Guest Post: Is Abacus 2007-AC1 Unique?

Submitted by Jim Bianco of Arbor Research

In the video below, it appears that Steve Liesman of CNBC has access to deposition or other facts in the SEC case.  Perhaps he has been talking to Paolo Pellegrini, Paulson’s former head trader who is believed to be a key witness for the SEC.  We have found no one else that is reporting on case specifics beyond what was in the SEC complaint.

Liesman reports that the Abacus 2007-AC1 deal (pitchbook) was somewhat unique in that it was Paulson’s only CDO that used a neutral third party manager to select collateral (ACA management) or “bespoke” deal.  Pauslon did other CDO deals where they picked the collateral directly and it was disclosed as such.  What is not clear is if Paulson’s economic interest in those deals failing was also properly disclosed.

The implication is if Goldman loses this case it will not lead to a precedent that will spread to many other CDOs.

Liesman is also reporting on the collateral selection for Abacus 2007-AC1.  Paulson originally proposed 123 deals be included.  ACA rejected 55 of them.  Then Paulson expanded his criteria to find more deals.  ACA and Pauslon went back and forth until enough deals were included to satisfy rating agency criteria to get the desired ratings for the CDO.

As we interpret Liesman’s words (feel free to disagree), ACA was not tossing out deals because they thought they were bad for CDO buyers, but ACA was using its expertise to game the rating agencies to make sure the deal got the desired credit ratings to make it work.

Liesman also reports that “someone close to Pellegrini” says that ACA selection criteria “stacked the deck” against Paulson’s short position therefore implying that this deal is not as fraudulent as it appears.  They also point out that ACA “took down” (we believe he means wrote protection against) $840 million of the $1.1 billion deal.  What is not clear is if ACA did this to get the deal done and then “re-insured” this exposure with a firm like AIG right after it closed.

If you are interested in the “inside baseball” of this case, this four minute interview is worth a look

Finally, the following video is a conversation with Josh Rosner, managing director of Graham Fisher, and Jesse Eisinger, a reporter with Propublica.  It was one of the better and more informed conversations about this case.

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