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.)