Commenter Steve sums up what Goldman did very succinctly:
What Goldman knew is that they had an investor (Paulson) who wanted to create an investment and take the short side of it, but that no one would want to buy it if they knew the component parts had been self-selected by the person on the other side of the bet. So they used ACA as a sham intermediary, and told investors that the component parts had been selected by this objective third party.
A little more Felix Salmon (who has this one wrapped like a mummy):
It makes a lot of sense here to do the old-fashioned thing and follow the money. Why was ACA so quiet about the fact that it wasn’t really picking the securities in the CDO it was nominally managing? Because it was being paid millions of dollars for its silence. And why was Goldman so happy to do Paulson’s bidding? Just look at the complaint.
The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1.
Even by Goldman standards, that’s real money. But the fact is that the investors in the deal had every right to know who was paying the piper — and Goldman went to great lengths to keep that fact secret.[…..]
Goldman talks ad nauseam about how everything it does it does for its clients, and how any profits it ultimately ends up making are just a result of being “long-term greedy”. But if it attempts legalistic hair-splitting about how its behavior in the Abacus case was technically not illegal, it’s just going to end up looking even more culpable in the eyes of its clients. Goldman, if it was behaving honorably here, would have been open about the whole truth of what was going on.
This is bank-on-bank violence, so it’s not even clear that the Santellistas will defend Goldman.
Although this matter is somewhat separate from fin reg legislation, it will take a Herculean Luntzian effort to disentangle the two in the public’s mind. It should be awfully easy for Democrats to call Republicans the party of Goldman-Sachs as the fin reg debate rages on.