Before the subprime mortgage market went kablooey, but not long before, Goldman Sachs put together a little CDO called Abacus. And when the market exploded, so did Abacus, which was bad for a lot of people, but mostly really good for Paulson & Co., which was shorting the whole thing, which it had the confidence to do because it selected the garbage that went into it.
Of course, the only people who knew that Paulson & Co picked said garbage were Paulson & Co and Goldman. Oh yea, and ACA Financial Guaranty, which said it picked the underlying securities, even though it didn’t. And that’s neither the only thing ACA did, nor the only thing it essentially outsourced to Paulson: It wrote the insurance policy for Goldman that was really for Paulson, but instead of doing any of the research or work to determine what the terms of that policy ought to be, it figured it would let Paulson do it. And since Goldman told them that Paulson was definitely not short the whole thing—even though it was—it would still like $130 million, please.
The courts have proven rather unamenable to the “we didn’t do our job at all and helped Goldman lie about it, but Goldman lied to us and that’s totally unfair” argument. ACA hopes that’s about to change. Goldman, less so.
A state judge in Manhattan in April 2012 denied a bid by Goldman Sachs to dismiss ACA’s fraud claims, rejecting the argument that ACA had failed to show that it relied on statements made by the bank about Paulson’s role in Abacus and the investment position the fund intended to take.
An appeals court in Manhattan reversed that ruling in May 2013, saying that ACA didn’t show it had exercised due diligence by asking about Paulson’s role before insuring the investment….
Richard H. Klapper, an attorney for the bank, told the court Thursday that ACA hasn’t shown that it depended on the bank’s representations in deciding whether to insurer Abacus.
“They did not reasonably rely on anything Goldman Sachs told them,” Klapper said.