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What is Goldman Sachs Abacus 2007-AC1?

The Abacus 2007-AC1 financial instrument is at the center of a civil lawsuit filed against Goldman Sachs and Company by the United States Securities and Exchange Commission (SEC).

The Goldman Sachs Abacus 2007-AC1 financial instrument -- what is it?!The Goldman Sachs Abacus 2007-AC1 financial instrument -- what is it?!

The SEC claims in their lawsuit that the Abacus 2007-AC1 securities were designed by Goldman to fail, sold to customers, and that Goldman then took a negative trading position (that is, one that produces profits when the security falls in value) against its own product.

The Abacus 2007-AC1 was originally created by Goldman Sachs for a hedge fund client, the hedge fund managed by John A. Paulson -- which the New York Times reports later posted over $1 billion in profits as a result of that.

The Abacus 2007-AC1 security is an example of a so-called derivative investment; that is an investment security whose underlying value is derived from the value of another security, rather than an underlying item of value. For example, a normal security, such as a share of Microsoft, owns one piece of Microsoft Corporation. In contrast, a derivative security's value would be based on the value of other securities, such as Microsoft. The relationship between the value of the derivative security and the value of the underlying security(ies) can be quite complex and unintuitive.

by Margaret Walker on Mon, 04/19/2010 - 07:00

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