Archive for the ‘CDO’ Category

On April 20, David Letterman read the Top Ten Goldman Sachs Excuses.  Oddly, the list includes all three of Goldman’s main arguments against the SEC charges.  See if you can guess which three (answers below):

(Link) Tuesday, April 20, 2010
Top Ten Goldman Sachs Excuses


9.You’re saying “fraud” like it’s a bad thing

8.Planned on using money to buy everyone in America delicious KFC Double Down sandwich

7.Distraught over George Lopez’s move to midnight

6.We were framed by evil menswear company Goldman Slacks

5.Since when are financial institutions not allowed to screw their customers?

4.Hey sport, how much to make these questions go away?

3.America needed a villain both Republicans and Democrats can hate

2.Everyone we ripped off got an “I Got Cheated By Goldman Sachs” tote bag

1.Uhh, it’s Obama’s fault?

Answers: 9 and 5 (and a little 10).  Seriously.  The defenses so far center around the idea that not disclosing that short interest selected the mortgages to put into this particular synthetic CDO deal was not illegal. The argument is that their customers should be aware that they may be trying to screw them. And the company seems to be fine with what happened, as long as they were making a buck without doing something illegal (yet to be determined of course).

Question: what is better for Goldman, 1) claiming this was a terrible mistake, that Goldman seeks to always disclose any and all pertinent information to clients, and that the company will build stronger internal safeguards to protect its clients, or 2) the current strategy?  Question: what is better for America?

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According to ProPublica (source) “Magnetar worked with major banks, including Merrill Lynch, Citigroup, and UBS. At least nine banks helped Magnetar hatch deals. Merrill Lynch, Citigroup and UBS all did multiple deals with Magnetar. JPMorgan Chase, often lauded for having avoided the worst of the CDO craze, actually ended up doing one of the riskiest deals with Magnetar, in May 2007, nearly a year after housing prices started to decline. According to marketing material and prospectuses, the banks didn’t disclose to CDO investors the role Magnetar played.” And “Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own.” What differs from the Goldman-Paulson situation is: “Magnetar says it never selected the assets that went into its CDOs.”  Fine line between “pushing for what is riskier” and “selecting” but it might be the difference between basing selection on broad ratings/public information and private analysis of what assets were more likely to fail.  Also, I should note that

And I just see that this is what Bloomberg thinks the case hinges on: article here.

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The SEC has proposed new rules governing various aspects of the asset-backed-securities (ABS) market. One in particular is a true surprise:  The SEC wants to require that ABS issuers release Python code (!!) that will codify (literally) the contractual provisions of the ABS. The SEC also wants to reduce the reliance on credit ratings during the issuance process. To think about these proposals, we first need to  remember what an asset-backed security is.


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“We’re structure experts, we’re not underlying-asset experts.”

—Moody’s employee

How exactly did the credit rating agencies assign ratings on collateralized debt obligations backed by mortgages? In “Triple-A Failure” in the April 27 issue of the New York Times Magazine, Roger Lowenstein explains in detail how Moodys rated one such issue, which Lowenstein calls “Subprime XYZ”. Lowenstein’s article is notable for the insight it provides into Moody’s ratings process. The ratings agencies were not the only culprit in this crisis, but they played an important role, and the Lowenstein article helps to elucidate that role. (more…)

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