And Schwartz, who kept her promise to keep Goldman informed, fails to mention this critical fact.
Pellegrini's Dissemblances, Half-Lies and Flat Out Lies
Then you have to consider the Pellegrini's word games, which are used to deceive. At three meetings, either they discussed investment recommendations, or they discussed Paulson's intention to short. Which means there could have been three meetings where the shorting strategy never came up. And, "wanting to buy protection on tranches of a synthetic RMBS portfolio," is not the same as wanting to buy protection on the portfolio being assembled for the ABACUS transaction.
And no, Steve, buying protection is very different from buying a naked short. Generally speaking, people buy protection on risk exposures they already own. Shorting something you do not own is altogether different.
Which is why Abacus 2007-AC1 and $100 billion other synthetic mezzanine CDOs just like it, were all deeply immoral and unethical transactions. They had no legitimate purpose, since they financed nothing. They never added "liquidity to the market," since everything about CDOs and credit default swaps is kept secret in order to protect the guilty. And they did not represent "a bearish view on housing," since this was money on a sure thing, the fatal flaws in the triple-B ratings of hyper-levered tranches of subprime bonds. Their singular purpose was to screw a bunch of suckers, the outsiders who never made it on to Greg Lippmann's email distribution list.
Here's an absolute must-read for anyone in business: George Orwell's, "Politics and the English Language," because corruption in finance is largely rooted in corruption in language.
Pellegrini Flaunts His Contempt For Ethics and the Rule of Law In Court
Eleven months after the SEC complaint was filed, Pellegrini working closely with defense lawyer Pamela Chepiga, sat for a deposition wherein they both worked hard to throw sand in everyone's face. Chepiga was relentless in her objections to each and every question. At that time, Pellegrini, who seemed to have the memory of a sieve, could not quite remember whether he contacted other potential CDO arrangers by stating his intention to purchase the CDO's equity, which was essentially a loss leader for people who bought shorts.
Investors, usually hedge funds, often used credit default swaps to take offsetting positions in different tranches of the same CDO security; that way they could make some money as long as the CDOs performed, but they stood to make more money if the entire market crashed. An FCIC survey of more than 170 hedge funds encompassing over $1.1 trillion in assets as of early 2010 found this to be a common strategy among medium-size hedge funds: of all the CDOs issued in the second half of 2006, more than half of the equity tranches were purchased by hedge funds that also shorted other tranches. The same approach was being used in the mortgage-backed securities market as well. The FCIC's survey found that by June 2007, the largest hedge funds held $25 billion in equity and other lower-rated tranches of mortgage-backed securities. These were more than offset by $45 billion in short positions.
Once again, CDOs and CDS are used with the explicit purpose of exploiting secrecy, of keeping outsiders in the dark. As Pellegrini testified: