A reader writes in:
I have no love for Goldman Sachs and agree that the SEC case is motivated by politics--the need to give the current financial reform bill some momentum and for the SEC to collect a scalp since they failed so badly in this crisis. ....
Goldman Sachs may or may not have misrepresented Abacus 2007-AC1 to ACA and IKB--I have no idea. However, I would hasten to point out that if the SEC or journalist did a little digging into the underlying mortgages and mortgage backed securities against which credit default swaps were written to build Abacus, they would find that real people lost their homes when they defaulted on their mortgages. Of course, it is to be expected that families lose their homes when they default on their mortgages. However (and this is the whole point of my note), a CDS only pays when there is a default event. (Goldman certainly learned this with their AIG CDS--although insolvent, the US Treasury prevented AIG from defaulting on their bonds meaning Goldman did not collect on the CDS written on AIG bonds.) So, Paulson et al had a HUGE incentive to make sure the underlying mortgages actually defaulted. No grace periods, no working out the terms, no excuses for late checks, etc. Paulson needed default in the technical and legal sense; not delinquent or non-performing, but default as defined in the actual mortgage. Think about that: if a local bank still held the mortgage it would do anything to prevent default; Paulson needed to trigger default and fast before the US government created any type of plan that would allow homeowners to stay in their homes as terms were re-set.
When Congress figures that out and parades these families on TV, Goldman will be asking Philip Morris for the name of its PR firm.