Factbox: How Goldman's ABACUS deal worked | Reuters

11/14/16, 4'02 PM

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BUSINESS NEWS | Fri Apr 16, 2010 | 4:30pm EDT

Factbox: How Goldman's ABACUS

deal worked
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The U.S. Securities and Exchange Commission is accusing Goldman Sachs Group Inc of
committing fraud in a complicated transaction involving securities known as
collateralized debt obligations.

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The particular deal that Goldman entered into with Paulson and others was called
ABACUS 2007-AC1.

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Here's how the deal worked, according to the SEC's complaint:

1) Hedge fund manager John Paulson tells Goldman Sachs in late 2006 he wants to bet
against risky subprime mortgages using derivatives. The risky mortgage bonds that
Paulson wanted to short were essentially subprime home loans that had been
repackaged into bonds. The bonds were rated "BBB," meaning that as the home loans
defaulted, these bonds would be among the first to feel the pain.
2) Goldman Sachs knows that German bank IKB would potentially buy the exposure
that Paulson was looking to short. But IKB would only do so if the mortgage securities
were selected by an outsider.
3) Goldman Sachs knows that not every asset manager would be willing to work with
Paulson, according to the complaint. In January 2007, Goldman approaches ACA
Management LLC, a unit of a bond insurer.
ACA agrees to be the manager in a deal, and to help select the securities for the deal
with Paulson. In January and February 2007, Paulson and ACA work on the portfolio,
coming to an agreement in late February.

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Goldman never tells ACA or other investors that Paulson is shorting the securities, and
ACA believes that Paulson in fact wanted to own some of the riskiest parts of the
securities, according to the complaint.
http://www.reuters.com/article/us-goldmansachs-abacus-factbox-idUSTRE63F5CZ20100416?rpc=59

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Factbox: How Goldman's ABACUS deal worked | Reuters

11/14/16, 4'02 PM

4) Goldman puts together a deal known as a "synthetic collateralized debt obligation"

designed to help IKB and Paulson get the exposure they want. IKB takes $150 million of
the risk from subprime mortgage bonds in late April 2007. ABN Amro takes some $909
million of exposure as well, and buys protection on its exposure from ACA Management
affiliate ACA Financial Guaranty Corp in May 2007.
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Goldman's marketing materials for the deal never

mention Paulson's having shorted more than $1 billion
of securities. Goldman receives about $15 million in
fees.

5) Months later, IKB loses almost all of its $150 million

investment. In late 2007, ABN is acquired by a
consortium of banks including Royal Bank of
Scotland. In August 2008, RBS unwinds ABN's
position in ABACUS by paying Goldman $840.1
million. Most of that money goes to Paulson, who made about $1 billion total.
'Trump Thump' whacks bond
market for $1 trillion loss

(Reporting by Dan Wilchins and Karen Brettell; Editing by Richard Chang)

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