In testimony Wednesday, Paolo Pellegrini, the former Paulson & Co managing director, said he made clear to ACA Capital Holdings Inc that Paulson wanted to bet against the deal.
"As I told all collateral selection agents, we were interested in shorting a CDO, shorting subprime securities in a CDO," said Pellegrini, one of the architects of hedge fund manager John Paulson's bet against subprime mortgages in 2006 and 2007. ...
Pellegrini, one of two people who worked on Paulson's strategy to take the stand so far, testified Wednesday he believed he told the principal employee at ACA working on Abacus, Laura Schwartz, about Paulson's strategy over drinks during a "shindig" for people in the CDO industry.
"I think there was some discussion of the portfolio and what we were trying to accomplish by shorting the market," he said.
That'll liven up the murderous boredom of the Fabrice Tourre trial! I mean, maybe not for the jurors, but: Pellegrini is the SEC's witness, and their whole case is basically that Fab told ACA that Paulson & Co. was long Abacus when it was actually short,1 so the fact that Paulson's main guy on the trade told ACA that Paulson was short seems pretty relevant. Now Pellegrini may not be the most reliable of witnesses - he'd previously said he didn't remember telling ACA that he was shorting housing, and he also previously claimed not to know what "CDO" stands for, which must have made attending a "shindig" for people in the CDO industry sort of awkward. "Great to be here with all you CDO industry folks, whatever that stands for, etc."
Still though: it's getting increasingly hard to believe that Fab deceived ACA about what side of the trade Paulson was on. You've got Pellegrini's testimony. You've got the fact that Pellegrini spent 2006 and 2007 proselytizing for shorting the housing market. You've got contemporaneous news reports about Paulson's strategy. You've got the weird fact that no one bought the Abacus equity - and that Goldman disclosed that - making it hard to see how ACA could have thought Paulson was buying it. Against all of that, you've got basically ACA, who meanwhile in another part of town are unsuccessfully suing Goldman and Paulson over this deal and so have some incentives to remember things their way.
The Tourre case was a little silly to begin with but now that a star witness for the SEC's main claim against him has testified that that claim is totally wrong, where does that leave the SEC? In a bad place, I guess, though you never know. If the jury doesn't understand what's going on, does it really matter what anyone says?
Ex-Paulson exec: Hedge fund's plans no secret in Tourre case [Reuters]
In Tourre Trial, S.E.C. Wages Battle Against Its Own Witness [DealBook]
The silly trial of Fabrice Tourre [Reuters / Felix Salmon]
1.Really that's half the case. The other half is that Fab told investors that ACA had picked the portfolio when in fact Paulson had. As we've discussed, I think that half is bullshit: for one thing Fab didn't write the offering circular that he's now being blamed for - he just looked at it. For another, banks are never really supposed to disclose to their customers who was on the other side of the trade. And anyway ACA really did sign off on the portfolio, though there was obviously input from other quarters.