Oh, of course, forgot to mention the most important point. If you're gonna sue Goldman for taking both sides of the bet, you'd have to sue every other firm, because they all do the same thing (to various degrees of success) for um... forever. Too bad there isn't a Wall Street Corp for Main Street America to sue.
<object width="640" height="385"><param name="movie" value="http://www.youtube.com/v/sCey_2eEj5Y&hl=en_US&fs=1&"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/sCey_2eEj5Y&hl=en_US&fs=1&" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="640" height="385"></embed></object> From 10:30 onwards, this guy's point is that the SEC is probably going to nail Goldman on the technical issue of not disclosing officially that Paulson was the selecting firm while ACA was disclosed as the selecting firm. The issue here isn't that Goldman is taking both sides of the bet. He goes further saying it doesn't even matter whether the "victims" knew that Paulson was the selecting firm by inference. As long as the prospectus had the wrong information, the SEC will win the case.
Just as an example, I pulled the February 26, 2007 remittance reports for the first 6 bonds in that deal document, right around when Goldman would have structured it. I didn't pull them all because this is meant to be an example, not homework for me. I originally had 20, but my web browser crashed before I could post them so you're down to 6. I'm not doing it again. 1. ABFC06-OPT1 M8 cusip 00075QAM4 Third most subordinated tranche. Deal closed on August 10, 2006. $1,082,162.766.21 (yes, that's a billion) worth of collateral backing $1,046,992,000.00 in bonds. As of February 26, 2007 distribution date, this deal had total delinquency, bankruptcy, foreclosure and REO of $76,344,920.69. And yes, that is 76 million in delinquencies in six months. On top of that it had realized loss (meaning it already went through delinquency, foreclosure, the house auctioned off, whatever amount from the auction paid to the mortgager and the rest of the loans and therefore bonds written down) of $71,304.96, this is great, and I'll explain why later. Right now though, what you need to know is the interesting part. The total amount of bonds subordinate to M8 (that would be the M9, B and CE aka. overcollateralization tranche) total $70,340,766.21. So you add the 71 grand in losses and the 76 mil in delinquency, you'd realize that M8 is already affected. If all the delinquencies don't become current, even assume no further delinquencies on the other bonds (which we now know turned out to be the case), the amount of delinquency around amount to the bonds subordinate to, therefore "supporting" M8, which itself is only 12,445,000.00 at closing date. It hasn't gotten paid a red cent in principal as of Feb 07 because of the way the CMO's are structured. Heck, only 3 of the 6 senior tranches have gotten any principle. And there are still 7 subordinate tranches (M1 to M7, read, senior to you) that haven't gotten their cut to you yet. So if you get wiped out now you would have gotten only interest accumulated thus far. 1 month LIBOR + 0.920%, and not for the life of the mortgage. Your yield would be... Now of course in real life there is a chance a delinquent loan become current again (which we know didn't happen) and even if not, you could auction off the house, pay whatever you get to the mortgage servicer who in turn would pay the bond holder, which in the case of a mortgage (therefore bond secularized from it) in California or Florida of 45 cents on the dollar through. The problem is of course, you are holding one of the most subordinated bonds in a CMO, protecting the seniors, which means the money doesn't get applied evenly at 45 cents across the board. The seniors get paid their full amount and you nibble on whatever is left, assuming there is something left. You get a realized loss. And guess which two states (also Vegas, NYC) are over-represented in sub-prime CMO's due to their obscene real estate prices and therefore, jumbo loans? California and Florida. As is the case here. Prospectus is here, feel free to read if you like: http://www.sec.gov/Archives/edgar/data/1054340/000095013606006572/file1.htm Remittance reports usually require you to sign up (i.e. passwords) and typically require you to be an institutional investor/agent so I won't bother to post the links. You can't access it any ways. The real meat is in the conclusion section, so if you don't like to read, scroll down below. 2. ABFC06.OPT2 M8 cusip 00075XAP2 Third most subordinate tranche. Deal closed October 12, 2006. $1,099,264,082.00 backing $1,072,331,000.00 in bonds. Delinquencies of $45,090,306.35 in 4 month. Bonds subordinate to M8 total $46,719,982.00. M8 is $10,443,000.00 Now the good thing is the amount of delinquencies haven't exceeded the bonds supporting M8 yet. Which means if the situation didn't get worse (which it did, of course) and you are holding the bond to maturity, you'd still get your money back. If you're holding short-term though, well, the first thing you'd face is a certain ratings downgrade. You got a junk bond BBB rating based on losers buying 46 million worth of bonds in even worse shape than you. If they get wiped out, or even if not, just take huge losses, you get downgraded by the rating agencies just like that. Meaning unless you hold to maturity, you take a hit. Oh, realized loss of $0. This is great. Scroll to the conclusion section. 3 and 4. ABSHE06-HE3 M7 and ABSHE06-HE4 M7 Those are UBN's, which only keeps the last 2 years worth of remittance reports on their website. To get the Feb 07 you'd have to e-mail them and I'm not gonna. 5. ACE06-FM2 M8 cusip 00442CAN9 Third most subordinate tranche. Deal closed October 30, 2006. $877,568,719.53 in collateral backing $862,211,000.00 in bonds. Delinquency totaling $112,489,306.13 in 4 months. What is that, 14% of all the mortgages? Bonds subordinate to M8 total $38,612,619.53, which itself is $6,582,000.00. No potential loss or ratings downgrade loss comment here. Do I really have to tell you M8 is gone? Based on historical auction recovery information, M8 face just about a certain death. This is a really bad deal. If you want to use any proof that CMO's and in particular, sub-prime CMO's are the devil's work, this would be a good candidate. It's so bad that they couldn't even get Fitch to put a rating on it when they structured the deal. See why? 6. ACE06-OPT2 M9 cusip 00441YAP7 Private placement. Remittance reports are restricted. 7. ARSI06-W1 M8 cusip 040104RQ6 Third most subordinate tranche. Deal closed February 7, 2006. $2,275,002,590.78 backing $2,209,027,000.00 in bonds. Total delinquency of $267,076,387.76 in a year. $6,924,865.45 of realized loss on top of that. M8 is $31,850,000.00 supported by subs totaling $111,475,490.78 so yes, M8 is probably gone. 8. CARR06-FRE1 M9 cusip 144538AN5 Second most subordinate tranche. Deal closed June 28, 2006. $1,171,839,227.33 in collateral backing $1,107,974,000.00 in bonds. $126,014,954.20 in delinquencies in 8 months. Realized loss of $15,569.89. You can tell this realized loss occurred in mid 06 instead of 07 and beyond because the amount written down is so damn low. Wait couple months and boom. M9 is $13,476,000.00 with $78,513,237.87 subordinate to it. For this one, if things didn't get significantly worse, you might've gotten chump change on the M9. As it turned out... 9. CARR06.FRE2 M8 cusip 14454AAN9 Third most subordinate tranche. Deal closed October 18, 2006. $985,032,503.66 in collateral backing $900,121,525.83 in bonds. $65,032,638.85 in delinquency over 4 months. $0 realized loss. M8 is $12,805,000.00 with $45,310,845.10 subordinate bonds to it. If things hasn't gotten worse, M8 might have recovered, if held to maturity. Otherwise, ratings downgrade loss. Conclusion And now we come to the meat. I want to say the other 14 bonds I looked at (but lost due to the browser crash) were in the same boat, meaning, really really bad. Now yes, it is a sample, meaning the rest of the bonds could be better, in which case I'd owe somebody an apology, but I doubt it. Let's go to: MFW' Guide to Screwing the Dumbass Investor 1. This is not the most interesting part but is the most important. If there's a CMO 101, this would be it. THE MOST SUBORDINATE TRANCHES ARE STRUCTURED TO FAIL IN A SUB-PRIME CMO. As I've mentioned already, how could you turn one of the most illiquid assets liquid and still guarantee higher return for certain class of investors? Somebody else loses. Buy the subordinates all you want as long as you know they are highly speculative so that you don't pay too much for them. 2. I kept saying how it's funny when I pointed out realized losses. It is. See, the process goes something like this. Mortgage goes delinquent, foreclosure, REO, auction, write down whatever you couldn't recuperate from the auction to the mortgage. Duh. Believe it or not (sarcasm), that process typically takes quite some time. Hence, on the other (bond) side, it takes some time for the servicer of the bond to know what amount can be recuperated to pay the bond holder and what amount to write down, called delay or lag in industry-speak. Before that it doesn't get written down. It's just delinquent. And typically (I would say 95%+ of the time), the servicer would pay (or advance) the interest shortfalls as well as principal payment for each period (if any) to the bond holder, taking a hit themselves (you didn't think they earn their 0.5% for free did you). What this means is, if you're a dumbass investor, if you only look at what amount of money paid to you each month, you wouldn't know the deal (therefore you) is in deep **** until they write down the loan, in which case you take a 2, 3, 5 whatever million hit along with the other dumbasses invested in the same or more subordinate tranche. So if you want to screw a dumbass, you'd find a deal with very high delinquencies but no (or very little) realized loss (which is a red flag even for dumbasses). This way, there's a pretty good chance anybody would longed the underlying bond would get wiped out. And even if they don't get wiped out completely, as all bonds subordinate to it get wiped out, the impending rating downgrade would ensure they take a loss. When that happens, guess who's holding the "short" end of the stick? If you are a smart investor, don't even have to have dealt with any bonds/CMO's/whatever, one of the first questions you should have asked is why there is so much delinquency but very little realized loss. Of course, the only way to have high delinquency/low or no realized loss combo is to have mortgages that are delinquent but still in foreclosure proceedings, which even though take a long time (as I've mentioned), takes only months instead of years. This means you MUST find only very recently structured deals. And which years do all the underlying bonds from that synthetic CDO come from? 2006 and 2007. Right when you know a deal has high foreclosure but haven't been hit by losses yet. 3. Despite what Main Street America thinks, sub-prime mortgage-backed securities pre 2005 (and certainly pre 2004) are of very high quality. Typically they are people with some trouble but nothing significant, short credit history (say young professionals) or just happen to be people living in jumbo loan areas. This meant CMO's backed by their loans are of pretty decent (definitely not great) quality. Those are the ones first picked off by the savvy investors. Post 2005 though, completely different story. All the good mortgages and bonds have been picked off. If you want to secularize more, you'd have to pick from the trash. Then of course, Paulson wanted to short the ones that are the trashiest of the trash and of course, high delinquency no realize loss, both of which means if you are gonna create a synthetic CDO, you'd pick from, guess what, 2006 and 2007 most subordinate bonds. And certainly when you see delinquencies/defaults go up See how that all tie together? So how much did that "arcane math" took me? About 10 minutes. For 20 bonds. With the majority of the time spent filing the filing. All you had to do was find the filings, which by the way are ALL PUBLIC INFORMATION. So for the 90 underlying bonds (if you want to do the whole thing), 45 minutes worth of work. Took me longer typing this explanation (a lot copying and pasting) than realize that deal was ****. Now obviously, if you wanted to price the bond, find the yield, duration, convexity, yield sensitivity, etc, you'd have to have FAR FAR FAR... FAR FAR FAR deeper understanding of field than this quick and dirty analysis. But even with this quick 5 minute analysis (especially if you have an analytics tool, which I think most institutional investors would have), there should be no question that these deal is set up for the short bet, i.e. Paulson stacked the deck. And this isn't one of those "hindsight is 20/20" things. Even if you didn't know the sub-prime crisis is coming (in which case you're incompetent), if you even had rudimentary knowledge of how the damn thing work, you'd have know not to long the deal. Put simply, the trader should be fired, PERIOD. I see that Paulson went from a relative nobody to managing $32 billion. Third largest hedge fund baby. Deserved? I leave that to you to answer. Last but certainly not the least, sub-prime CMO's, CMO's or MBS in general is a very legit investment and risk management tool. The problem is, with the easy money policy as the prevailing condition in the US, it was only a matter of time before something collapsed. If it wasn't the sub-primes it would have been credit cards, student loans, CMBS's and what have you. As it turned out, it was just the sub-prime CMO's turn.
-- It's called politics and trying again to fool the American people, yet again. -- Obama's ex-advisor is the new GS laywer. http://www.nytimes.com/2010/04/21/business/21craig.html?src=busln "Word that President Obama’s former White House counsel, Gregory Craig, is now representing Goldman Sachs led the administration on Tuesday to say that it had no advance knowledge of the move and to distance itself from any suggestion that Mr. Craig might try to lobby the government on behalf of the investment firm." -- GS donated $1,000,000 to Obama' campaign. --It's called breaking another promiss. http://www.msnbc.msn.com/id/28767687/ "Obama's new lobbying rules will ban aides from trying to influence the administration when they leave his staff. Those already hired will be banned from working on matters they have previously lobbied on, or to approach agencies that they once targeted. The new rules also stipulate that anyone who leaves his administration cannot try to influence former friends and colleagues for at least two years. Obama is requiring all staff to attend to an ethics briefing like one he said he attended last week. Obama called the rules tighter "than under any other administration in history." They followed pledges during his campaign to be strict about the influence of lobbyists in his White House. "The new rules on lobbying alone, no matter how tough, are not enough to fix a broken system in Washington," he said. "That's why I'm also setting rules that govern not just lobbyists but all those who have been selected to serve in my administration."
Being a lawyer isn't the same as being a lobbyist influencing Washington staff, congress, or the Whitehouse. This has nothing to do with that promise. Influence would be if Obama's whitehouse dropped the charge, not proceeded with the prosecution.
^ It's called franchiseblade taking the bait and helping the pretendian in his derailment That's not what they're being sued for however. it wasn't the fact they were on both sides, it was the fact that they are alleged to have basically constructed a rigged game via the Fabulous Fab, and they're being sued for 10b-5 disclosure violations as a part of that game.
Good work summarizing the whole GS scheme. You can blame the investors too but the fact is that there is probably little price transparency on these sort of investments and they never should have even thought about investing in these assets. If people knew how to properly value mortgage related assets (no one really does), you would have seen more Paulson-like investors making a killing on the market collapse and less of the established mortgage banks blowning up.
This ignores the key fact that a bubble can go on for a long, long time. It's easy to say, now knowing when it popped, that these investments were terrible. But had the housing bubble lasted a few years longer, these may not have been such terrible bets. And while it's easy to say "the bubble would pop", it wasn't nearly as easy to say that the bubble would pop in 2008. It could just as easily have popped in 2006 or 2010 or 2020.
We have laws against gambling but we will allow people to bet on other people not being able to pay their rent? I can understand banks taking out such policies, but other uninterested parties?
Sigh yes, the good old 10b-5. Tell me Sammy, was there any proof that Goldman actually went out and said "hey guys, you gotta buy this, this it's a great investment?" They created a game in which one of their clients wanted (and has a chance to profit from) and then went out a solicited on his behalf. I see no evidence where they deceived the investor about its return. As a matter of fact, if you read the news articles, you'd know there are Goldman traders who thought they should've taken the long position. There was a claim by the SEC that ACA was misled into believing Paulson & Co. was long the CDO. Well, Paolo Pellegrini is on record as saying they met ACA and communicated clearly that Paulson & Co. is short the CDO. ACA did not refute that claim. So far, the SEC's only potential case seem to be the "omit to state material fact" through the "picked by ACA" part. I'm sorry, I don't get that line of reasoning. CMO's and CDO's certainly are very complex, but what's not transparent about them? Could Intex have told you those bonds were doomed to fail? Yes. Could the Yield Book have told you those bonds were doomed to fail? Yes. Could BondEdge have told you those bonds were doomed to fail? Yes. Hell, I think even Bloomberg, the data company (do they loss model yet) could have told you those bonds were doomed to fail. How long does it take in those tools? 30 seconds. Create a portfolio, copy the cusips, insert your assumptions, calculate. Can't afford multi-million dollar analytics tools? Do it manually (like I did). Would have told you those bonds were doomed to fail. You didn't even have to be right about the sub-prime crisis, just have enough knowledge of CMO's and CDO's and you'd know it's probably a losing trade. In your post you said no one really know how to value mortgage related assets, that's not really true. It not a matter of do they know. It's a matter of could they, because they can't predict the future. The problem really is a lot of the people who trade such products do not have understanding of such products. And even if did, their prices are assumptions dependent (because after all, they are not vanilla bonds). So you could be clueless and wrong on assumptions (like IKB), knowledgeable but wrong on assumptions (like Goldman, who took the wrong side of the trade as well because of their wrong assumptions) or knowledgeable and right on assumptions (like Paulson). So Paulson ended up being the only one who earned money. Lastly, yes, most people should not be trading such products. Why did IKB and ABN Ambro do it? Did they run out of corporate bonds to trade? If they didn't understand, there's no reason to do it.
Who cares? That's not the rule of 10b-5. A materially misleading misrepresentation in offering documents (in this case, the misrepresentation of the portfolio as having been chosen by ACA rather than Paulson so that he could short them) i pretty clearly qualifies as a manipulative or deceptive device in connection with the purchase or sale of securities under any interpretation of the rule. If that's what GS is going to hang their legal hopes on, they're going to lose.
This is exactly what I said in #42 Is it true that the even if Goldman can prove that the "victims" knew that Paulson was the selecting firm by inference/construction (eg. Goldman proves through emails/phone records that the victims were talking to Paulson about the deal), Goldman would still be in trouble as long as the prospectus had the wrong information?
Of course you knew these structured products would fail as would anyone with 10 minutes of due dilligence. I was saying that the investors probably shouldn't even have been investing in them to start with, regardless if the products were rigged or not. CMO and CDO pricing is far from perfect. So if the experts aren't certain what they are really worth, how can the investors? The investors deserve some of the blame for not doing their research and for getting in over their head.
These Senate hearings are great if anybody is watching. Carl Levin just set a record for use of the term "shi-tty" in a Senate proceeding, I think. I can't wait to see Stewart/Colbert do something with that one.
Know what that is Sammy? That's a catch-all clause. That's basically saying we can't find any fault with your action under the pre-existing rules so let's throw this in there where we could throw at you... just in case. Wonder why the need for boilerplate disclaimers? And no, that's not Goldman's defense. Goldman's defense is that ACA DID pick the securities, which they did. No one said anything about whether anyone influenced their decisions. To sum it up, Goldman said that ACA had the final say regarding whatever was picked, which they did. Without getting to philosophical about this, it's pretty simple isn't it? I would suspect that most of us would like to invest. If not, good luck to you, I don't know how you would even pull it off because that would preclude you from buying a house as well. For the rest of us who would like to invest though, that involves you making some kind of expression regarding the future, and that's the bottom line. Let's use stocks for example, because [sarcasm]everybody understands stock[/sarcasm]. Anyone who took finance 101 can tell you the price of the stock is the discounted cash flows right? So in buying stock, you've made an opinion regarding the future. Bonds, CMO's, CDO's and other fixed income products are the same way. It's the sum of the discounted cash flows in which you believe would occur in the future. In order to make that stream of cash flows, you have to make assumptions regarding what will happen in the future, as you have to with stock. And if you were able to make the right assumptions, pricing those bonds would actually be very simple. The problem is we can't predict the future. But that does not mean "no one knows how to price them" as you stated in your previous post unless you were to draw the conclusion that know one knows how to price stocks either. Forget about how much money a company will earn. We don't know if it will remain a going concern and how long it will remain a going concern. Now of course CMO's and CDO's are much more complex than vanilla stock, which is why I would agree with the assessment as being "hard to value assets." But I think calling for their outright ban (I don't remember who did) would be going way overboard. Last but not the least, I forgot to mention this in my previous post, I just can't believe how dumb those investors/ACA were. Did it occur to them why the need for a synthetic CDO? If someone on the other side want to take an equity position, they could have just gone out and bought the underlying (or substantially similar) assets. Or if they thought that would be too expensive (hard to imagine it being more expensive than paying Goldman millions in fees to structure a deal) they could have bought substantially similar Re-REMIC's. There wasn't much need for an investor to take a long position on a synthetic CDO that he couldn't have done cheaper through other means. The only reason anyone would go through the trouble is to short the underlying CMO's, which you couldn't have done without a CDS or synthetic CDO. You could sell your long position you hold, but that still wouldn't be taking an adverse view. There's no way they shouldn't have know the other side was a short.
Can someone tell me how Susan Collins could get elected, even in Maine? I thought the hearing was very amusing. You are asking the head of Mortgage products division to answer specific questions regarding positions and profit/loss from those positions specific traders did from 3, 4 years back? That's pure comedy.
10b-5 is not really a catch all clause - there's a lot of common law tests that courts have devised to interpret its terms.
Sam, we have certainly had our little entertaining disagreements on this board, but if you can support the cause of getting these people by the balls, I support you on this.
