Hedge fund manager John Paulson’s company reportedly made billions shorting the subprime mortgages packaged and sold by Goldman Sachs — which is now facing fraud charges by the Securities and Exchange Commission.
Paulson began betting against subprime mortgages as early as 2006, setting up two funds focused for that purpose.
At the time, the bet seemed highly contrarian: Big firms like Merrill Lynch and Citigroup were gorging on enormous profits by packaging and trading blocks of risky home loans, The New York Times reports.
According to The Wall Street Journal, two of the points of contention in the SEC's securities fraud charges against the investment bank are whether Goldman misrepresented Paulson's investment objectives, and the extent of Paulson's role in selecting the securities that went into the mortgage-backed product Goldman marketed and sold to investors.
Goldman, the SEC complaint says, "misled ACA into believing that Paulson was investing in the equity of ABACUS 2007-ACI and therefore shared a long interest with CDO investors."
The complaint also alleges that Paulson "heavily influenced the selection of the portfolio" for the CDO. However, Paulson, who isn't charged in the case, said in a statement that portfolio selection agent ACA Management LLC "had sole authority over the selection of all collateral in the CDO."
Those securities were later rated AAA by credit rating agencies.
"Paulson has never misrepresented our positions to any counterparties," the company’s statement said, adding that "the vast majority of people in the market thought we were dead wrong."
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