Note that the deal was a synthetic CDO, so the cash flows that are sliced and distributed come from CDS premiums on sub-prime MBS (not directly as cash flows from mortgages). Either way it is the same bet-being long the mortgages or selling insurance on them (which is a bet that they won’t default). Who is paying these premiums? Any buyer of CDS who thinks the underlying mortgages are going south. Could that have been Paulson? Must be in the complaint somewhere.
a) GS was aware of these investigations because of a Wells Notice, sent them in December 2009. Still it looks like they made some reactive comments that may make them look bad. Its not as much the fraud that catches you as the attempt made to cover it up.
b) Bear Stearns apparently declined this deal on ethical grounds.
c) If this is all that the SEC comes up with, it is not a smoking gun, but a water pistol!
d) And a nice moralistic short story version HERE.
e) Notice how the VIX popped huge on Friday!!