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Great Leap Forward

John Paulson, Goldman Sachs, and Harvard: The conclusion of the Abacus Story

All: I’ve been quiet for a while; I’ll explain why later. However the following story is just too good to pass up. Enjoy!

Subject: Jeff Sachs on The Harvard IKB School of Engineering
Date: Fri, 5 Jun 2015 13:21:11 +0000

> *The Harvard IKB School of Engineering*
> Jeffrey Sachs                June 5, 2015
> The good people of Dusseldorf, Germany, and specifically the IKB Bank,
> which specializes in loans to small and medium-size businesses, has
> kindly endowed Harvard University’s engineering school with a gift of
> $400m. Harvard President Faust announced the endowment on June
>
> the most generous in the University’s history. Strangely, though, the > Harvard Engineering School was renamed after hedge-fund manager John A.
> Paulson, not IKB, and thereby hangs a tale.
>
> You see, the gift by Dusseldorf was not made in its own name. In fact,
> the money en route to Harvard was taken from IKB through an infamous > swindle. Back in early 2007, before the 2008 financial crash, hedge fund
> manager John Paulson approached Goldman Sachs with the idea of ripping
> off unknowing investors to the tune of $1 billion. In essence, Paulson
> would assemble a $1 billion portfolio of toxic assets (known as Abacus)
> that Goldman Sachs would market to its unsuspecting clients. Paulson
> would bet against the portfolio, so that the investors’ $1 billion loss
> would be Paulson’s gain. Goldman would pocket some fees for its service
> in this treachery against its own clients.
>
> As planned, the $1 billion portfolio of securities collapsed in value
> soon after IKB (with its $150 million purchase) and other hapless
> investors bought in. Paulson walked away with $1 billion. Goldman got
> paid its fees. IKB lost its investment, collapsed, and was bailed out by
> the German taxpayers.
> When the Securities and Exchange Commission got wind of this duplicity,
> it charged Goldman Sachs with financial fraud, in a complaint
> <http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf> that
> details the timing and particulars. A few months later, Goldman settled
> <https://www.sec.gov/news/press/2010/2010-123.htm> with the SEC by paying
> a fine of $550 million.
>
> Paulson, strangely enough, was not charged by the SEC, and walked away
> with the ill-begotten $1 billion. In a Wall Street community that prizes
> money far above honesty, Paulson was hailed for his genius in the deal.
> He was the toast of the town. Goldman’s CEO Lloyd Blankfein, for his > part, was so satisfied following the onset of the financial meltdown that
> he boasted that he was doing “God’s work.”
> <http://www.businessinsider.com/lloyd-blankfein-says-he-is-doing-gods-
> work-2009-11?IR=T>
>
> In giving away the money of the German people, Paulson did not display
> any evident acknowledgement of the true nature of his ill-gotten gains.
> Nor did Harvard make a fine point of the matter. The Harvard Business
> School Dean described Paulson as “the epitome of a visionary leader.”
> <http://news.harvard.edu/gazette/story/2015/06/harvard-receives-its-
> largest-gift/> The Romans used to say of ill-gotten lucre, *”pecunia non
> olet”* (“money doesn’t stink”).
>
> Note that Paulson only turned over to Harvard less than half of his ill-
> gotten windfall from the Abacus fraud, $400 million of $1 billion. He has
> pocketed the rest, plus billions dollars more that one reasonably
> suspects have a similar origin. The whole sordid experience reminds one
> of a Soviet-era story.
> A Russian babushka (grandmother) is praying in a church for 10 rubles for
> a winter coat. The Soviet commissar passing by the church is disgusted,
> and hands the women 5 rubles to go buy a tattered winter coat. Later he
> is surprised to see her back at the church praying once again. He moves
> closer to listen in on her prayers. “Thank you, God, for sending the 10
> rubles, but next time don’t send it through the Communists; they kept 5.”
>
> We can say the same to the German people. Thank you for endowing
> Harvard’s Engineering School. But next time don’t send it through John
> Paulson; he kept $600 million of it. The least the rest of us can do is
> call the school by its rightful name: the Harvard IKB School of
> Engineering.
> Jeff Sachs Articles  www.jeffsachs.org by Sonia Sachs
> http://tinyletter.com/ssachs
> 61 Claremont Ave New York, NY 10027 USA

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