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Pointless deals line Wall Street pockets, Goldman Sachs suit shows

April 17, 2010|Michael Hiltzik

One problem Paulson and Goldman faced, the SEC says, is that the deal would be hard to sell as a profitable investment in the mortgage market if anyone learned that Paulson was on the other side, because of his reputation as a doomsayer. So they concealed his interest. They hired ACA Management, a firm renowned for its expertise in analyzing mortgage securities, to work on the deal and told their marks -- er, customers -- that ACA picked the portfolio.

Yet, according to the SEC, in building the portfolio ACA chose liberally from a list provided by Paulson.

The SEC says ACA at first didn't know that Paulson was going to short the portfolio, which doesn't make ACA look too swift. In fact, Goldman allegedly led ACA to believe that Paulson was making a $200-million investment in the package, not that he was selling it short. In the end, Paulson made his billion and Goldman made its fee.

(The firm claims to have lost $90 million on the underlying securities, but it's worth noting that it may also have earned commissions from the other investors, and that this was only one of many deals in its ABACUS program, which the SEC dates back to 2004.)

Let's not pretend that Goldman is unique in its impulse to treat high finance as a self-contained game. This is the way Wall Street has operated for years: An enormous amount of effort has gone into ginning up outlandishly complex deals that are miles removed from the business of economic growth. Bankers take home millions of dollars in bonuses for these achievements, while the economy at large stagnates for want of capital.

Financial regulation, properly crafted, will help redirect America's financial brainpower from wasted effort to worthy effort. The next time you hear someone in Washington say we don't need such reform, you should answer back: Remember ABACUS!

Michael Hiltzik's column appears Sundays and Wednesdays and occasionally on other days. Reach him at, read past columns at, and follow @latimeshiltzik on Twitter.

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