Goldman: ‘Someone Had to Take the Other Side’

In the fall, Goldman Sachs knew that the S.E.C. was looking at its fishy Abacus package, so the big bank had its white shoes over at Sullivan & Cromwell write a lengthy response about why the trade wasn’t really all that interesting. (From Alphaville by way of Felix Salmon.)

The italics are all theirs:

“As in other synthetic CDO transactions, by definition someone had to assume the opposite side of the portfolio risk,” the attorney for Goldman wrote, “and the offering documents made clear that Goldman Sachs, which took on that risk in the first instance, might transfer some or all of it through a hedging and trading strategies using derivatives.”

In case that wasn’t clear, they use it again later:

“All participants in the transaction understood that someone had to take the other side of the portfolio risk, and the offering documents clearly stated that Goldman Sachs might lay off some or all of the short exposure to the portfolio that it had taken on,” the attorney wrote. “A disclosure that the relatively unknown Paulson was the entity to which Goldman Sachs transferred that risk would have been immaterial to investors in April 2007.”

In short: of course someone was going to be on the other side, and whether it was someone who put the package together and happened to be shorting it wasn’t really the other parties’ business.

Goldman: ‘Someone Had to Take the Other Side’