"In other words Paulson combed through the data available on these subprime mortgage deals and picked out the crappiest of the garbage - the most-rotting of the dead fish, all of which allegedly were "AAA" at the time one would presume but which he was quite sure would soon be either downgraded - or default outright - and then asked Goldman to use those as the references against which it would write the swaps that Paulson wanted to buy.
But remember - Goldman didn't buy the bonds to set up the CDO - they just issued a credit-default swap, which, it appears, Paulson's hedge fund bought.
Goldman then went out and solicited people to buy the tranches of the CDOs, selling what was alleged to be a cash-flow stream that Mr. Hedgie had offered (out of the goodness of his heart, no doubt - ed: yes, that's sarcasm) to fund!
Here's the question:
Did Goldman disclose to the potential buyers in the offering circular that John Paulson had come to them with a laundry list of characteristics he wanted in the CDO and offered to fund the credit-default swaps which would only make him money if those reference bonds blew up, and that he would take large, material losses IF THE SECURITIES - AND THE CDO - PERFORMED AND ACTUALLY GENERATED THE CASH FLOWS PROMISED?
It's About Damn Time (Goldman) Posted 2010-04-16
The Audacity Of Synthetics Posted 2010-02-09
Has it been that long? ;-P