BUSINESS SNAPSHOT - ABACUS
金融学作业代写 They act as intermediaries between buyers and sellers. In this particular case, Party A was a hedge fund controlled by John Paulson.
In 2007 Goldman Sachs created a product called ABACUS from a synthetic ABS (Assetbacked security) CDO (collateralized debt obligation). An ABS CDO is formed from a portfolio of tranches (often mezzanine tranches) of ABSs. The word synthetic means that Goldman defined the ABS CDO, but it did not actually buy the underlying tranches. It then acted as an intermediary between two parties. Party A bought a credit default swap providing protection against . What the losses on the senior tranche of the ABS CDO would have been if it had been created. Party B sold the credit default swap, agreeing to provide the protection. Party A paid Party B an insurance premium (the CDS spread).
So far, so good. This is what investment banks such as Goldman Sachs do all the time. 金融学作业代写
They act as intermediaries between buyers and sellers. In this particular case, Party A was a hedge fund controlled by John Paulson. This was one of the few hedge funds to make big bets against the performance of subprime mortgages and the housing market generally. It transpired that Paulson paid Goldman Sachs $15 million for creating the structure and that his hedge fund had a hand in choosing the ABSs that went into the structure. Party B was IKB Deutsche Industriebank AG (IKB), a bank based in Dusseldorf, Germany. That specializes in lending to small and medium-sized companies. The portfolio manager was ACA, which at the time had a good reputation for managing ABS CDOs.
It is alleged that Goldman Sachs represented to IKB that the ABS CDO had been defined by ACA when the ABSs in the portfolio had in fact been chosen by John Paulson’s hedge fund as ones that were likely to incur huge losses. Specifically, it is alleged that Paulson constructed the synthetic ABS CDO with tranches formed from portfolios of mortgages where the borrowers had low FICO scores and came from states where the rate of house appreciation had been the highest
Both IKB and ACA took huge losses on ABACUS, and Paulson’s hedge fund made a huge profit.
(IKB had to be bailed out because of the massive losses it sustained from the subprime meltdown.) The deal was investigated by the Securities and Exchange Commission (SEC), and Goldman Sachs ended up paying a fine of $550 million, the largest in the history of the SEC at that time. Goldman Sachs's position was hurt when it was revealed that an executive working on the deal, Fabrice Tourre, had sent the following e-mail to a friend: “More and more leverage in the system. The whole building is about to collapse anytime now …. Only potential survivor, the fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all the implications of those monstrosities!!!”
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