Doing a public service was the very last thing on the minds of the geniuses at Goldman Sachs who created Abacus 2007-ACI, but I for one am grateful to them.
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Abacus is the name of the investment package that has caused mighty Goldman to get its tail caught in a crack at the Securities and Exchange Commission. According to the federal fraud cops, Abacus is nothing but a scam. Yet, I find it enormously useful, because it reveals two dirty little secrets that Wall Street does not want us outsiders catching onto.
Secret #1 is that Wall Street has radically and abruptly shifted its function. Rather than being the financier of productive business enterprises, it is now a global gambling house for the superrich, as Abacus proves.
A hedge fund huskster named John Paulson had scoured mortgage records to find home loans that he was sure would be foreclosed. He then got Goldman to pool these shaky mortgages into Abacus and sell the package on the premise that it would actually increase in value. Paulson paid $15 million to Goldman to market Abacus.
Investors were not told that Paulson had hand-selected these doomed mortgages and had made a side bet that they would fail. Investors lost $1 billion, Paulson made a billion, and Goldman cashed in, too.
Abacus was a casino game, pure and simple – and that’s what Wall Street has become.
Secret # 2: The media reported that Paulson “earned” a billion bucks in this deal. But he did not. He grabbed, snookered, absconded with, and otherwise hauled off a billion – but “earned” implies meriting something. For example, America’s teacher-of-the-year certainly earns a paycheck of $40,000, but Paulson is a snake who did nothing to deserve his billion-dollar haul.
So thanks Goldman Sachs for showing us your Abacus and revealing two ugly secrets on how Wall Street really works.
“S.E.C Accuses Goldman Of Fraud in Housing Deal,” The New York Times, April 17, 2010.