Borrower Bailout?: Goldman Sachs Conveyor Belt

 Via: Livinglies

Borrower Bailout?: Goldman Sachs Conveyor Belt

  • If you have a GSAMP securitized loan you might want to pay particular attention here. In fact, if you ever had a securitized loan of any kind you should be very interested.
  • Hudson Mezzanine: The use of the word “mezzanine” is like the use of the word “Trust.” There is no mezzanine and there is no trust in the legal sense. It is merely meant to convey the fact that a conduit was being used to front multiple transactions — any one of which could be later moved around because the reference to the conduit entity does not specifically incorporate the exhibits to the conduit.
  • The real legal issue here is who owns the profit from these deals? The profit is derived from insurance. The cost of insurance was funded from the securitized chain starting with the sale of securities to investors for money that was pooled.
  • That pool was used in part to fund mortgages and insurance bets that those mortgages would fail. 93% of the sub-prime mortgages rated Triple AAA got marked down to junk level even if they did not fail, and insurance paid off because of the markdown. That means money was paid based upon loans executed by borrowers, whether they were or are default or not.
  • If enough of the pool consisted of sub-prime mortgages, the the entire pool was marked down and insurance paid off. So whether you have a sub-prime mortgage or a conventional mortgage, whether you are up to date or in default, there is HIGH PROBABILITY that a payment has been made from insurance which should be allocated to your loan, whether foreclosed or not.
  • The rest of the proceeds of investments by investors went as fees and profits to middlemen. If you accept the notion that the entire securitization chain was a single transaction in which fraud was the principal ingredient on both ends (homeowners and ivnestors), then BOTH the homeowner borrowers and the investors have a claim to that money.
  • Homeowners have a claim for undisclosed compensation under the Truth in Lending Act and Investors have a claim under the Securities laws.  (That is where these investor lawsuits and settlements come from).
  • What nobody has done YET is file a claim for borrowers. The probable reason for this is that the securities transactions giving rise to these profits seem remote from the loan transaction. But if they arose BECAUSE of the execution of the loan documents by the borrower, then lending laws apply, along with REG Z from the Federal reserve. The payoff to borrowers is huge, potentially involving treble damages, interest, court costs and attorney fees.
  • Under common law fraud and just plain common sense, there is no legal basis for allowing the perpetrator of a fraud to keep the benefits arising out of the the fraud. So who gets the money?
April 26, 2010

Mortgage Deals Under Scrutiny as Goldman Faces Senators

By LOUISE STORY

WASHINGTON — The legal storm buffeting Goldman Sachs continued to rage Tuesday just ahead of what is expected to be a contentious Senate hearing at which bank executives plan to defend their actions during the housing crisis.

Senate investigators on Monday claimed that Goldman Sachs had devised not one but a series of complex deals to profit from the collapse of the home mortgage market. The claims suggested for the first time that the inquiries into Goldman were stretching beyond the sole mortgage deal singled out by the Securities and Exchange Commission. The S.E.C. has accused Goldman of defrauding investors in that single transaction, Abacus 2007-AC1, have thrust the bank into a legal whirlwind.

The stage for Tuesday’s hearing was set with a flurry of new documents from the panel, the Permanent Senate Subcommittee on Investigations. That was preceded by a press briefing in Washington, where the accusations against Goldman have transformed the politics of financial reform.

In the midst of this storm, Lloyd C. Blankfein, Goldman’s chairman and chief executive, plans to sound a conciliatory note on Tuesday.

In a statement prepared for the hearing and released on Monday, Mr. Blankfein said the news 10 days ago that the S.E.C. had filed a civil fraud suit against Goldman had shaken the bank’s employees.

“It was one of the worst days of my professional life, as I know it was for every person at our firm,” Mr. Blankfein said. “We have been a client-centered firm for 140 years, and if our clients believe that we don’t deserve their trust we cannot survive.”

Mr. Blankfein will also testify that Goldman did not have a substantial, consistent short position in the mortgage market.

But at the press briefing in Washington, Carl Levin, the Democrat of Michigan who heads the Senate committee, insisted that Goldman had bet against its clients repeatedly. He held up a binder the size of two breadboxes that he said contained copies of e-mail messages and other documents that showed Goldman had put its own interests first.

“The evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients,” Mr. Levin said.

Mr. Levin’s investigative staff released a summary of those documents, which are to be released in full on Tuesday. The summary included information on Abacus as well as new details about other complex mortgage deals.

On a page titled “The Goldman Sachs Conveyor Belt,” the subcommittee described five other transactions beyond the Abacus investment.

One, called Hudson Mezzanine, was put together in the fall of 2006 expressly as a way to create more short positions for Goldman, the subcommittee claims. The $2 billion deal was one of the first for which Goldman sales staff began to face dubious clients, according to former Goldman employees.

“Here we are selling this, but we think the market is going the other way,” a former Goldman salesman told The New York Times in December.

Hudson, like Goldman’s 25 Abacus deals, was a synthetic collateralized debt obligation, which is a bundle of insurance contracts on mortgage bonds. Like other banks, Goldman turned to synthetic C.D.O.’s to allow it to complete deals faster than the sort of mortgage securities that required actual mortgage bonds. These deals also created a new avenue for Goldman and some of its hedge fund clients to make negative bets on housing.

Goldman also had an unusual and powerful role in the Hudson deal that the Senate committee did not highlight: According to Hudson marketing documents, which were reviewed on Monday by The Times, Goldman was also the liquidation agent in the deal, which is the party that took it apart when it hit trouble.

The Senate subcommittee also studied two deals from early 2007 called Anderson Mezzanine 2007-1 and Timberwolf I. In total, these two deals were worth $1.3 billion, and Goldman held about $380 million of the negative bets associated with the two deals.

The subcommittee pointed to these deals as examples of how Goldman put its own interests ahead of clients. Mr. Levin read from several Goldman documents on Monday to underscore the point, including one in October 2007 that said, “Real bad feeling across European sales about some of the trades we did with clients. The damage this has done to our franchise is very significant.”

As the mortgage market collapsed, Goldman turned its back on clients who came knocking with older Goldman-issued bonds they had bought. One example was a series of mortgage bonds known as Gsamp.

“I said ‘no’ to clients who demanded that GS should ‘support the Gsamp’ program as clients tried to gain leverage over us,” a mortgage trader, Michael Swenson, wrote in his self-evaluation at the end of 2007. “Those were unpopular decisions but they saved the firm hundreds of millions of dollars.”

The Gsamp program was also involved in a dispute in the summer of 2007 that Goldman had with a client, Peleton Partners, a hedge fund founded by former Goldman workers that has since collapsed because of mortgage losses.

According to court documents reviewed by The Times on Monday, in June 2007, Goldman refused to accept a Gsamp bond from Peleton in a dispute over the securities that backed up a mortgage security called Broadwick. A Peleton partner was pointed in his response after Goldman refused the Gsamp bond.

“We do appreciate the unintended irony,” wrote Peter Howard, a partner at Peleton, in an e-mail message about the Gsamp bond.

Bank of America ended up suing Goldman over the Broadwick deal. The parties are awaiting a written ruling in that suit. Broadwick was one of a dozen or so so-called hybrid C.D.O.’s that Goldman created in 2006 and 2007. Such investments were made up of both mortgage bonds and insurance contracts on mortgage bonds.

While such hybrids have received little attention, one mortgage researcher, Gary Kopff of Everest Management, has pointed to a dozen other Goldman C.D.O.’s, including Broadwick, that were mixes of mortgage bonds and insurance policies. Those deals — with names like Fortius I and Altius I — may have been another method for Goldman to obtain negative bets on housing.

“It was like an insurance policy that Goldman stuck in the middle of the sandwich with all the other subprime bonds,” Mr. Kopff said. “And it was an insurance policy designed to protect them.”

An earlier version of this article misidentified Senator Levin’s home state.

Relatated Stories:

Shareholders Sue Goldman, Blankfein Confirming Trusts Do NOT Own the Loans

Merrill Lynch Accused of Same Fraud as Goldman Sachs; House of Cards are beginning to fall: Bloomberg

This is going to unleash a domino effect! Come one, Come all! Anyone buying these CDO’s from these fraudsters need to get examined!

Interested to see their stock this week??

 

 

Merrill Used Same Alleged Fraud as Goldman, Bank Says (Update1)

By William McQuillen

April 17 (Bloomberg) — Merrill Lynch & Co. engaged in the same investor fraud that the U.S. Securities and Exchange Commission accused Goldman Sachs Group Inc. of committing, according to a bank that sued the firm in New York last year.

Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, known as Rabobank, claims Merrill, now a unit of Bank of America Corp., failed to tell it a key fact in advising on a synthetic collateralized debt obligation. Omitted was Merrill’s relationship with another client betting against the investment, which resulted in a loss of $45 million, Rabobank claims.

Merrill’s handling of the CDO, a security tied to the performance of subprime residential mortgage-backed securities, mirrors Goldman Sachs conduct that the SEC details in the civil complaint the agency filed yesterday. It claimed Goldman omitted the same key fact about a financial product tied to subprime mortgages as the U.S. housing market was starting to falter.

“This is the tip of the iceberg in regard to Goldman Sachs and certain other banks who were stacking the deck against CDO investors,” said Jon Pickhardt, an attorney with Quinn Emanuel Urquhart Oliver & Hedges, who is representing Netherlands-based Rabobank.

“The two matters are unrelated and the claims today are not only unfounded but weren’t included in the Rabobank lawsuit filed nearly a year ago,” Bill Halldin, a Merrill spokesman, said yesterday of the Dutch bank’s claims.

Kenneth Lench, head of the SEC’s Structured and New Products unit, said yesterday that the agency “continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress.”

Failed to Disclose

In its complaint, the SEC said New York-based Goldman Sachs, which had a record $13.4 billion profit last year, failed to disclose to investors that hedge fund Paulson & Co. was betting against the CDO, known as Abacus, and influenced the selection of securities for the portfolio. Paulson, which oversees $32 billion and didn’t market the CDO, wasn’t accused of wrongdoing by the SEC.

Goldman Sachs, the most profitable securities firm in Wall Street history, created and sold CDOs tied to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that Paulson helped pick the underlying securities and bet against them, the SEC said in a statement yesterday.

The SEC allegations are “unfounded in law and fact, and we will vigorously contest them,” Goldman said in a statement.

Merrill Lynch’s arrangement involved Magnetar, a hedge fund that bet against a CDO known as Norma, Rabobank claimed.

Effort to Replicate

“When one major firm becomes aware of the creative instrument of others, there is historically an effort to replicate them,” said Jacob Frenkel, a former SEC lawyer now in private practice in Potomac, Maryland.

SEC spokesman John Heine declined to comment on whether it is investigating Merrill’s actions.

Norma’s largest investor was investment bank Cohen & Co, with more than $100 million in notes, according to Rabobank’s complaint.

Merrill loaded the Norma CDO with bad assets, Rabobank claims. Rabobank seeks $45 million in damages, according to a complaint filed in state court in June 2009. Rabobank initially provided a secured loan of almost $60 million to Merrill, according to its complaint.

Risks Disclosed

Merrill countered in court papers that Rabobank was aware of the risks, which were disclosed in the transaction documents. The bank should have been responsible for conducting its own due diligence, and shouldn’t have relied on Merrill, it said in a court filing last year seeking to dismiss the case.

Steve Lipin, an outside spokesman for Magnetar, didn’t immediately comment.

The case is Cooperatieve Centrale Raiffeisen- Boerenleenbank, B.A. v. Merrill Lynch & Co, 09-601832, New York State Supreme Court (New York County).

To contact the reporter on this story: William McQuillen in Washington at bmcquillen@bloomberg.net.

Last Updated: April 16, 2010 23:03 EDT

MATT TAIBBI: Goldman Sachs “VAMPIRE SQUID”

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

TYX91101 Taibbi’s excellent articles alone are worth the price of the magazine. There have been several. He’s doing a commendable job of putting Wall Street monkey business into the public consciousness. You never get that kind of reporting on CNBC. Great work Matt! 6 hours ago
overseachininadoll Those who greatly benefited from the crash must hand back the money. (Paulson company) 14 hours ago
Relugus Alot more than the sycophantic financial journalists who kiss Wall Street’s ass. Wall Street has been screwing people, stealing taxpayers money, stealing wealth from the people, for decades. People are slowly waking up to what Wall Street is, a bunch of criminals and gangsters. 18 hours ago
Related Articles:

Dylan Ratigan does a great job explaining the con: GOLDMAN SACHS

The SEC’s complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.

 

Many recall this post below:

Move over GOLDMAN SACHS…WE have a New Player to this Housing “Betting” Crisis…NASDAQ Presenting the Law Offices of David J. Stern, P.A. (“DJS”)

SEC Charges Goldman Sachs With Fraud: Complaint Reveals Discovery Tips

Posted on April 16, 2010 by Neil Garfield

“The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest and civil penalties from both defendants.” Editor’s Note: Here is where the rubber meets the road. This same pool of illegal fraudulent profit is also subject to being defined as an undisclosed yield spread premium due to the borrowers. Some enterprising class action lawyer has some low hanging fruit here — the class is already defined for you by the SEC — all those homeowners subject to loan documents that were pledged or transferred into a pool which was received or incorporated by reference into this Abacus vehicle)

SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 21489 / April 16, 2010

Securities and Exchange Commission v. Goldman, Sachs & Co. and Fabrice Tourre, 10 Civ. 3229 (BJ) (S.D.N.Y. filed April 16, 2010)

The SEC Charges Goldman Sachs With Fraud In Connection With The Structuring And Marketing of A Synthetic CDO

The Securities and Exchange Commission today filed securities fraud charges against Goldman, Sachs & Co. (“GS&Co”) and a GS&Co employee, Fabrice Tourre (“Tourre”), for making material misstatements and omissions in connection with a synthetic collateralized debt obligation (“CDO”) GS&Co structured and marketed to investors. This synthetic CDO, ABACUS 2007-AC1, was tied to the performance of subprime residential mortgage-backed securities (“RMBS”) and was structured and marketed in early 2007 when the United States housing market and the securities referencing it were beginning to show signs of distress. Synthetic CDOs like ABACUS 2007-AC1 contributed to the recent financial crisis by magnifying losses associated with the downturn in the United States housing market.

According to the Commission’s complaint, the marketing materials for ABACUS 2007-AC1 — including the term sheet, flip book and offering memorandum for the CDO — all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC (“ACA”), a third party with expertise in analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”) [Editor’s Note: Brad Keiser in his forensic analyses has reported that Paulson may have been a principal in OneWest which took over Indymac and may have ties with former Secretary of Treasury Henry Paulson, former GS CEO], with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson’s adverse economic interest or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials.
The Commission alleges that Tourre was principally responsible for ABACUS 2007-AC1. According to the Commission’s complaint, Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. Tourre is alleged to have known of Paulson’s undisclosed short interest and its role in the collateral selection process. He is also alleged to have misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting. The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% was on negative watch. By January 29, 2008, 99% of the portfolio had allegedly been downgraded. Investors in the liabilities of ABACUS 2007-AC1 are alleged to have lost over $1 billion. Paulson’s opposite CDS positions yielded a profit of approximately $1 billion.

The Commission’s complaint, which was filed in the United States District Court for the Southern District of New York, charges GS&Co and Tourre with violations of Section 17(a) of the Securities Act of 1933, 15 U.S.C. §77q(a), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b) and Exchange Act Rule 10b-5, 17 C.F.R. §240.10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest and civil penalties from both defendants.

The Commission’s investigation is continuing into the practices of investment banks and others that purchased and securitized pools of subprime mortgages and the resecuritized CDO market with a focus on products structured and marketed in late 2006 and early 2007 as the U.S. housing market was beginning to show signs of distress.

Glenn Beck on The Goldman Sachs Connection

So what does this ‘FRAUD” mean and the AIG bailout they received?

 

U.S. Accuses Goldman Sachs of Fraud: THE NEW YORK TIMES

U.S. Accuses Goldman Sachs of Fraud

Brendan McDermid/Reuters The new Goldman Sachs global headquarters in Manhattan.
By LOUISE STORY and GRETCHEN MORGENSON “GOTTA LOVE THESE TWO FOR THEIR EXCELLENT WORK”
Published: April 16, 2010

Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.

The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.

The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.

According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.

Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.

But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.

“The product was new and complex, but the deception and conflicts are old and simple,” Robert Khuzami, the director of the S.E.C.’s division of enforcement, said in a statement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

Mr. Paulson is not being named in the lawsuit. In the half-hour after the suit was announced, Goldman Sachs’s stock fell by more than 10 percent.

In recent months, Goldman has repeatedly defended its actions in the mortgage market, including its own bets against it. In a letter published last week in Goldman’s annual report, the bank rebutted criticism that it had created, and sold to its clients, mortgage-linked securities that it had little confidence in.

“We certainly did not know the future of the residential housing market in the first half of 2007 anymore than we can predict the future of markets today,” Goldman wrote. “We also did not know whether the value of the instruments we sold would increase or decrease.”

The letter continued: “Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients.’ ” Instead, the trades were used to hedge other trading positions, the bank said.

In a statement provided in December to The Times as it prepared the article on the Abacus deals, Goldman said that it had sold the instruments to sophisticated investors and that these securities “were popular with many investors prior to the financial crisis because they gave investors the ability to work with banks to design tailored securities which met their particular criteria, whether it be ratings, leverage or other aspects of the transaction.”

Goldman was one of many Wall Street firms that created complex mortgage securities — known as synthetic collateralized debt obligations — as the housing wave was cresting. At the time, traders like Mr. Paulson, as well as those within Goldman, were looking for ways to short the overheated market.

Such investments consisted of insurance-like policies written on mortgage bonds. If the mortgage market held up and those bonds did well, investors who bought Abacus notes would have made money from the insurance premiums paid by investors like Mr. Paulson, who were negative on housing and had bought insurance on mortgage bonds. Instead, defaults spread and the bonds plunged, generating billion of dollars in losses for Abacus investors and billions in profits for Mr. Paulson.

For months, S.E.C. officials have been examining mortgage bundles like Abacus that were created across Wall Street. The commission has been interviewing people who structured Goldman mortgage deals about Abacus and other, similar instruments. The S.E.C. advised Goldman that it was likely to face a civil suit in the matter, sending the bank what is known as a Wells notice.

Mr. Tourre was one of Goldman’s top workers running the Abacus deal, peddling the investment to investors across Europe. Raised in France, Mr. Tourre moved to the United States in 2000 to earn his master’s in operations at Stanford. The next year, he began working at Goldman, according to his profile in LinkedIn.

He rose to prominence working on the Abacus deals under a trader named Jonathan M. Egol. Now a managing director at Goldman, Mr. Egol is not being named in the S.E.C. suit.

Goldman structured the Abacus deals with a sharp eye on the credit ratings assigned to the mortgage bonds associated with the instrument, the S.E.C. said. In the Abacus deal in the S.E.C. complaint, Mr. Paulson pinpointed those mortgage bonds that he believed carried higher ratings than the underlying loans deserved. Goldman placed insurance on those bonds — called credit-default swaps — inside Abacus, allowing Mr. Paulson to short them while clients on the other side of the trade wagered that they would not fail.

But when Goldman sold shares in Abacus to investors, the bank and Mr. Tourre only disclosed the ratings of those bonds and did not disclose that Mr. Paulson was on other side, betting those ratings were wrong.

Mr. Tourre at one point complained to an investor who was buying shares in Abacus that he was having trouble persuading Moody’s to give the deal the rating he desired, according to the investor’s notes, which were provided to The Times by a colleague who asked for anonymity because he was not authorized to release them.

In seven of Goldman’s Abacus deals, the bank went to the American International Group for insurance on the bonds. Those deals have led to billions of dollars in losses at A.I.G., which was the subject of an $180 billion taxpayer rescue. The Abacus deal in the S.E.C. complaint was not one of them.

That deal was managed by ACA Management, a part of ACA Capital Holdings, which changed its name in 2008 to Manifold Capital Holdings.

Goldman at first intended for the deal to contain $2 billion of mortgage exposure, according to the deal’s marketing documents, which were given to The Times by an Abacus investor.

On the cover of that flip-book, it says that the mortgage bond portfolio would be “selected by ACA Management.”

In that flip-book, it says that Goldman may have long or short positions in the bonds. It does not mention Mr. Paulson or say that Goldman was in fact short.

The Abacus deals deteriorated rapidly when the housing market hit trouble. For instance, in the Abacus deal in the S.E.C. complaint, 84 percent of the mortgage bonds underlying it were downgraded by rating agencies just five months later, according to a UBS report.

It takes time for such mortgage investments to pay out for investors who short them, like Mr. Paulson. Each deal is structured differently, but generally, the bonds underlying the investment must deteriorate to a certain point before short-sellers get paid. By the end of 2007, Mr. Paulson’s credit hedge fund was up 590 percent.

Mr. Paulson’s firm, Paulson & Company, is paid a management fee and 20 percent of the annual profits that its funds generate, according to a Paulson investor document from late 2008 titled “Navigating Through the Crisis.”