Ex-Goldman Trader Bought Major Stake in ACA, Shorted Subprime CDOs
By Kevin Connor  •  Apr 26, 2010 at 13:54 EST

The Goldman-Paulson fraud suit threatens to throw a spotlight on a realm of Wall Street that has escaped most scrutiny throughout the financial crisis: the hedge fund industry. Top hedge fund managers profit from Wall Street’s business model of fraud and collusion more than any CEO at the big banks, but tend to evade accountability because of the opacity of their industry and their extraordinary power.

One such hedge fund manager is Richard Perry. Perry, a former Goldman Sachs trader, became known as one of the subprime winners in 2007 — one of the hedge fund managers who saw the crisis coming, and placed profitable bets that the housing market would collapse. Perry reportedly shorted $3 billion in subprime-related securities, netting a $1 billion profit on the trade.

Around the same time, in late 2006 and 2007, Perry’s hedge fund, Perry Corp, began buying up shares in a certain financial management company that had a close business relationship with Goldman Sachs. His stake grew from 5% to 8% (around $30 million in early 2007), to the point where Perry Corp was disclosed as a major shareholder in the company in the prospectus for one CDO put together by Goldman in August 2007.

That company: ACA Capital, the same firm wrapped up in the Goldman Sachs-John Paulson CDO deal that the SEC has deemed fraudulent.

Perry’s winning billion-dollar subprime short, alongside his major investment in ACA, is all the more notable because of his ties to Goldman Sachs. He was a star trader at the bank under former Goldman Sachs head Robert Rubin, and has partnered with the bank on investments in recent years. Perry is extremely close to Rubin, outside of the professional context — former babysitter to his children, teaching assistant, and advisory board member at Rubin’s Hamilton Project. Despite being extremely close to someone who made $1 billion shorting the subprime market, Rubin has called the financial crisis a “perfect storm” that no one saw coming.

Perry is also the nephew of former Bear Stearns CEO Jimmy Cayne. Bear Stearns was the biggest shareholder of ACA before it went bust.

Which subprime securities did Perry short to score $1 billion? Were they Goldman Sachs CDOs? Was ACA involved?

These are all questions worthy of investigation. But what makes Perry’s investment strategy even more suspicious is the fact that he has previously been investigated for a complex derivatives deal that played both ends of a trade.

In 2004, with the help of financial engineering by Bear Stearns and Goldman Sachs, Perry acquired a large voting stake in a pharmaceutical company (Mylan Laboratories) that was considering the takeover of a smaller company (King Pharmaceuticals). Perry owned a significant stake in King, and also hedged against a drop in Mylan’s stock price.

As Mylan’s biggest shareholder, Perry could vote through the merger, causing a drop in Mylan’s stock price but reaping up to $28 million on the deal because of his investment in King and his Mylan hedges.

The SEC ultimately fined him $150,000 for failing to make the proper disclosures. Perry hired a former SEC official, William R McLucas, to argue his case. Even that probably wouldn’t have happened if Perry had not gotten on the nerves of Carl Icahn, the next biggest shareholder of Mylan.

Were Wall Street investors like Perry, Goldman, and Paulson intentionally using corporate shells like ACA (and AIG) to dupe the marketplace and funnel profits back to them? And were they using their connections to the companies — ownership stakes, personal ties, and so on — to encourage them to participate in these risky deals?

At this point, only one thing is for certain: further investigations are needed.

8 Responses to “Ex-Goldman Trader Bought Major Stake in ACA, Shorted Subprime CDOs”

  1. Ex-Goldman Trader Bought Major Stake in ACA, Shorted Subprime CDOs « SpeakEasy Says:

    [...] Originally posted at Eyes on the Ties. Kevin Connor is co-founder and research director of LittleSis.org, an involuntary facebook of powerful Americans. var __buzrr_style="big_blue_buzzicon_bg"; Share – AAA Email Print Share Post on reddit Post on stumbleupon Post on facebook Post on digg Post on twitter Post on delicious LIKED THIS ARTICLE? JOIN OUR EMAIL LIST Stay up to date with the latest AlterNet blog headlines via email [...]

  2. Kevin Connor: Ex-Goldman Trader Bought Major Stake in ACA, Shorted Subprime CDOs | Goo News Says:

    [...] Originally posted at LittleSis.org’s blog, Eyes on the Ties. [...]

  3. Did John Perry Take The "Perceived" Paulson CDO Cap Structure Arbitrage To A Whole New Level In 2007? | Stocks! Says:

    [...] what we would like to touch upon, is a curious tangent of this “ruse” – as blog LittleSis points out, one entity that could have taken the “Fund X” scheme to a whole new level may be the [...]

  4. Did John Perry Take The "Perceived" Paulson CDO Cap Structure Arbitrage To A Whole New Level In 2007? | W DE WEB Says:

    [...] what we would like to touch upon, is a curious tangent of this “ruse” – as blog LittleSis points out, one entity that could have taken the “Fund X” scheme to a whole new level may be the [...]

  5. Chris Says:

    From: http://market-ticker.denninger.net/archives/2215-Goldmans-Interlocking-Relationships.html

    “ACA had a horrible reputation,” he told me, which led me to ask the obvious question so why would Goldman want ACA’s stamp as selection manager on the CDO they were marketing? Fabrice Tourre, the 31-year-old named as the architect of Abacus, is quoted as insisting that Goldman wanted ACA’s brand name and “credibility” on the CDO.

    My source told me to check out who the head of ACA was married to. “I think you’ll find it’s a senior woman at Goldman Sachs,” he said.

  6. Ex-Goldman Trader Bought Major Stake in ACA, Shorted Subprime CDOs « Bear Market News Says:

    [...] Ex-Goldman Trader Bought Major Stake in ACA, Shorted Subprime CDOs [...]

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