The second simplest and most concise explanation of the newest revelation concerning Goldman Sachs, John Paulson and the toxic securities that have poisoned the investing world comes from Richard Russel's Dow Theory Letter.
(The best one is above).
Now it can be told. It started with billionaire fund manager John Paulsen. He had an idea that the wild speculation in homes was putting the price of homes into the bubbly stratosphere, and that the whole home-structure was due to collapse. Paulsen went to a few firms including Goldman and asked them to structure mortgage packages that would include some of the poorest quality mortgages. Paulsen's plan -- bet against these vehicles and these items and hope that he would be correct -- that the housing boom would go into free-fall. This is exactly what happened, and Paulsen and his investors pocketed billions in profits.
Bear Sterns turned down a deal with Paulsen. But Goldman and Deutsche Bank went along with Paulsen. Goldman, knowing the mortgage packages they had created were toxic, sold these deals to investors without telling them about Paulsen and his thesis that these mortgage packages were created to fail. What's worse, Goldman even sold these toxic packages short. Goldman sold the product to their customers and at the same time shorted the products.
But what about the agencies that were supposed to grade these packages? They were as asleep as was the SEC on the Madoff case. The toxic packages got a AAA classification from the rating agencies. All in all, a disgusting case of collusion and incompetence by Wall Street and the rating agencies and stupidity on the part of the buyers of these toxic packages.
The fact is that Paulsen had been searching for bubbles in the economy, and he correctly zeroed in on real estate and specifically home mortgages. But Paulsen never sold his toxic packages to investors, Goldman did. Which is why the SEC has focused its fraud accusations on Goldman and left Paulsen alone.
Paulsen & Co. earned $15 billion betting against the housing market in 2007. Paulsen, 54 years old, personally made nearly $4 billion that year. Today Paulsen's hedge fund has $32 billion in assets, making it one the world's largest hedge funds. Of interest is that Paulsen's most recent big investment is in gold and gold stocks and exchange traded funds tied to gold.