Corporate Governance

Paulson's Role in Selecting the Reference Portfolio

By J Robert Brown Jr.

Want to know exactly what role Paulson played in the selection of the portfolio, at least according to the Wells Statement submitted by Golden?  (The Wells was posted on the web site of the Financial Times).  Here it is, in Goldman's own words:

• Goldman Sachs started the portfolio selection process by providing Paulson with a database of RMBS securities and a spreadsheet listing securities that fit Paulson?s requirement that the portfolio be restricted to 2006-vintage subprime RMBS that were rated Baa2 by Moody?s Investor Service and approximately BBB by Standard & Poor?s. Paulson then provided Goldman Sachs with a spreadsheet of 123 securities. Goldman Sachs sent this spreadsheet of 123 securities to ACA for its evaluation and potential inclusion in the 2007- AC1 Reference Portfolio.

• ACA evaluated each of the 123 securities using its proprietary models and methods of analysis. ACA rejected more than half of the securities, and sent Goldman Sachs a revised spreadsheet listing 86 securities, including 55 from the list of 123 securities and 31 additional 2006-vintage Baa2-rated securities.  ACA later proposed an additional 26 reference securities.  Goldman Sachs suggested that two of the proposed securities be rejected, and ACA suggested three replacements.

• ACA and Paulson then met on February 2, 2007 to discuss the reference portfolio. During this meeting, Paulson proposed a list of securities, nine of which ACA had already rejected. After the meeting, ACA emailed Paulson and Goldman Sachs, reiterating its rejection of the nine securities and attaching a spreadsheet listing 100 securities (79 of which previously had been approved by Paulson and ACA).  Paulson suggested? removal of eight of the securities (seven of which were removed) and Goldman Sachs suggested removal of two of the securities (one of which was removed).  Paulson then circulated a list of 90 reference securities. Of these 90, ACA requested that the parties make substitutions for three of the securities.  ACA proposed eleven alternative securities and Paulson agreed to three out of those eleven securities.  ACA thereafter agreed to the removal of three New Century securities, and the substitution of three securities to include in the final portfolio.

• ACA ultimately approved 90 securities that it stood behind as the portfolio selection agent, albeit from the category of 2006/2007-vintage Baa2-rated subprime RMBS.  There is no indication that ACA 'rubber stamped' any of the securities suggested by Paulson, or that it behaved in any way that was inconsistent with the normal obligations of a Portfolio Selection Agent. And as a sophisticated market player that managed billions of dollars in subprime securities, ACA should easily have recognized any tendencies or marginal biases in the securities that Paulson recommended.

The description, to the extent accurate, suggests a high level of involvement in the selection of the reference portfolio.

Full post as published by The Race to the Bottom on April 20, 2010 (boomark / email).