Academic

The Goldman Earnings Call, Part 1: ACA Chose and It Doesn?t Matter Anyway

By Kim Krawiec

 In my last post on this topic, I went through the SEC?s complaint against Goldman Sachs and assessed the strength of the allegations.  At 11:00 am yesterday, Goldman Sachs held its first quarter 2010 earnings call.  Naturally, the SEC complaint came up, both in the firm?s opening statements, and during the Q&A session.  Their statements shed some light on several missing or unclear facts in the case, and give an indication of their likely defense on some charges.

Below are short quotes from the opening statements of Gregory Palm, GS General Counsel, that I find relevant to the case, followed by my own interpretation of the relevant portions from the Q&A.  You can access the full transcript here.

1.1  1. ACA Chose and Had Every Reason To Choose Well

The first relevant point that I believe Palm makes in his opening statement is that ACA, rather than Paulson, did, in fact, exercise independent judgment in choosing the ABACUS portfolio.  Moreover, ACA, as the largest single investor in the deal, was financially incentivized to choose the portfolio and to choose well.

From Palm?s opening statement:

In the process of selecting the referenced portfolio, ACA which was both the portfolio selection agent and overwhelmingly the largest investor evaluated every proposed security. Although ACA received input from both Paulson and IKB, ACA had sole responsibility for determining and did determine the final portfolio and was paid a fee for performing that role. ACA used proprietary models and methods of analysis to develop its own independent view of the relative riskiness in each security. To that point ACA rejected more than half of the securities suggested by Paulson. (all emphasis mine)

However, there is some push back on this point in the Q&A from Michael Mayo of CLSA.  Mayo essentially boils down the SEC complaint to two points made on page 12: ?One, Paulson helped to select the portfolio and two, Paulson was going short.?  So, he asks, tell us why the SEC is wrong.

Palm responds:

In very simple terms the portfolio here was not selected by John Paulson. The portfolio here was selected by ACA. ACA had the responsibility to do that. They were paid to do it. They did do it and they were the largest investor in this transaction overwhelmingly. They certainly had every incentive to do it. As I indicated in the prepared remarks way more than half of the portfolio are things they suggested . . .

But Mayo quickly notes the issue here: 

At what point does materiality kick in? If John Paulson had suggested all of the securities in the portfolio and ACA selected them all would that then be material? If he selected one and they selected one that wouldn?t be material. If he selected all maybe that would be material. At what point do you cross the threshold?

2.    2. Who Chose ? And Even The Contents ? Are Not Material

Palm responds with an argument that he first introduces in his opening statement: it didn?t really matter who chose the portfolio ? it was essentially just a bet on the housing market and that bet turned out to be wrong, so ?I believe it didn?t matter what was selected here.?

From Palm?s opening statement:

All of that being said, the particular securities in the referenced portfolio were not ultimately a key factor in the performance of this transaction. The entire pool of DAA rated securities from the 2006 vintage performed similarly amidst an unprecedented market collapse.

In my next post, I?ll cover several more issues, including what ACA did or did not know, and how much Goldman lost on the deal and why.

Related Posts:
The Goldman Complaint

Full post as published by The Faculty Lounge on April 21, 2010 (boomark / email).