(Article changed on July 22, 2013 at 22:27)
(Article changed on July 22, 2013 at 14:27)
"So I met with Paulo last night," wrote Laura Schwartz in a series of email chains that read like an epistolary novella. "He may as much of a nerd as I am, since he brought a laptop to the bar and he also seemed to have a worksheet from DB [Deutsche Bank] and another manager."
Paulo was nothing like Laura. The story of a professional setup and seduction by a ruthless cad is familiar and depressing. And the aftermath three years later, wherein the world learns how Laura was played for a sucker in a highly immoral and unethical scheme, is pretty disgusting. Paolo Pellegrini, whose contempt for personal morality and business ethics seems boundless, essentially calls her a stupid prostitute. Stupid not to know his malign intent, and a prostitute who colluded with him to defraud investors. He doubled down in Federal Court last week, when he lied under oath.
[NYMag] by [NYMag]
A Disinformation Campaign Launched on CNBC
But the disinformation campaign to malign Schwartz goes back more than three years. It was launched on CNBC on April 20, 2010, four days after the SEC filed its complaint against Goldman and Fabrice Tourre, alleging securities fraud in the sale of Abacus 2007-AC1, a CDO that was designed to fail. Carrying water for Pellegrini and/or Goldman, Steve Liesman carefully cherry picked facts in ways that misled CNBC's viewers.
"Pellegrini testified that he told ACA Management, the main investor in a Goldman mortgage-securities transaction, that Paulson intended to bet against--or short--the portfolio of mortgages ACA was assembling," reported Liesman, who omitted Pellegrini's retraction.
"Later in the deposition, Pellegrini [said] he doesn't recall specifically telling her," reported New York Magazine, which had some respect for accuracy. "But [he] noted that he had walked her through the methodology Paulson and Co. had used to select the subprime securities. So, if she, "didn't know they were planning to take a short position in Abacus, he said, then she was just dim." Pellegrini, who was heavily lawyered and no fool, was trying to have it both ways. If he did tell Schwartz of his specific intent, then he was conspiring with her to defraud investors. So instead, he selectively recounted events so as to make Schwartz look stupid. It would "have been a little difficult to sort of miss the fact that we were trying to short this stuff," he said.
Pellegrini's intent is to deceive by cherry picking his facts. He leaves out the part where he tells Schwartz that he wants to exclude riskier triple-B-minus tranches, or when emails her that some of her proposed investments , "have some characteristics that make them too risky from our perspective." The signals he sent were decidedly mixed.
Which brings us to Liesman's second sleight of hand, which misled viewers about the nature of the meetings. Contrary to what he strongly insinuated, Schwartz never negotiated with Pellegrini as an investor; she was acting as the Selection Agent, an entity designated to act in an independent professional capacity on behalf of all purchasers of the CDO. She negotiated with Pellegrini because Goldman told her that his hedge fund, Paulson & Co., was taking the most most highly levered and deeply subordinated tranche in the deal, the equity tranche, and that securing a commitment from the "transaction sponsor," was the critical path to getting the deal done.
By claiming that Schwartz knew of his intention to short the portfolio, Pellegrini was essentially saying that she was prostituting her professional position, as Selection Agent, to mislead outside investors who believed that she was acting in their best interests. If he specifically told her of his intent, then he was conspiring with her to promote the same deception.
Since Goldman, the largest synthetic CDO underwriter, had never used a Selection Agent before, Schwartz was eager to establish a positive working relationship with the firm. So, after pushback in the preliminary discussion about the nature of the portfolio, she sent an email signaling her willingness to be flexible and reasonable. "I certainly hope I didn't come across too antagonistic on the call with Fabrice last week," emailed Schwartz to her Goldman contact on January 14, 2007. "I can understand Paulson's equity perspective but for us to put our name on something, we have to be sure it enhances our reputation." She clearly had no idea what kind of people she was dealing with.
Hiring ACA As An Unwitting Shill
Which was the entire point. Here the was sequence of events. First in late 2006, Tourre pitched his idea to Paulson: Goldman sells a CDO specifically designed fail so that the the credit default swap beneficiary, Paulson, can secure a quick $2 billion windfall. And for fabricating and selling this bogus transaction, which had no legitimate business purpose, Goldman would earn a $20 million fee for acting as a middleman, while taking no credit risk.
Out of concern that the market might become saturated by the tsunami of similarly bogus synthetic CDO deals entering the marketplace, Paulson suggested hiring an outside investment manager, a name like ACA, to lend the deal some verisimilitude to suckers, who would be deluded by fraudulent triple-A ratings.