We are proud to be literally the last source in the entire world to bring you the story that Goldman Sachs was actually charged with wrongdoing by the government it thought it had paid for. Hooray for democracy, or something. And for bloggers being completely asleep at the wheel. Just as shocking as $GS actually being charged with something is the SEC sort of growing a pair, for now.

Right, so one upside of our being otherwise occupied today is that we don’t need to spend a lot of time explaining what they (allegedly)(totally) did: marketed a CDO they claimed was created by Company A but was actually created by Dude B, who made it suck on purpose and then loaded up on CDSs for when it failed, except it forgot to tell its customers that last part.

Goldman responded in the usual fashion: a strongly-worded press release that is best summed up, “Whaaa, me? C’mon, you know me,” and is more full of fail than a ca. 2008 financial statement.

Goldman Sachs Lost Money On The Transaction. Goldman Sachs, itself, lost more than $90 million.  Our fee was $15 million.  We were subject to losses and we did not structure a portfolio that was designed to lose money.

The firm would like you to know they lost money on the transaction. Or, rather, they lost money on a transaction. If you believe for one second that Goldman didn’t hedge against losses on a $2b CDO, thereby making a ton of money when it tanked, I have a successful bank in Charlotte to sell you. Suddenly the wonderbank, this paragon of financial success stacked top to bottom with the smartest guys in most rooms, suddenly that bank doesn’t do research on a product it’s selling? Sure. You bet.

Extensive Disclosure Was Provided. IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities.  The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side.

And see, that’s exactly the problem: extensive disclosure was provided, but that disclosure was missing some key information. That’s why Goldman is being sued. We wonder if they actually read more than the first two pages of the nastygram from the SEC.

ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions.  ACA had the largest exposure to the transaction, investing $951 million.  It had an obligation and every incentive to select appropriate securities.

Yes, that’s sort of the point, also. The SEC alleges that while ACA may have technically selected the bonds that comprised the CDO, John Paulson (& Co.) compiled the list that was presented to ACA to choose from. That list, of course, was designed to fail hard, but ACA was not made aware of that little point. That $951m in exposure? Most of that was from protection that one of ACA’s units sold on these bonds – which we hardly believe it would have taken on had it, y’know, been told the truth about what those bonds were really made of.

Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SEC’s complaint accuses the firm of fraud because it didn’t disclose to one party of the transaction who was on the other side of that transaction.  As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.

Or a short one. Speaking of Paulson, he made a tidy profit of nearly $1b on the whole deal, and isn’t named as a defendant in the lawsuit, so big win for John.

Why did we give these guys bailout money, again?