Inside the Goldman Trade

The news on Friday that Goldman Sachs had been sued by the Securities and Exchange Commission on allegations of fraud floored most of Wall Street. But it came as no surprise to Wall Street Journal reporter Greg Zuckerman, whose book The Greatest Trade Ever detailed the transaction at the center of the Goldman case. Mr. Zuckerman talks about the security, which was created for a Goldman investor, John Paulson, who had a distinct interest in seeing it fail.

The Observer: Did the S.E.C. bring this case just to make up for all its past fuck-ups? There have been rumors the Obama administration said that if regulators were going to do this, they had to go after Goldman.

Mr. Zuckerman: I’m not a Goldman conspiracy theorist. And it’s a very complicated issue, so it takes a long time to prove. That said, they did start working on this in early 2008. By the end of 2008, they were grilling Paolo Pellegrini, the architect of these deals, who worked for John Paulson. It does come at a curious time, when there’s the financial reform bill in Washington, and the same day the S.E.C. was criticized for making mistake after mistake. I like to just think it took them a while to make the case.

Are other banks going to be charged? They all did similar things, either for Paulson or other hedge funds.

Well, there are reasons to think that this is a little bit of an easier case for the government to bring because you have this third party, ACA, which makes it more unique, and you can argue misrepresentation. But in other ways there are other similar deals done by other investment banks that I would argue are more egregious. So yeah, you’ve got to figure the government and lawyers are poring over those other deals right now. And, you know, Paulson went to all the other banks, and a lot of them agreed to do this for him. So there’s definitely going to be scrutiny of other deals done either for John Paulson or other hedge funds.

There’s a part of your book where Paulson has pitched this to a bunch of banks, and someone at Bear Stearns said he wouldn’t do it because selling deals that someone was shorting on the other side ‘didn’t stand up to Bear’s moral compass or ethics standards.’ Bear Stearns. Ethics standards. I just need you to comment on that.

There’s a lot of irony there, for sure. I think it also speaks to the fact that there was a lot of gray area in these deals, that some banks thought it was perfectly fine and some didn’t. Some people thought I should’ve taken a bigger stand on the investment bankers or John Paulson, but, you know, the way I looked at it was that I’m sort of old-school journalism and I don’t believe in taking a stand. The readers are smart enough to come to their own conclusion. Some read it and find blame in Paulson or the banks and some find no blame, and either is fine. It’s for them to judge.

Even though he hasn’t been charged with anything, a lot of people are coming down on Paulson, saying what he did was amoral and whatnot. Shouldn’t we be giving him kudos? Wasn’t he just coming up with an awesome trade and killing it for his clients?

The argument against John Paulson is that because of his efforts, there were several billion dollars in toxic product created that eventually hurt global banks, and that it was at his instigation. But what also needs to be kept in mind is that he never sold any of this product to investors, and it’s not his job to worry about who is on the other side of his transaction. They all knew the collateral behind these deals, they all could analyze it, and you have to remember that at the time, Paulson wasn’t the name he was today. Taking the other side of a deal that was created in part by John Paulson and his team seemed like a good proposition at that time.

So do you think even if Goldman had disclosed what the S.E.C. says it should have, regarding Paulson’s role, the investors would’ve made the same decision on it?

Yeah, I don’t think many investors would have had a second thought about taking the other side of a trade of John Paulson’s back in 2006 or early 2007. He was seen as a tourist investor dabbling in real estate, and some people thought he was out of his league—even Goldman Sachs thought he was out of his league. Josh Birnbaum, a top trader at Goldman, sat across from Paulson in his office and warned him about what he was doing.

Goldman is all about—or saying it’s all about—the clients being number one, and now because of all this, people, investors, are questioning that commitment. But Paulson was a Goldman client. So they were still working in one client’s best interest. Sometimes you have to play favorites, right?
Yeah, I mean, you could argue that if John Paulson had lost a billion dollars on this deal, that he should have complained that he’s a client of Goldman Sachs, and he wasn’t warned that a sophisticated, huge German bank which does credit analysis on a daily basis was on the other side of his transaction.

What do you think of the defense that the losers should’ve known better, done their due diligence and known what they were getting into?
Yeah, I mean, these things were not being sold to mom-and-pop investors. They were going to sophisticated investors, who should have and could have done their homework. As for the argument that Goldman should have told the investors about Paulson’s role in putting it together, it’s interesting; we’ll see what happens. They don’t have to be told who is on the other side, but the government thinks you can’t tell people ACA put this together when John Paulson had a hand in it.

Inside the Goldman Trade