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.