Who is Next in the SEC’s Crosshairs? Some Possible (and Heretofore Overlooked) Suspects

By Yves Smith and Tom Adams, an attorney and former monoline executive

Both the traditional media and the blogosphere have taken an almost obsessive interest in the suit the SEC filed against Goldman last week with regard to one of its synthetic real estate related CDOs, Abacus 2007 AC1. Goldman’s shares and the stock market in general traded down, presumably seeing this suit as a turn in the tide, an end of the US government’s supine stance on questionable practices in the financial service sector.

Although the Wall Street Journal is reporting that the SEC is widening its investigation, so far it appears to be going only after very low hanging fruit. While the Journal notes that the SEC is looking into specific CDOs issued by Merrill, UBS, and Deutsche Bank, in all the examples mentioned, there is an existing private lawsuit against the investment bank. As we discuss in detail below, we think this initial salvo falls well short of the universe of possible miscreants.

So the big question remains: how aggressively will the SEC pursue these cases? As John Bougearel noted in an earlier post, it is too early to tell whether this suit is indeed the beginning of a concerted initiative (with the initial litigation allowing the SEC to perfect its legal arguments and uncover more information through the discovery process) or simply an effort to address (as in appease) to a public mad as hell about no-questions-asked bank bailouts and continuing subsidies to the financial services industry.

And while many commentators have focused on the quality of the SEC”s apparent case, the truth is it is far too early to tell. The claims do look strong enough to survive summary judgment, which means the SEC will be able to seek more information from Goldman, Paulson, former ACA staffers, and various counterparties. It can add claims if it wants to as the case progresses.

And as other have noted, the odds are high that even if Goldman wins (or more likely, settles), it comes out the loser. When Procter & Gamble and other large companies sued Bankers Trust over losses they sustained on derivatives trades gone bad, many observers argued they didn’t have much of a case. Procter in particular had a sophisticated treasury operation; how could experienced market players claim they had been duped? The litigation appeared to be an effort to stem losses on bad bets.

But when P&G obtained access to taped conversations of BT staff discussing their and others’ trades, public opinion shifted dramatically. The bank’s posture was openly predatory (the most infamous quote was “Funny business, you know? Lure people into that calm and then just totally fuck ’em.”). BT never recovered from the scandal, but it took a second run-in with the authorities (failing to turn abandoned client assets over to the state) that led to the bank’s sale to Deutsche Bank.

Assuming that the Goldman suit is the first step in a bigger initiative, where might the SEC and private claimants go next? There would seem to be at least three obvious channels: other John Paulson-related CDOs; non-Paulson Goldman Abacus trades; synthetic CDO programs like Abacus, apparently for the banks’ own accounts (the most notable example being Deutsche Bank’s Start program) and the Magnetar CDOs, which were structurally different than the Paulson program but appear to have been designed with the same intent, namely using a CDO to gain access to credit default swaps on particularly drecky subprime debt at cheap price (since the use of a CDO lured some counterparties into accepting AAA prices for at best BBB risk).

Greg Zuckerman’s book The Greatest Trade Ever discusses the origin of the synthetic CDO, and depicts Paulson as the moving force behind them, attributing $5 billion of CDOs to him. According to Zuckerman, Paulson approached Goldman, Deutshce Bank, and Bear Stearns in 2006 about launching synthetic CDOs that he would sponsor in return for taking down the ENTIRE short side (as in all of the CDS used to provide the cash flow for the CDO). Bear Stearns found the idea to be unethical (!) while Goldman and Deutsche went ahead.

Various commentors, including this blog (and later in an extensively researched New York Times story) have observed that Goldman’s Abacus program (25 deals, totaling over $10 billion) appeared to be designed to serve Goldman’s desire to put on a short position, yet presented to customers as no different than other CDOs. Deutsche Bank’s less widely discussed Start program appears to be along the same lines.

Although one of Magnetar’s deals is also on the list of cases the SEC is probing, this CDO (Norma) has been in the press since 2007, when it was the focus of one of the very first stories on dodgy CDOs, this one published by the Wall Street Journal. Magnetar’s program was far and away the largest of all the subprime short strategies that used synthetic or heavily synthetic CDOs as a major component. Our tally of the trades (more complete than ProPublica’s) puts the total at 29 transactions with a total par value of over $37 billion.

We’ve sorted the deals by banker, since the winks and nods that might have occurred between the dealer and the hedgie sponsoring the deal could have operated across multiple transactions. The list shows that some major CDO players have not yet received much critical scrutiny for their role in working with CDO sponsors who appear likely to have designed the deals to fail, namely Calyon, Mizuho, Citigroup, Lehman, and Wachovia. We’ve also put Calyon and Mizhuo together on our spreadsheet, since the team at Calyon decamped to Mizhuo (while any legal action would presumably target the bank-issuer, plaintiffs might want to examine the conduct of the professionals at both firms).

In other words, there is a lot of dirt if the SEC chooses to dig. And it is far too early to tell whether they have the Administration support and the bloodymindedness to do so.

Andrew Dittmer and Richard Smith contributed to this post

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  1. fiscalliberal

    Yves – to the lay reader, it gets confusing regarding who is selling the shorts to people like Paulson and why they see the benefit in doing it.The AIG model seems to be unsustainable, so what is being done different now to continue the practice, and who is doing it. Would pricing not increase diminishing the practice?

    The public needs a whole bunch of sunshine to get a view of what is going on

    1. NS

      I agree with you but along with sunshine, DISINFECTANT is also required upon unearthing the creeping filth under the rock which appears to be golden.

      Its full of bedbugs which have sucked Main Streets dry from around the world. I didn’t have a choice, I didn’t want to play in their sandbox but they played in mine, crushed my sandcastle, sole my lunch and then kicked stand in my face while laughing.

      I won’t be impressed until there are tangible changes, structural changes which slams the door shut and puts a massive lock on it. I can only dream of clawbacks.

      Clearly the grand experiment gone wrong of the CFMA and GBLA with complicit and connected ratings agencies, regulatory authorities (in particular the CFTC and OUT TO LUNCH DOJ), etc. is FALSE and FAILED. We can either hit another iceberg or turn the ship around.

    2. AJ

      If I’m understanding things correctly, the answer to who was taking the other side of the CDS trades is that they were being turned into synthetic CDOs and sold to investors, 80% of which were rated AAA.

    1. charles

      A view from Europe: to be a little more precise, Rabo has
      a lawsuit in Europe ongoing against Merrill Lynch, related to
      “Norma”, one of the CDOs assembled by the other hedge-fund Magnetar and has just made contact with the S.E.C to inform them of the ongoing proceeds.

  2. DownSouth

    The role that Alan Greenspan played in all this should not be overlooked.

    As Kevin Phillips observes in Wealth and Democracy,

    Corruption, like larceny, comes in many forms, some blatant, others more subtle. Booms, speculative heydays, and other periods of money worship bring the highest rations of both corruptions, the hard and the soft.

    And it was in the role of “soft” corruption where Greenspan, informed by the sociopathic ideologies of Ayn Rand, played such a devastating role. As Phillips goes on to point out, the soft corruption, like that offered up by the Greenspans of the world, dovetails perfectly with the overt corruption of the likes of Goldman, John Paulson and Deutsche Bank:

    Less obtrusive but at least as important has been the corollary corruption of thinking and writing—-the distortions of ideas and value systems to favor wealth and the biases of “economic man.”

    It should come as no surprise that, after Greenspan retired from the FED, he had his payday waiting for him with Paulson and Deutsche Bank:

    Alan Greenspan, the former Federal Reserve chairman, is reportedly joining Paulson & Company. This is a major addition the company, but some have questioned its reasoning for hiring Greenspan.


    Greenspan is also holds a position with Deutsche Bank….

    1. Doug Terpstra

      DownSouth, you always find the heart of it. How suspicious it is indeed that the maestro bubble-blower Greenspan directly enabled pirates like Paulson & Co to blow-up and loot the economy and then signed on as exclusive advisor (non-disclosed fees) immediately after his retirement.

      That occurred over two years ago, in January of 2008. Here’s what Yves Smith said at the time.

      “Ooh, I am ill. … In keeping with Greenspan’s tutelage at the knee of Ayn Rand, he has exercised his right not to be constrained by propriety or other rules that govern little men and has gone and sold himself to what is no doubt the highest bidder, Paulson & Company. …

      It’s one thing for Greenspan to sell books and give speeches to try to salvage his reputation. Nixon did that too, with more success and less profit. It is quite another for him to benefit in a far more direct fashion from the devastation he created, by hooking up with the fund that scored the biggest kill from the worst aspects of the negative real interest rates that Greenspan put into effect.

      Overly cheap credit always and inevitably leads to bad investments, And Greenspan of all people should have known that. How he can rationalize his actions then and now is beyond me. But I forgot. Objectivism means never having to say you’re sorry.

      Actually, it is worse than that. More than 50 years ago, this country could be awakened from its nightmare of Joe McCarthy-led Communist-in-every-closet witch hunting by the exposure of McCarthy’s methods in the first nationally televised Congressional hearings. The pivotal moment occurred when a Boston lawyer, Joseph Welch, rebuked McCarthy with the now-famous phrase, “Have you no sense of decency, sir, at long last? Have you left no sense of decency?”

      But decency and propriety mean nothing in America these days. What used to be recognized as corruption is now shrugged off as business as usual. When a nation loses its moral compass, it also loses its soul. …”

      (from typepad.com: http://forestpolicy.typepad.com/economics/federal_reserve/page/2/ )

  3. Bryan in Oz

    ex Crazy Eddie CFO Sam Antar who now runs an anti corporate corruption website has nothing but praise for the SEC’s lead counsel in the GS case

    …”The SEC chose top gun Richard E. Simpson as its lead counsel in its lawsuit against Goldman Sachs and Fabrice Tourre. Coincidently, Richard E. Simpson was the same lead counsel for the SEC in its successful case against Crazy Eddie and the Antar family.

    Simpson is a twenty year veteran at the SEC Enforcement Division. He could have easily made much more money in the private sector, but instead stayed at the SEC. As a former adversary who did battle against Simpson and later buckled under his pressure to cooperate with him, I found him to be very focused, knowledgeable about how criminals operate, and he knows how to bring them down…”
    lots more follows

    1. DownSouth

      Bryan in Oz,

      Thanks for the link.

      While cynicism is certainly the order of the day, curioser things have happened. Take the downfall of the mighty AT&T, for instance. All it takes is one rogue prosecutor and one rogue judge, a matched pair who refuse to join the ranks of what Orwell called the “paid liars and bumsuckers,” and the mighty come tumbling down.

      Judge Harold H. Greene and William Baxter (the DOJ prosecutor) were up against the Reagan juggernaut as well as the seemingly all-powerful AT&T:

      In 1983, the last full year before the divestiture took effect, the Bell System’s total assets were $150 billion, making it bigger than GM, GE, US Steel, Eastman Kodak, and
      Xerox combined! AT&T annual revenues were nearly $70 million, representing approximately 2% of the U.S. GNP. AT&T’s net income was nearly $6 billion, slightly smaller than the total NASA budget at that time. AT&T employed just under 1 million people, making it the largest employer in the U.S.


      But Baxter and Greene were not deterred. As Yurcik goes on to explain:

      William Baxter was an eccentric Stanford University Law Professor who had not addressed a court in session for about 20 years. Baxter considered himself an economist
      although he had no formal training as such. Baxter’s nomination and the disqualification of his superiors created an ironic situation. Baxter had publicly argued that no one company should be able to integrate regulated and unregulated divisions of its business because it could use the “safe” profits from its regulated side to subsidize the price of unregulated products (a cross-subsidy). Reagan’s closest advisors including William French Smith, Edwin Meese (Counselor), Malcolm Baldridge (Commerce Secretary), and Casper Weinberger (Defense Secretary) believed unequivocally that the DOJ’s case against AT&T should be dismissed. This created a situation that if AT&T sympathizers in the Reagan inner circle were going to intervene, they would have to quickly go through or around Baxter. Baxter would have none of this and stated before a press conference staged to announce the case, “The case is perfectly sound…and I intend to litigate it to the eyeballs.”

      And Greene was equally immune to the inordinate pressure applied by the Reagan administration and AT&T:

      After the DOJ prosecution finished its presentation, AT&T submitted a 500-page brief moving for dismissal based on the grounds that the prosecution had not proved its
      case. Judge Greene, however, had no intention of dropping the suit and his response, dated September 11 1981, was clear, “The motion to dismiss is denied. The testimony
      and the documentary evidence produced by the Government demonstrate that the Bell System had violated the antitrust laws in a number of ways over a lengthy period of time…the burden is on the defendants to refute the factual showings…” This preliminary ruling by Greene eventually served a dual purpose. First, it prevented intervention by the Reagan White House since any action now would leave the
      Administration open to the accusation that they were favoring “malefactors of great wealth.” The ruling also pushed AT&T to settle the case on its own terms rather than
      risk a potentially devastating loss.

    2. emca

      /B in Oz

      A second on thanks. The best overview of SEC-GS action to date, particularly if your hung on the exact mechanisms of the trade. Of note:

      “Rule 10b-5 prohibits public companies, their officers, and employees from making:

      …any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person….”

      The case is, did GS “omit to state a material fact..to make statements made…not misleading”?

      GS short defense fails to address this central compliant. What GS failed to achieve financially or investors expectations of deceit are critically irrelevant.

      The abruptness of GS’s response was triggered by release of SEC charges, an apparent (and successful?) tactic to the catch GS off guard. Indeed, the Sam Antar’s claim is that Goldman’s took the bait and through statements bordering themselves on deception, have further harmed their cause. The ‘kiss of death’, cutesy SEC.

      Thankfully Richard E. Simpson, lead prosecutor, is no Obama milksop. He is not a cheerleader to a battle, he is the battle. A civil service holdover from the Bush (or earlier administrations) Simpson has the tenacity, brains and ambition to see the job through. GS will seriously need its legions of lawyers to go full force before this is over.

      Despite sentiments otherwise, Goldman may not be able to just do a settlement, take a fine and move on. The accusation (a more pointedly, the sustaining)of deception could spill over into other GS brokered transactions, resulting in further civil suits against the company by private parties.

      The suit, its possible outcome, is a big deal.

      1. craazyman

        Huh. Rule 10-5b in Goldman’s case. Rule 105 in Lehman’s case. 1s and 0s and 5s, in that order.

        Is this a synchronicity?

        Could be a wink and a nod from the Big Trickster just to mess around a little with our heads. ;)

        1. emca

          Yes, with 1-0-5 one could definitely read (government) conspiracy.

          ‘Big Trickster’ ala Goldman-Sachs. GS must feel that they been turned upon and betrayed (tricked) in their dutiful ‘loyalty’ to a government and/or fair-play, or else it is, yes, just a great charade by forces unknown.

          While I’m open to arguments, I’ll go with variations on the former, thanks.

  4. Jeffferson

    The Obama administraton would not have unleashed the SEC in such a high profile fashion against Goldman unless he plans on taking down the current crop of corrupt bank executives. Nothing less will suffice if Obama is to have any chance of maintaining the Democrat majority in Congress come November let alone have any prayer of reelection in 2012. The public demands frog marches. Nothing less will do.

    The moment the Wall Street gang blew off their scheduled face time with Obama in Washington, it was obvious what was coming next. You can be sure that Mr. Simpson has mapped out a nasty litigation strategy that will be sure to leak a series of Fabulous Fab like one liners to the MSM.

    Once chum has been tossed into the waters, the sharks must feed.

    1. Tao Jonesing

      I hope you’re right, Jefferson, but I’m not holding my breath. Thus far, the Obama administration has shown that it has only one play in its play book: talk tough, make a big compromise in the opening bid, then proudly accept something that you said was unacceptable when you were talking tough.

      1. Jeffferson

        There is another agenda at work here.

        Volcker, Geitner, Bernanke and Obama are seeking an opening to implement the G20 and IMF global monetary initiatives which includes a single global central bank administering a single global currency. In other words, global government that is no longer accountable to democratic processes. Rooting out the evil, corrupt bank executives gives them the perfect opportunity to institute this new international regulatory regime under a populist flag.

    2. DownSouth

      Could it be true? Has Obama finally woken up from his stupor and smelled the coffee?

      FDR also naively thought he could play ball with the vipers. It is unfortunate, if it is indeed true that Obama is finally seeing the light, that he had to reinvent the wheel and couldn’t learn from FDR’s experiences. As Confucius said: “A wise man leans from his experience; a wiser man learns from the experience of others.” But better late than never, no?

      The evidence was fast accumulating: the Administration’s great experiment in “business self-rule” had come into full collision with the ingrained determination of business executives to hold down their costs of doing business, to push up prices if they could, and in general to run their companies as they pleased, come hell, high water, or General Johnson.


      Intermittently throughout the year 1933 the Senate Committee on Banking and Currency, with the aid of its inexorable counsel Ferdinand Pecora, had been putting on one of the most extraordinary shows ever produced in a Washington committee room: a sort of protracted coroner’s inquest upon American finance.


      It showed how they had made huge profits (which represented the exercise of no socially useful function) at the expense of the little speculators and of investors generally, and had fostered a speculative mania which had racked the whole economic system of the country—-and this not only in 1928 and 1929, but as recently as the spring of 1933, when Roosevelt was in the White House and Wall Street had supposedly been wearing the sackcloth and ashes of repentance.
      –Frederick Lewis Allen, Since Yesterday

  5. craazyman

    It will be interesting indeed to see what legal theory can make a crime out of the failure to predict the future. The notion that these big-hitting institutions were defrauded by Goldman and others truly makes me wince and laugh at the same time. These investors defrauded themselves — with their sightless greed and money lust and hideous salaries for doing nothing but “analyzing” whatever it is they were supposed to analyze for their million-or-more-dollars-per-year desk work — and they miserably failed in their duties as portfolio managers, fiduciaries and stewards of their client’s money.

    The short sellers and big money bag holders are two humps of one camel, a camel that manipulates the thing we call “money” — which is really a manifestation of the spiritual energies exchanged by human interaction in the non-local quantum vaccum by means of the propagation of trans-mathematical emotion-waves of sentience — and eats as much of it as it can before defecating it out in lumps of steaming camel plop.

    No. What we have here is not law or even philosophy. Instead, it is the cultural superego wracked with messages of pain from the social extremities confronted finally with the need to modify its foundational structures for the preservation of the corpus-publicus. This is a form of psychoanalysis where the ID energy will be as wild as a dragon caught on the end of a lance.

    1. Tao Jonesing

      No criminal charges have been filed yet and may never be.

      The legal theory for the civil fraud case is no mystery. It is laid out in the complaint. If you read it, I think you’ll understand that nobody is trying criminalize the failure to predict the future. That’s a red herring.

    2. DownSouth


      It’s a tough job, isn’t it, this portrait the SEC is trying to paint, drawing a fine line between the outright malice of a Goldman and the bumbling incompetence of an ACA?

      But neither yields a very flattering image of the finance industry, and I think that counts for a lot, at least politically speaking.

      And since when is naïveté, ignorance, stupidity or not-so-pure motives on the part of the victim a defense for crime? Is murdering a prostitute not a crime?

      1. craazyman

        I agree 100% South. This stuff should be a crime though, to be this fast and loose with money/spirit. Just like the way they’re grinding those Chinese girls to dust so we can all save a nickel on our Microsoft mouses. And how are we even to know when we walk into Staples to get a new one? I need a new one now. And when I hand the money over I drill a nail into the Palm of a Chinese teenager. Just like the bagholders thrust a spear into the side of the Christus Publicus Trustus so they could suck a little more of the blood of the lamb like an Aztec sacrifice.

        But Tao Jones makes a good distinction between criminal and civil fraud. That is apropos indeed here.

        I had the joy of participating once in a civil gone criminal securities fraud trial — as a “witness”. Oh how the sausage is made without a recipe. God knows what gets chopped up into it.

      2. Tao Jonesing

        Blaming the victim of a crime is time-honored tradition in this country. For example, it used to be appropriate to provide evidence that a rape victim had previously engaged in consensual premarital or extra-marital sex as a defense to rape. Apparently, the theory was that if a woman consented to have sex with one man, she had consented with all men. To this day many people respond to news of a murder or rape by saying “he/she was asking for it.”

  6. tranchefoot

    Would Rodg Cohen and Co. be targeted in something like this, or do the miscreant’s lawyers get special “professional courtesty” from the SEC?

  7. been there done that

    “We’ve sorted the deals by banker”
    Yves – you are on the right track but you sorted by Bank, not Banker. Follow the Banker…………

    1. tom

      The Calyon/Miszuho list is effectively a sort by bankers. this team (led by Alex Rekeda) helped Magnetar put their first deal together, later went to Mizuho to do a few more deals and helped them do the CDO squared deal that allowed Magnetar to clean up the program. While at Mizuho, they got their bank to buy the senior bond that resulted in a huge loss. They probably did the same thing at Calyon. In fact, one reason they might have left Calyon is because that bank was out of capacity for the deals, so they need to find another deep pocket. Just speculation, at this stage…

      1. been there done that

        Tom – I think your speculation is more accurate than not. Many teams moved as one but many sr guys moved solo and brought the asset mgrs and access to sponsors with them, so to speak. Banks fill up on any and all combos of product, asset mgrs and sponsors so the combo of “diversification” or lack thereof is an interesting pattern indeed!
        follow the banker……….

      2. decora

        Rekeda used to work at AMBAC in the credit derivatives department but i couldnt understand how that figured into the big picture.

  8. Maggie Knowles

    Just received this press conference announcement from our CA AG: Brown Accuses Moody’s of Stonewalling Investigation into Its Role in Financial Crisis

    LOS ANGELES – At a news conference on Monday, April 19 at 10:00 a.m., Attorney General Edmund G. Brown Jr. will discuss court action against Moody’s Investors Service requiring the company to explain how it gave its highest credit ratings to securities backed by risky subprime mortgages and other toxic assets.

    Moody’s was a key link in a chain of brokers, lenders, mortgage bankers and other Wall Street market movers that cost millions of ordinary Americans their homes and their savings.

    Date: Monday, April 19, 2010
    Time: 10:00 a.m.
    Location: 300 South Spring Street
    Los Angeles, CA

    Note: TV crews should arrive early for security screening.

    1. VenusVictrix

      So he’s decided to check in from the ether? Maybe Brown should take a look at the complaint filed against Moody’s over a month ago by the Connecticut AG.

      Brown is obviously desperate to inject some life in his pathetic gubernatorial bid.

    1. Tao Jonesing

      Goldman is the elite of the elite. It is up to Goldman to decide who gets sacrificed. If you’re right and the government does not expand its inquiry beyond this lawsuit, then Goldman decided that Fabulous Fab is the goat, not Goldman.

      1. AK

        Tao Jonesing says:
        >> Goldman is the elite of the elite. It is up to Goldman to decide who gets sacrificed.

        Goldman’s elitist status is not supported by anything but government power. They don’t have a private army to stand by them. So, they will fall instantaneously if the decision to sacrifice them is already made.

        1. Tao Jonesing

          If you take a close look at what Bush, Obama and both political parties did in response to the financial crisis, you’ll see that you have it precisely backwards: “our” government only has power because of Goldman Sachs and the other TBTF banks. Who needs a private army standing behind him when he has his finger on a button that can launch an economic nuke?

          Simon Johnson wrote something similar a year ago:


          Also, see this post at the Baseline Scenario explaining why you can’t let something “instantaneously fail” when you have nothing to replace it with:


          1. ron

            As long as the US has JPM, MS, C and BOA to backstop the system it can be done, perhaps the decision to throw King Goldman off the throne and into the guillotine has already been made at an undisclosed back-room NYFED meeting.

  9. dilbert dogbert

    Lots of words above but in the long run the business of the finance industry is crime.

  10. Jefferson

    At core, it’s really a pretty simple case.

    Was it a material fact under 12(b)(5)that Paulson was involved in selecting 100 subprime mortgage bonds placed in the CDO while simultaneously entering a short against the CDO?

    As a prospective investor in the CDO, I would certainly consider that information to constitute a material fact. Anybody who can honestly say they would not deem that information relevant in making a determination whether or not to invest in the CDO?

  11. MichaelC

    The Abacus case also reopens the door to exploring the role of the SIVs( and the conduits) and highlights the links to the resulting gov’t bailouts as the banks brought SIVs on to their books. Paulson’s (Hank) Super SIV proposal looks even dodgier in light of the Abacus suit.

    IKB sponsored the Rhinebridge SIV, which bought CDOs and and funded itself largely via CP. The Rhinebridge SIV was a buyer of multiple Abacus deals. When Rhinebridge failed IKB was on the hook. IKB failed as a result and was taken over by a German state bank. Rhinebridge was one of the first SIVs to be liquidated. Who do you think was the winning bidder of the Rhinebridge assets at the firesale? GS.

    A case can be made that the major banks held lots of Super Senior pieces of these CDOs intending them to be stuffed into their sponsored SIVs. In that case the intended losers would be the CP buyers of the SIVs. If there had been a more orderly collapse of the housing market and CDOs, these losses would likely have remained at the SIVs and been largely borne by CP holders, as was the case with Rhinebridge and others. They (SIVs) were designed to liquidate before losses reached the senior investors. They (the SIVs) would have remained remote from their sponsors and no gov’t bailout would have been needed. (Its notable Canada didn’t bail out their banks) The speed of the collapse nixed that, so by the summer of ’07 as the CP markets collapsed in Canada it was clear gov’t intervention in the US and Europe was inevitable.

    Its not clear if the ABN exposure was at the bank or in its SIV, but it raises the question, how many of these deals, like DBs Starts ended up in SIVs?

    Which leads to the question how much of the bailout money was used to bailout the SIVs, which were loaded with deals originated through Paulson/Magnetar programs?

    The losers at the SIVs were CP investors and gov’ts, in other words ordinary folk. The dealers were likely aware of the ultimate buyers of these bonds, as they would have been marketing the bonds to banks with deep distribution networks.

    I’m harping on the SIVs because just as the GS/Paulson program looks like a joint search for suckers, the SIVs were an already established solid base of suckers ripe for the picking (CP investors). Keeping an eye on the role of the SIVs in the collapse helps to counter any arguments that these unregulated entites served any other purpose than to set up a pool of unprotected investors for predation. In that regard every sponsor of a SIV was conciuosly ‘betting against their client’, buyers of the sponsored SIVs CP.

    The gov’t guarantees of MM accts is a consequence. That guarantee needs to be repealed. There is no need for it if the funds follow their investment guidelines and the paper they invest in is properly rated.

  12. Jay Weinstein

    In hindsight, the name “Banker’s Trust” is one of the great oxymorons ever :)

  13. Sai

    It would expedite the probing if the below are high lighted to the public in simple terms.

    A CDO has the underlying bonds/mortgages as a sort of collateral. What is such collateral in case of a synthetic CDO? One can see the cash flows from CDS premiums but not the collateral.

    And how is the rating procured for a synthetic CDO in the absence of clear collateral.

    1. AJ

      As I understand it, “collateral” is a misnomer in both a CDO and synthetic CDO. They underling assets are not pledged as collateral. Instead they just generate a stream of cash flows to be divided up into the tranches. In that case, there is no difference between cash flows generated by the underlying mortgage and the premiums paid on the CDS (at least until there is a credit event).

  14. recaldo

    magentar also requested slices of abacus be put in its cdo. not sure how that affects the picture, if at all.

  15. readerOfTeaLeaves

    Just a quick shoutout to Yves and co-authors for taking time to put the audio files on this blog site.

    I was able to listen to several articles earlier today, which I didn’t have time to read — but was able to listen to while tending to other tasks.

    I don’t know whether people mention this feature of the blog very often, but I’m finding it enormously helpful so wanted to leave a comment to thank you.

  16. Tao Jonesing

    Brad DeLong has a link to Goldman’s presentation of the Abacus synthetic CDO.


    Pay special attention to the second and third risk factors listed on slide 8 (page 9 of the document), which I’d bet Goldman hopes to use to absolve themselves of liability. One way to read them is “Goldman Sachs may be lying to you right now. Therefore, Goldman Sachs will accept no liability for lying to you right now, if, in fact, Goldman Sachs is lying to you right now.”

    1. emca

      Reads like disclaimers on those EULAs they are always asking me to click acceptance saying the seller has no liability (or interest) in the performance of their product, despite any advertised claims they make otherwise.

      I’m particularly fond of page 9:

      “Certain conflicts of interest relating to Goldman Sachs and its Affiliates; No reliance…
      Goldman Sachs does not make any representation, recommendation or warranty, express or implied, regarding the accuracy, adequacy, reasonableness or completeness of the information contained herein or in any further information, notice or other document which may at any time be supplied in connection with the Transaction and accepts no responsibility or liability therefore.”

      Of course if you sell a car that you know it is going to croak, but don’t disclose it to the buyer, furthermore charge the buyer with a Contract that states the would-be seller is under no obligation the tell the would-be buyer, who you know has assume otherwise, such privately held information pertaining to the survivability of vehicle in question (under the guise of proprietary discretions?)…

      This may be the tact GS legal team is going to pursue. While technically a savvy trade, I wouldn’t want to buy a used car from said buyer down the line.

      1. Tao Jonesing

        zerohedge has Goldman’s response to the SEC’s initial inquiry of the Abacus CDO, and it looks like Goldman is relying on that risk factor, among others.

        The problem that Goldman is going to run into is that the lawyers who wrote the risk factors probably had no practical experience in defending against allegations of fraud. Risk factors are typically written by securities lawyers. Most securities lawyers that I’ve worked are transactional attorneys, not litigators. To the extent that a securities lawyer has litigated, it is typically in response to a shareholder derivative action, and most of the material omissions were made in good faith.

        When bad faith is involved, safe harbor disclaimer language will not save you. Here, it seems that GS (1) affirmatively stated to investors that ACA selected the securities (omitting that Paulson actually picked them) and (2) affirmatively stated to ACA that Paulson was investing in the Abacus CDO, or at least failed to correct ACA’s stated belief that Paulson was doing so (omitting that Paulson was actually shorting the CDO, not investing in it). Safe harbors were created to shield people acting in good faith, not fraudsters.

        The crackerjack GS legal team will discover this, if Obama doesn’t capitulate and accept a settlement. The whole defense is juvenille: it’s like saying a promise you made didn’t count because you had your fingers crossed behind your back.

    2. Justicia

      Bond Girl also has good read on Goldman’s feint:

      I think any person who is being intellectually honest here will regard Paulson as a de facto portfolio selection agent in this transaction, and if investors care about the economic interests of the portfolio selection agent, they would care about Paulson’s economic interests. If you read Goldman’s response, you will discover that this entire arrangement was initiated by Paulson. Paulson approached Goldman with a strategy he wanted to implement, and Goldman went looking for investors to take the other side of that transaction. There is nothing wrong with that, in my opinion. The problem has always been his involvement in the process of selecting the securities, and the fact that this was not disclosed

      1. Dan-in-PA

        I’m assuming that, along with knowing he had selected the various securities that made up the Abacus CDO’s, but I would venture further that, Paulson’s own position (long or short) is of extreme interest to potential investors in this particular instrument.

        of course, we all know that if GS had informed the world that not only Paulson select the securities here, but was shorting the whole shebang….well, how would GS get anyone to invest in this thing to generate the kind of income needed to offset expected losses?

        Who in their right mind would ever buy into a security that was advertised as being designed to fail?

  17. Dreadnought

    This is the age of corporate permissiveness a l’outrance. Wall Street has a lock on Washington and the great American publicity machine. The only (minimal) risk is if parties begin to fight among themselves for total domination. No sign of that so far, but stay tuned.

  18. decora

    something i have wondered about. . . The Calyon CDO team left in Nov 2006 to go to Mizhuo. but 3 Calyon deals closed in the weeks and months after that. So… was that team still involved? How did that work?

  19. Entirely

    I don’t have my hopes up. Good to see a little bit of daylight, but after spending the better part of $20T keeping this rotten edifice above water, I just don’t see them letting the whole jenga board fall now. Its like in Matrix 3 where Neo and Trinity glide above the clouds and see three seconds of glorious sunlight before crashing back down into the wasteland…

    And BTW… 29 Constellation deals is light. I don’t know all the names, but I’d suspect the number is closer to 50.

    And if anyone wants to do the digging, MS and C had their own mini-ABACUS programs as well. The MS deals were all named after US presidents and the C deals were all named “Franklin” I believe.

    We live in their world…

    1. oriduck

      J Kyle Bass, years ago, gave some cryptic comments about CDOs that would obviously fail, saying that these CDOs had the names of dead presidents. Could the relevant Citigroup CDOs be a series of Jackson CDOs that Citigroup did in late 2006? I’ve not seen a “Franklin” CDO from them?

  20. oriduck

    this site has consistenly had some of the best, most correct CDO reporting that i’ve seen — a real pleasure in light of so many other people misunderstanding, misreporting and/or just failing to see.

    that said, i think there are some minor errors in your Magnetar list. the deal totals for the Citigroup CDOs you mentioned are incorrect, i think, because the super senior tranches have been omitted. when you add those tranches back in, the first two Cetus CDOs are $1 billion each, as is Octans III. the last of the Cetus deals is $1.5 billion. Lacerta is $2 billion.

  21. Paul Tioxon

    This could actually be a real crisis: power vs money. The ultimate question of maintaining the social order is to question the sovereignty of the state. The power of our republic comes out of the barrel of a gun. The NRA and some Tea Parties dwell on this lesson from history, unfortunately, they keep projecting what has happened to everyone else in the world onto what they think has happened here or fear will happen on a larger scale. This is not now nor ever has been a police state or an authoritarian dictatorship, but the power of the state is absolute, and does not allow for competition. Goldman Sachs et al can not be allowed to function as some sort of meta government by virtue of controlling the economy through finance, beyond the reach of accountability by the federal government. If what I am reading here is accurate in your assessment of the scale of economic distortion regularly practiced and this most recent crisis is soon to happen again, but much worse and possibly beyond any management tool kit to fix, then the financial oligarchs have signed their death warrants. The social order that provides the basis for the power and privilege enjoyed by the rest of the power elite, outside of Wall Street, can not be compromised to the point that state sovereignty is attacked. It may have been weakened, bought off, distracted or outmaneuvered in the past, but it can not be allowed to have a wholesale collapse, a real crisis. This crisis is not even taking into account what the well educated but dispossessed among the affluent middle class would do in the event of a real crisis. And of course, at that point, the dogs of war would be let loose. That is, if this is a real crisis, and not just people deferring their flat screen TV purchases for another 2 years or so.

  22. Francois T

    In other words, there is a lot of dirt if the SEC chooses to dig. And it is far too early to tell whether they have the Administration support and the bloodymindedness to do so.

    Sure! With the 2 Republicans commissioners (over 5) who already voted against suing Goldman Sachs, one can easily imagine the kind of political grade-AAA game of chicken shit will play out at the SEC and in Washington, DC.

    Unless these commissioners are replaced manu militari, there will be a slew of leaks from the SEC to the GOP followed by screams of “witch hunt” against the very fine members of the financial elite. Fix news will take over and you watch how Orwellian the freak show will become.

    The Obama Administration will need a lot more intestinal fortitude than what they’ve mustered so far to successfully wrestle the Wall Street badasses to the ground.

    Of course, I’m assuming they’re willing to do so in the first place.

    A rather generous assumption…I guess I feel magnanimous today.

  23. Wayne Caswell

    But there’s another big contributor to the economic downfall that’s rarely discussed – the sociopathic behavior of vertically integrated volume homebuilders. Homeowners of Texas shows the role of “Texas Homebuilding and the Global Collapse” (http://homeownersoftexas.org/collapse.pdf), including:

    * The 1999 repeal of the Glass-Steagall Act allowed volume builders to own mortgage, title, and/or insurance companies. It gave them the ability to minimize risk by immediately offloading their mortgage risk as mortgage-backed securities, and it gave them a natural incentive to increase home sales through predatory loans.

    * With the sale of homes on the line, volume builders made subprime, low-interest loans with adjustable rates and little to nothing down (i.e. no skin in the game). The easy credit and streamlined loan qualification encouraged homeownership among people ill prepared to own a home. It also encouraged speculation and flipping among people with means.

    * This worked as long as prices rose, and with little government oversight, the vertically integrated volume builders perpetuated the problem. They often artificially inflated appraisals and even included cars and other debt in the loans. But the supply of housing units soon outstripped demand, and the bubble burst.

    * During the building boom, attention was diverted away from construction quality and focused on volume instead. To shield themselves from lawsuits from shoddy construction or abuse of undocumented workers, builders promoted tort reform, mandatory binding arbitration, and the “right-to-repair” concept. They also found ways to use the cheapest building materials (e.g. Chinese drywall) and falsify or ignore building codes and inspections, leaving many homes now unfit to live in.

    * To make matters worse, when President Bush signed the Small Business Liability Relief and Brownfields Revitalization Act (Brownfields law) in January 2002, he contributed to urban sprawl by allowing builders to buy cheap farm land and build homes there without disclosing or being held liable for the health risks of pesticide contamination.

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