One comment

  1. MichaelC

    Thanks for the clips.

    The dynamic management of the CDOs opens the door to a whole new level of understanding.

    If I understand these two clips, then

    SOC Gen owned Davis Sq CDOs and hedged them with AIG. These were held at SOC Gen in the Negative Basis book. When MLIII was established Soc Gen delivered the CDO to the FED and terminated the CDS with AIG, leaving SocGen flat.

    Prior to that, TRW had been dynamically managing Davis Sq, loading the Davis Sq CDO (which it’s parent, Soc Gen held in the Neg Basis book)with risky CDOs.

    Why would TRW load more crap into assets on it’s parent’s book? That sounds odd.

    Until we consider that the risk in Davis Sq at SocGen is transferred back to AIG through the guarantee in the neg basis book. Soc Gen remains flat no matter what happens at Davis Sq, so Davis Sq is merely the conduit for delivering more crap to AIG. Soc Gen is effectively renting its balance sheet. And since its already been established that the neg basis book is a bonus looting tool, then I get Soc Gens incentive.

    But who are they acting as a conduit provider for?

    I guess that brings us back to our old freinds GS and the IBs, who created the Davis Sq CDO.

    If the replacement CDOs were synthetics where GS and the IBs are the counterparties, then Davis Sq could be used to house new CDOs created by GS and others to “satisfy their customers demand” for short exposure to subprime. Apparently that could continue till Davis Sq was filled to capacity, or AIG was forced into bankruptcy, whichever came first.

    If this scenario is right, then you could make the case it ls was designed by the IBs, with the aid of Soc Gen, and SocGens subsidiary to drive AIG into the arms of the Govt. GS (or its clients) wins big as the protection buyer on the replacement CDO. And since Cassano’s states that AIG didn’t insure post ’05 subprime, we have to wonder if he was ignorant or complicit as well.

    Since TCW was the largest collateral manager involved in MLIII trades,and if the SocGen neg basisbook/AIG/GS Underwriter template was standard for deals TCW managed that ended up in MLIII, then TCW (and Soc Gen) should be getting as much attention as GS.

    Also, If this scenario is correct, then it would be good to know who created and benefitted from the replacement CDOs, which I guess connect us right back to the “Magnetars” and Lewis’s Big Short heros.

    If the dots are correctly connected here,then the obvious question is: How in the world can anyone make the case that the IBs must be saved or that any of the bonus money attached to this activity is anthing other than fraudulent conveyance?

    And if this scenario is right, it seems like its time to shout, “Hold On!” on regulatory reform, until it can be determined that the reformers understand what happened and that the reforms will prevent the stars from aligning again like this for the IBs in the future.

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