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Goldman’s no-name defense

By A. James Memmott

May 4, 2010 at 7:16am

The Securities and Exchange Commission lawsuit filed last month against Goldman Sachs may turn upon the issue of John Paulson’s name recognition.

The SEC is arguing that Goldman had a duty in early 2007 to issue a kind of “John Paulson” alert.

In doing so, it would have let investors know they were about to invest against a position held by Paulson’s hedge fund, Paulson & Co.

And it wasn’t just that Paulson & Co. was hoping that a Goldman financial product called Abacus 2007-AC1 would lose.

The SEC claims that Paulson knew it would go under as it had loaded the synthetic collateralized debt obligation or CDO with toxic assets.

Paulson & Co. made $1 billion; the investors lost $1 billion.

But in what the Wall Street Journal calls the “No Big Deal” defense, Goldman officials assert that they didn’t have to tell investors about John Paulson’s involvement because he wasn’t widely known.

In other words, being on the other side of a trade from Paulson in 2007 was not considered dangerous territory.

Published reports indicate that Goldman may have a point.

Paulson’s name did not appear on the Forbes lists of richest Americans for 2005 and 2006. Nor did it appear on the Trader Monthly annual list of top earning traders for those years.

It wasn’t that he was losing money. A profile in Portfolio magazine showed that Paulson’s firm had generally - and sometimes spectacularly - outperformed the market since its founding in 1994.

However, the firm’s fortunes improved dramatically in 2007.

The Goldman CDO labeled Abacus 2007-Ac1 was completed in April and quickly began losing money for investors and therefore making money for Paulson.

On Sept. 20, 2007, Paulson’s name appeared for the first time on the annual Forbes list of the 400 richest Americans.

Paulson was at No. 165 on the list with an estimated wealth of $2.5 billion.

From then on he moved up, making money in a bad market. In 2008, Paulson was No. 78 with a net worth of $4.5 billion. In 2009, he was No. 33 at $6.8 billion.

Doing well when others were doing so poorly has brought attention to Paulson, turning him into what Portfolio called “the man who made too much.”

The magazine reported that, as his firm was growing, Paulson generally flew under the radar.

He did draw some attention in 2005 when he purchased the former Town Club on East 86th Street in Manhattan for $14.7 million.

Paulson has continued to invest in real estate for himself, sinking millions into mansions on Long Island.

Newsday notes that in 2008 he spent $41.3 million on three parcels in Southampton that include a 13-bedroom mansion with a dining room that seats 60 people.

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