MEMORANDUM

To: Mortgage Capital Committee

Egol--------------
David Gerst
Cc:
Date:
Re:
Jordan Kaufman
Darren Thomas
Fabrice Tourre
Geoff Williams
Shin Yukawa
Armen Avanessians
Robert Berry
Justin Gmelich
Margaret Holen
Bill McMahon
Bunty Bohra
Slim Bentami
Josh Birnbaum
David Lehman
Peter Ostrem
Matt Schroeder
Mike Swenson
Mike Turok
Steve Elia
Glade Jacobsen
Rob Leventhal
Darren Littlejohn
Mary Marr
Mitch Resnick
March 12, 2007
ABACUS Transaction sponsored by ACA
I. Introduction
Goldman
Sac.hs
The Structured Product Correlation Trading Desk is currently structuring a synthetic COO, ABACUS 2007-
AC1 ("AC1", or the "Transaction"). AC1 will reference a $2 billion static portfolio consisting entirely of
Baa2-rated midprime and subprime RMBS (such portfolio, the "Reference Portfolio"). ACA Capital
Management (the "Portfolio Selection Agent"), will be the portfolio selection agent for the transaction. The
Desk will distribute on a best efforts basis the super senior through AlA2 layers of credit risk of AC1 (such
risk layers, the "Targeted Tranches"), and consistent with prior ABACUS transactions, Goldman will act as
protection buyer in connection with the Transaction. Simultaneously with the distribution of AC1, Goldman
will write protection on the Targeted Tranches to Paulson Credit Opportunities Master Ltd. ("Paulson").
Goldman will receive an upfront premium from Paulson for distributing risk at or within specified strike
spreads. Through this arrangement, Goldman is effectively working an order for Paulson to buy
protection on specific layers of the AC1 capital structure at or inside specific spread levels.
Permanent Subcommittee on Investigations
EXHIBIT #118
Confidential Treatment Requested by Goldr GS MBS-E-002406025
FILED: NEW YORK COUNTY CLERK 03/08/2011
INDEX NO. 650027/2011
NYSCEF DOC. NO. 13-3 RECEIVED NYSCEF: 03/08/2011
and margin terms of such exposure will be reviewed and approved by Legal and Credit prior to execution
of such private CDS trades.
The expected issuance is summarized below:
Notional ACA Expected
Amount Selection Ratings Target Investors I

Super Senior (al
1,100.00 45.00% - 100.00%
CiassA1 200.00 35.00% - 45.00%
ClassA2 180.00 21.00% - 35.00%
Class B 60.00 18.00% - 21.00%
Class C 100.00 13.00% - 18.00%
Class 0 60.00 10.00% -13.00%
First Loss 200.00 0.00% - 10.00%
Total
2,000.00
NA
0.250%
0.250%
0.500%
0.500%
1.000%
NA
Not Applicable
Aaa/AAA
Aaa/AAA
Aa2/M
Aa3/M-
A2/A
NRlNR
ACA, other hedge
funds, monolines
Syndicated Tranche
Syndicated Tranche
Syndicated Tranche
Syndicated Tranche
Syndicated Tranche
Not Offered
<al We expect to buy protection on the super senior tranche of the AC 1 transaction from one or more suitable counterparties. Such
super senior trade would be executed in the form of a private credit default swap transaction.
(b) ACA will earn portfolio selection fees accrued actuall360 and paid monthly on the outstanding notional amount (as reduced from
time-to-time by amortization or credit losses) of the Notes as set forth above.
We expect on the closing date to issue up to $700 million of Notes as summarized in the table above. All
of the Notes will be rated by both S&P and Moody's.
We intend to target suitable structured product investors who have previously participated in ACA-
managed cashflow COO transactions or who have previously partiCipated in prior ABACUS transactions.
The Notes will have a legal maturity of 30 years. However, the expected average life of the Notes will be
between 3 and 5 years. Goldman shall have the option to terminate the CDS and cause one or more
classes of Notes to be redeemed on any payment date occurring on or after 2 years following the closing
date.
The Reference Portfolio has been selected and mutually agreed upon by ACA and Goldman. Following is
a summary of the Reference Portfolio characteristics expected to pertain as of the pricing date:
90 equally-sized Reference Obligations, $22.22 million notional per name.
Each Reference Obligation is a mid prime or subprime RMBS obligation.
All of the Reference Obligations were issued after January 1, 2006.
Each Reference Obligation has an actual rating by Moody's of "Baa2".
Pursuant to a portfolio selection agency agreement that ACA will enter into on the Closing Date with the
Issuer, ACA will select the initial Reference Portfolio. Following the Closing Date, the Reference Portfolio
will remain static, and no discretionary removals, substitutions nor reinvestments will be permitted.
3
f:nnfidential Treatment Reauested bv Goldman Sachs GS MBS-E-002406027
III. ACA's role
ACA Capital Management (the "Portfolio Selection Agent"), will be the portfolio selection agent for the
transaction. ACA has selected a Reference Portfolio of 90 Baa2 rated RMBS obligations for the
Transaction. ACA has approximately $16 billion of assets in 22 CDOs under management. ACA currently
employs 30 full-time professionals who are dedicated to the CDO asset management business and is
active in both the cash and synthetic structured product markets. We expect to leverage ACA's credibility
- ~ ~ - - - ~ - - - _____ and_francbise Jo_belp_dislrihute_tbis Transaction.
- - - ~ ~ ----- ------ - ~ - - - --- -
The financial guarantee insurance company arm of ACA has also indicated its interest in participating as
risk taker at the supersenior level of the capital structure. ACA has indicated that they would have interest
in writing protection on the 45% - 100% supersenior tranche of the Reference Portfolio at a spread of
approximately 40bps. This level does not include intermediation costs that will be incurred in order to be
able to hedge the ACA counterparty risk. We expect the cost of such intermediation to be 10bps p.a. The
Desk is still working on identifying counterparties that will be able to take ACA's counterparty risk.
IV. Paulson's role
Paulson is a large macro hedge fund that has taken directional views on the subprime RMBS market for
the past few months. In 2006 the Desk worked an order for Paulson to buy protection on a supersenior
tranche off a portfOlio similar to the Reference Portfolio selected by ACA, and the AC1 Transaction is
another mean for Paulson to accomplish their trading objective: buying protection in tranched format on
the subprime RMBS market.
The Desk expects to enter over the next few days into a letter agreement with Paulson. Under such
agreement, Goldman will work an order for Paulson to buy protection on specific layers of the AC1 capital
structure (such layers, the "Targeted Tranches") at or inside specific spread levels (the "Strike Spreads').
If Goldman succeeds in placing a given Targeted Tranche inside the related Strike Spread, Goldman will
receive from Paulson a fee on the notional amount of such Targeted Tranche distributed. Such fee will
have a floor component (the "Minimum Fee Rate") and an upside sharing component, under which
Goldman will share with Paulson any execution delivered at levels tighter than the Strike Spreads.
Using reasonable pricing assumptions for the super senior and the mezzanine layers of risk as disclosed
below, in conjunction with the strike Spreads that we expect to negotiate with Paulson, we project the all-
in profit for this transaction to be between $15mm and $20mm.
Expected Expected
Ratings Strike Spread PriCing Spread
Tranche (Moody's/S&P) (% p.a.) (% p.a.)
Super Senior (a)
Not Applicable 0.95% 0.50%
Class A1 Aaa/AAA L+1.25% L+1.00%
Class A2 Aaa/AM L+1.50% L+1.25%
Class B Aa2/AA L+2.40% L+1.75%
ClassC Aa3/AA- L+2.90% L+2.50%
Class D A2/A L+5.75% L+5.00%
First Loss NRlNR NA NA
V. Accounting Treatment
With respect to Goldman's accounting treatment, AC1 has been reviewed and approved by Mary Marr in
Accounting Policy, and the transaction contains the same structural provisions which were approved by
Accounting Policy for the prior ABACUS transactions. In particular, given that the junior-most class of
notes in each transaction is exposed to the substantial majority of expected losses in the structure and
4
Confidential Treatment Requested by Goldman Sachs GS MBS-E-002406028
the expectation that Goldman will not purchase any of the junior-most class of notes, Accounting Policy is
comfortable that Goldman would not be required to consolidate the transaction. Similar to the prior
ABACUS transactions, AC1 uses the so-called Beneficial Interest Exchange ("BIEj Option structure
approved by Accounting Policy which permits Goldman to sell the initial triple-A collateral to the Issuer at
fair market value without requiring Goldman to consolidate the transaction. The BIE Option allows
noteholders to substitute the triple-A collateral securities held by the Issuer with other eligible securities of
their choosing, subject to approval of Goldman (such approval not to be unreasonably withheld).
-----
regulatory and accounting considerations. To the extent Goldman was to purchase Notes on the Closing
Date, further review might be required to confirm the FIN 46 and FAS 140 analysis of this transaction. lim
Saunders has received this memo and will sign off on the legal considerations prior to priCing.
P&L recognition and valuation adjustments for ABACUS transactions will follow the valuation adjustment
policy as approved by Brian Lee and Rob Leventhal in Controllers. As noted above, we expect to have full
capital structure price observability on the pricing date.
The CDS transaction will be marked to market, and P&L will be recognized reflecting observable spread
movements on the reference obligations. For example, a general widening of spreads, holding implied
correlation constant, would result in the recognition of a gain on the transaction, and conversely a general
tightening of spreads would result in the recognition of a loss. Spreads on the reference obligations will be
marked to market by the secondary traders responsible for cash and synthetic trading of such securities,
and will be subject to price verification by Controllers. However, so long as Goldman's offsetting credit
default swap trades with Paulson remain outstanding, Goldman should remain mark to market neutral
following any such spread movements.
VI. Model and Booking Policy
There is not yet an industry standard model. for ABACUS type transactions. FICC Strategies have
developed and Derivatives Analysis has approved a pricing model and tradable infrastructure specifically
for the ABACUS CDS transactions which are in compliance with Firm policy. The model reflects the
economic and legal structure of the reference obligations, the specialized credit events and settlement
mechanisms applicable to the ABACUS CDS transactions, and a correlation framework for the structured
product portfolios referenced in the ABACUS CDS transactions. This ABACUS CDS model is fully
consistent with the pricing model and infrastructure which has already been put in place for single-name
credit default swaps on structured products. No model waiver will be required for this transaction.
As with the prior ABACUS transactions, the issuance of Notes will require the relevant Goldman affiliates
to enter into a new basis swap and a new collateral security put. These aspects of the ABACUS structure
are described in more detail in the Appendix. FICC Strategies has recently developed a pricing model for
the basis swap and the put options for ABACUS trades. This model has been blessed by FICC Strategies,
approved by Derivatives Analysis and affirmed by Model Control.
VII. Strengths !Issues to Consider
Strengths
Franchise: This transaction is a new and innovative transaction for Goldman Sachs and the COO
market; it is the first ABACUS transaction using a Portfolio Selection Agent, using an attractively
structured reference portfolio of Baa2 mid prime and subprime RMBS obligations that will be
appealing to investors, in a challenging market environment. This transaction addresses the
objectives of multiple clients of the firm: it helps ACA increase their assets under management and
their fee income; it enables Paulson to execute a macro hedge on the RMBS market; it offers to COO
investors an attractive product relative to other structured credit products available in the market. Our
ability to structure and execute complicated transactions to meet multiple dient's needs and
objectives is key for our franchise.
Attractive Risk/Return Profile: Goldman is not taking any warehouse risk in this transaction. No
underlying risk is ramped before the execution of AC1, and Goldman's profits come directly from the
purchase of credit protection on tranches of an RMBS portfolio (selected by ACA) from the COO
market and simultaneous re-offering of such protection under the same terms for a pre-negotiated
5
Confidential Treatment Requested by Goldman Sachs GS MBS-E-002406029
premium that will be payable by Paulson. Goldman is therefore acting as agent, but retains the
option to principal this AC1 transaction.
Establish Leadership in Growing Market Segment: Executing this transaction and others like it
helps position Goldman to compete more aggressively in the growing market for synthetics written on
structured products.
Profit: Assuming distribution in full of the super senior through "A2/A" tranches this transaction is
expected to generate, after fees and expenses, between $15 and $20 million in P&L.
Issues to Consider
Potential Conflicts of Interest: Although the reference portfolio has been selected by AC1 as
portfolio selection agent, as in all the ABACUS transactions Goldman is acting as principal as a
protection buyer in these transactions (as well as taking other principal roles summarized in the
Appendix). The transaction disclosure notes the various capacities in which Goldman entities act as
counterparty to the transactions and the risk factors section notes the potential for conflicts of interest.
As with prior ABACUS transactions, we receive advice of outside counsel (McKee Nelson) regarding
disclosure in ABACUS securities offerings and all such disclosure will be reviewed and approved by
Tim Saunders in Legal.
Expense and Protection Cost: The AC1 transaction will entail non-refundable upfront expenses
which are expected to be paid from an upfront expense payment made by Paulson to Goldman
pursuant to the letter agreement expected to be entered into between Goldman and Paulson as well
as ongoing protection costs (inclusive of portfolio selection fees paid to ACA) that will match the
ongoing protection costs payable by Paulson to Goldman under our credit default swaps with
Paulson.
Distribution Cannibalization: This transaction will be appealing to the same type of investors who
traditionally purchase mezzanine ABS COOs. The firm is currently prioritizing the sale of ABS COOs
for which the risk has already been aggregated vs. COOs that have not been ramped. For this
reason the AC1 transaction is only being showed to accounts that have already declined to
participate in other ABS COO transactions where Goldman has taken warehouse risk.
Contingent Market Value Risk on Collateral Securities: Similar to the prior ABACUS transactions,
in the event that some or all of the collateral securities need to be liquidated to fund protection
payments to Goldman under the credit default swap, or to fund certain other principal payments on
the notes, Goldman will be exposed to the risk that such collateral securities have a market value less
than par at the time of liquidation. This risk is mitigated somewhat by the facts that (1) the collateral
securities will be triple-A floating rate structured securities selected by Goldman, (2) Goldman may
select the particular securities to be liquidated and thus may select the securities expected to trade at
or above par at such time and (3) only a relatively small amount of securities are expected to be
liquidated at any given time. The exception to this third point is the case of optional redemption, which
is entirely at Goldman's discretion.
Accounting: We do not expect any consolidation issues with respect to this transaction. P&L
recognition, valuation adjustment policies and infrastructure/control enhancements are continuing
subjects of discussion with Brian Lee and Rob Leventhal in Controllers.
6
Confidential Treatment Requested by Goldman Sachs GS MBS-E-002406030
VIII. Appendix: Structural Summary
The Issuer will enter into a CDS with GSCM (as protection buyer), as well as several other hedging
transactions with other Goldman entities as described below. Under the CDS, the Issuer will be obligated
to pay GSCM for credit losses experienced on the Reference Portfolio to the extent a relevant tranche is
impacted by such losses and the Issuer has sold protection to Goldman under the CDS on such tranche.
In exchange for the protection payments, GSCM will be obligated to pay a stated running premium to the
~ - - .... ------------'lssuer,-whicb..sbalLb.e....UsedJo...mak.e...i.nterest Ra.yments under the notes. _______ . ______ .. _____ ._
No Goldman entity shall be required to own or be otherwise exposed to any of the reference obligations
as a condition for payment under the CDS.
The CDS will be cash settled immediately upon satisfaction of conditions to settlement after a credit
event. All credit events and related settlement mechanics are consistent with the current form of the
Standard Terms Supplement for a Credit Derivative Transaction on a Mortgage- Sacked Security with
Pay-As-You-Go or Physical Settlement (Form I) (Dealer Form) and Form of Confirmation.
The Notes will be collateralized by relatively liquid triple-A structured product securities (none of which
shall be issued by the same issuer as any reference obligation). GSCM (as protection buyer) will have the
right to select the collateral securities, subject however to several constraints specified in the Offering
Circular. Note that selection of high-quality collateral is generally in Goldman's interest and that in this
respect our incentives are largely aligned with that of Noteholders. The collateral securities will be
reviewed by Credit prior to closing.
GSCM will enter into a basis swap with the Issuer, under which the accrued interest payments on the
collateral securities (which bear interest at rates indexed to USOR) will be paid to GSCM and GSCM shall
pay the related Issuer USOR flat. Noteholders will bear the credit risk of collateral security non-payment,
as failure of the Issuer to pay the accrued coupons on the collateral securities to GSCM will be an event
of default under the notes, and GSCM will not be required to continue payments under the basis swap.
Amounts owed to GSCM under the basis swap will be senior to payments due under the notes. The
combination of the USOR index payments by GSCM and the CDS premium by GSCM will always equal
the sum of ongoing expenses of the Issuer and interest payments under the Notes.
The rating agencies require that noteholders be protected against market value declines in the collateral
securities, in the event that collateral must be liquidated to fund (1) cash settlements to GSCM, (2)
amortization of the Notes (other than a mandatory early redemption), or (3) an optional redemption of the
Notes if GSCM exercises its termination option under the CDS.
Goldman, Sachs & Co. (as collateral disposal agent) will select which collateral securities are to be
liquidated in each case above, and will be responsible for determining in good faith the strategy (in its
commercially reasonable discretion) likely to achieve the highest proceeds for the collateral securities to
be liquidated.
In the first circumstance (cash settlements under the CDS), Goldman will bear the risk that the collateral
has declined in value. When a loss amount is determined, a commensurate face amount of collateral will
be liquidated, and GSCM under the CDS will only be entitled to receive such proceeds received on such
liquidation.
With respect to the other two circumstances, GSI (as put provider) shall be required to buy the collateral
securities to be liquidated at par, if GS&Co. (as collateral disposal agent) is unable to obtain a price in the
market of at least par.
In the case of optional termination, the put is not really a risk to Goldman, since our decision to terminate
the transaction will by definition include both the value of the CDS termination and the value of the
collateral securities. We view the put more as a modest reduction in the value of our option to terminate
the CDS.
We believe the put risk arising from amortization of the notes (other than in connection with Goldman
terminating the CDS) is small for the following reasons:
The notes cannot begin to amortize until after the super senior notional has been reduced to zero. We
do not expect any of the Notes to receive any principal payments for at least 4.0 years under base-
case prepayment assumptions.!
7
Confidential Treatment Requested by Goldman Sachs GS MBS-E-002406031
The amount of collateral required to be liquidated in any month is purely a function of reference
portfolio amortizations in that month, which is likely to be small in relation to the principal balance of
the notes and should be smoothly distributed over time.
Goldman (as protection buyer) has the right to direct reinvestment of any principal on collateral
securities. The initial collateral securities are expected to have approximately a 2- to 3-year weighted
average life. In the future, prior to any amortization of the notes occurring, we could direct the trustee
to keep a suitable portion of the collateral invested in cash, incurring more negative carry on our
-------
The spread on the initial collateral securities is expected to be approximately 7-10 bps over UBOR. It is
the put to Goldman which enables us to select high-quality collateral and earn this positive spread over
UBOR in the ABACUS structure. For these reasons outlined above, we believe that this positive carry
generated by the put feature creates significant value for the synthetic transaction and more than
adequately compensates for the put risk.
Lastly, as noted above, in a mandatory ear1y redemption of the Notes (arising from an adverse tax event
or from a default of one or more Goldman entities that are parties to the transaction), the put would not be
exercisable against Goldman, exposing noteholders to the market value of the collateral.
The transaction structure is depicted in the schematic below.

Events
Confidential Treatment Requested by Goldman Sachs
8

! 1
i Super Senior I
. Amount I
!
L. __ . ___ . __ J
GS MBS-E-002406032