The SEC alleged that Goldman allowed Paulson to help select securities in the CDO, known as Abacus 2007-AC1, without telling investors that Paulson was shorting some assets in the CDO, or betting its value would fall.
When the CDO's value plunged within months of its issuance, Paulson walked off with $1 billion, while investors lost the same amount, the SEC said.
To be sure, Paulson & Co. has not been accused of doing anything illegal. But the fund, which took in a record $3.7 billion in 2007 on bets against the housing market, wasted no time distancing itself from the alleged fraud.
"Paulson is not the subject of this complaint, made no misrepresentations and is not the subject of any charges," the fund said in a statement released hours after the SEC unveiled the charges Friday.
But the letter Paulson sent Tuesday suggests that some of his clients may have been unnerved by the high-profile case against Goldman, which has raised fears that related charges could be brought against other Wall Street banks.
Is it time to buy Goldman Sachs?In the letter, Paulson asserts that his fund didn't structure or originate the Abacus transaction, which he called a "shelf program," that Goldman created in 2004.
While Paulson acknowledged that he "suggested securities to be included in the reference portfolio," he said bond insurer ACA Capital Management had "full and final authority for selecting the reference collateral."
He added that the CDO was "tranched" and received top-tier credit ratings from both Moody's and Standard & Poor's.
Paulson says he was not known as an experienced mortgage investor before 2007, when he began expressing concerns that the housing market was overheating. At that time, he says, there were plenty of veteran investors who disagreed.
"Many of the most sophisticated investors in the world, who had analyzed the same publicly available data we had, were fully convinced that we were wrong, and more than willing to bet against us," he said.
Paulson argues that his role in the Abacus deal was "appropriate and conducted in good faith" in part because there was no shortage of investors willing to take the "long side" of the deal, or bet that the CDO's value would rise.
"Every synthetic CDO by definition has a long and short side," he said. "These products are designed specifically so that buyers and sellers can take positions based on their view of the expected performance of a given market."
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