By Eric Johnston
THE hedge fund that made billions betting against the US subprime mortgage market, Paulson & Co, has told investors, including its Australian clients, that it had always been transparent and open regarding its negative view of the North American housing market.
In an attempt to distance itself from global fraud claims engulfing Wall Street heavyweight Goldman Sachs, Paulson said its involvement in the Abacus security marketed by Goldman Sachs was appropriate and conducted in good faith. While Paulson does not operate in Australia, its funds are distributed by boutique funds management group Ashton Advisors.
Paulson reportedly made about $US1 billion by betting against Abacus, the mortgage-backed trading instrument at the heart of the US Securities and Exchange Commission case against Goldman.
The SEC claims Goldman Sachs sold mortgage investments to major investors without telling buyers the securities were developed with input from Paulson, a client that was betting on them to fail. The Goldman Sachs executive accused of shepherding the deal, Fabrice Tourre, allegedly boasted about the ''exotic trades'' he created.
While the SEC alleges in court filings that Paulson helped select securities making up the Abacus security, no charges have been filed against the hedge fund.
In a letter sent to investors and obtained by BusinessDay, Paulson said it ''did not structure or originate'' the Abacus transaction, saying this was a shelf program created by Goldman Sachs. ''All of our dealings were through arm's-length transactions with experienced counterparties,'' it said.
In it, Paulson also narrows in on the SEC complaint that Paulson suggested the securities to be included in the reference portfolio for the Abacus instrument. The hedge fund noted that an independent firm, ACA, acted as a collateral manager for the Abacus security and had ''full and final'' authority for selecting the make-up of the security.
Paulson said that of the 123 securities it suggested for inclusion in Abacus, ACA ultimately accepted 55 and rejected 68. ACA also added an additional 35 securities independent of Paulson.
"Paulson was transparent and open regarding its concerns about the mortgage market, which were driven by analysis of publicly available data," the letter states. ''We believed that the two-year adjustable rate mortgages made to lower-income borrowers with poor credit history, little or no documentation, no down payment rates … would set the stage for significant delinquencies and foreclosures, thus eroding the value of those securities.''
Goldman Sachs has denied the SEC allegations and will contest the charges.