By Colin Barr
July 17, 2010

Are the Scots right to have their kilts in a twist over the Goldman settlement?

As part of its $550 million pact with the Securities and Exchange Commission, Goldman

agreed to pay $250 million to two investors that took big losses when a 2007 subprime debt sale went sour.

Goldman will pay $150 million to IKB, a German bank that bought debt in the Abacus deal. The payment will make IKB whole on its Abacus investment, though it will hardly solve all of IKB’s problems, which include multiple bailouts and the recent conviction of its former chief on stock manipulation charges.

Faring less well on its Abacus exposure will be the Royal Bank of Scotland

. The U.K. financial titan ended up losing $840 million when Abacus went bad, thanks to its purchase of Dutch bank ABN Amro, which in turn had guaranteed a contract written by failed bond insurer ACA.

After all that, RBS will get back just $100 million from Goldman. It’s clear the bank, now majority owned by U.K. taxpayers after its 2008 collapse, isn’t pleased.

RBS said Friday it would “carefully consider all of its options” in the case, suggesting a civil suit against Goldman could be on the way.

And the more the merrier, as far as that goes. Though escaping a fraud judgment will help Goldman defend itself against subprime-related suits, the firm did acknowledge it failed to fully disclose pertinent facts to investors, such as the role short-seller John Paulson played in selecting Abacus investments.

The SEC said it couldn’t comment on how it arrived at the payouts in the settlement, which must yet be approved by a federal judge.

But the account provided in April’s civil suit against Goldman suggests the agency views IKB as twice duped in Goldman’s failure to fully disclose how the investment came together.

The suit alleges Goldman recruited ACA to act as manager, to make the Abacus deal look safer. Goldman and the trader in charge of the deal, Fabrice Tourre, knew IKB “was unlikely to invest in the liabilities of a CDO that did not utilize a collateral manager to analyze and select the reference portfolio,” the suit claimed.

So they hired ACA for the sake of drawing IKB’s investment. They then further misled IKB by failing to disclose short-seller Paulson’s role in selecting the investments, the SEC alleged.

Goldman conceded in its settlement that “it was a mistake” not to disclose Paulson’s role or his short bet.

Goldman also failed to disclose Paulson’s bets against Abacus to ACA, and indeed made representations that suggested he was buying part of the deal, the suit alleged. ACA ended up writing an $840 million insurance policy on the deal – money Goldman then collected from RBS when Abacus went belly-up nine months later.

But that’s just one strike against Goldman in its dealings with ACA, against two in its handling of the IKB relationship.

Beyond that, ACA did have an opportunity to review the investments in the Abacus deal, knowing full well it would be on the hook should they go bad. It didn’t exactly distinguish itself in that role.

It’s often worth ignoring what Warren Buffett has to say in defense of Goldman, given his big stake in the bank. But there is something to what said in May regarding the losses RBS took on ACA’s behalf.

“It’s a little hard for me to get terribly sympathetic that a bank made a dumb credit deal,” he said. And it’s a little hard to make the case a bank that does so should be made whole.

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