Schwartz said Goldman Sachs sent her a draft term sheet for the deal, which said that the equity tranche was “pre- committed” to Paulson. The SEC claims that Paulson, which made $15 billion making massive short bets against the residential mortgage market in 2006 and 2007, never considered investing in the equity, or “first-loss” tranche.
Schwartz also said that Tourre failed to correct an e-mail she sent referring to “Paulson’s equity perspective” on the deal.
And she testified about running into Paolo Pellegrini, the Paulson executive, in Jackson Hole, where she was attending a dinner for managers of collateralized debt obligations. Over drinks in a hotel bar they discussed the Abacus transaction, Schwartz said.
Pellegrini didn’t disclose that the hedge fund was shorting the portfolio that it was helping ACA assemble, she said.
Pellegrini, who testified earlier in the trial, said he believed ACA knew that Paulson was taking a short position on Abacus.
On cross-examination by Tourre’s lawyer, John “Sean” Coffey, Schwartz told jurors that ACA wouldn’t have changed its standards for selecting a portfolio of mortgage-backed securities whether it was getting input from a long or a short investor. She also said she had worked on deals in which investors took both long and short positions on portfolios.
Tourre’s lawyers are trying to show that Paulson’s participation didn’t increase the risk that Abacus would fail and that it didn’t make a difference to ACA.
The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).