumble. The trade earned the firm roughly $3 billion in fees in 2007.

The firm’s Advantage Plus fund, its largest, jumped 160 percent that year on the back of the subprime wager. Its Credit Opportunities funds, which held the biggest chunk of the firm’s bet, were up 600 percent.

The SEC’s suit doesn’t bode well for the entire U.S. financial services industry, said Ed Rogers, chief executive officer of Tokyo-based hedge-fund adviser Rogers Investment Advisors Y.K.

“You don’t want to be the company or industry that the U.S. government loves to hate,” he said.