Congress
The U.S. Congress (Congress news) has played a behind the scenes role in the Goldman Sachs CDO controversy. Designated to oversee the financial industry, it was Congress that passed the legislation that allowed Goldman's corporate abuses to occur. So while Congressional legislators are chastising Goldman for simultaneously creating CDOs and betting against them, the practice remains legal under laws they've enacted. Thanks in part to Congress, current financial securities laws have enabled firms to get powerful and manipulative. Fortunately, a financial reform bill that would overhaul industry regulation passed in the Senate last Thursday. The bill moves to a House-Senate conference committee, with a unified bill expected to pass July 4. During this uncertain regulatory climate, Congress must act quickly to pass what may be the much needed remedy for the maladies plaguing the financial industry. Successful passage could compensate for lawmakers' lackluster performance at the Goldman hearing, at which many appeared ill-informed about the financial matters surrounding the case.

Paulson & Co.
In the Abacus deal, hedge fund manager John Paulson of Paulson & Co. (John Paulson news) was in charge of selecting the collateral for the portfolio. Paulson picked CDOs he thought would perform poorly and bet against them. So, when the Abacus CDOs failed a few months later, the hedge fund made about $1 billion, while investors lost $1 billion. Paulson, known for betting against mortgage securities, was not charged by the SEC.

Fiscally, Paulson & Co. certainly came out on top. But its strategic involvement in the Abacus deal--and the nondisclosure of that involvement--is causing negative repercussions within the financial industry. Paulson's actions have tarnished the reputation of the powerful hedge fund and, more importantly, generated an air of apprehension among hedge fund investors. Perhaps investor concerns will diminish with the passage of the final financial reform bill anticipated this summer. Both the House and Senate versions require all hedge fund advisers over a certain size to register with the SEC, a move toward improving regulatory oversight.