April 20, 2010

And now the story changes...

As you can probably tell from the post on Friday, the whole Goldman Sachs thing really makes me sick because it's just so goddamn gross. Of course, it also makes me really happy to have sold my GS months ago (and no, it wasn't because of this... it was because of the VAR in their prop trading)

  • Friday afternoon GS released a statement that said (essentially) the SEC was full of shit, Paulson had nothing to do with the construction of Abacus 2007-AC1 (which was the vehicle through which Paulson made his negative bet on the value of mortgage securities) and "Oh, by the way, we lost money on that trade, too... and now we're being persecuted"!

    Of course, it all fell apart yesterday when GS was forced to admit that yes, indeed, Paulson had a part in the construction of AC1. While it's true ACA, the independent management company (wink, wink), did make the final decision on the reference portfolio on which AC1 would be based, they did it with a lot of input from Paulson which GS mislead them into believing was the sponsor on the deal. Sponsor is a fancy way of saying he was the one buying the riskiest piece, the equity tranche, which also happens to be the smallest and the buyer of that usually gets to help with the construction of the reference security portfolio and credit structure. Problem is, he didn't... GS got stuck with that piece because no one wanted it. Paulson, greedy fuck that he is, wasn't even as smart as Magnetar in taking a small piece of the long side of the trade just to give the appearance that he wasn't out to fuck the world until it begged him to stop.

    Oh, and had someone not taken the equity it would have been unfunded which might have spooked the other investors or, as they should be called in this trade, the patsies.

  • Speaking of the mooks who bought this shit, I had a chance to read the prospectus and learned that nothing was hidden from these people, aside from Paulson's involvement. Which means, from my perspective, these fuckers deserved what they got. Why? These folks were allegedly sophisticated and savvy investors, managing billions in, for example, pension funds. The couldn't take the time to do the due diligence on the reference securities? Forget that, as most of the structure was rated A anyway (and none of it really was)... but they never even bothered to ask who was on the other side of the trade? Remember, for a synthetic CDO to exist, someone has to put up a mountain of cash (the long) and someone has to pay quarterly premiums (the short) which flow to the long through Credit Default Swaps. If a credit event occurs, all the money goes to the short. If it doesn't, the long gets payments for as long as they continue and then they take their money back eventually when the short finally stops paying.

    AND NO ONE BOTHERED TO ASK, WHO IS SHORT THIS TRADE?!?!?! This part actually pisses me off more than the due diligence because, frankly, you gotta be goddamn stupid to not even bother to ask the most basic of questions (I'm looking at you, ERS and TRS management... you guys better be concerned because someone is going to poke around and find out if you morons planted money in synthetics as well).

  • It was only a matter of time until folks came out of the industry wood work, like cockroaches, to defend GS. And upfront was Henry 'InternetStockPimp' Blodgett. Rather than link to what asshat said, here's a post over at Brad DeLongs that's very much worth the read just to see someone beat up on Blodgett.
  • The problem was, is and will continue to be that this was nothing more than a vehicle to funnel money to the short side... it was a rigged bet that dramatically increased the size and scope of the financial crisis. These investments were created not to increase market liquidity but instead to suck it up, into the hands of hedgies like Paulson and the peeps at Magnetar. Normally, I'd be congratulating them on their ingenuity but in this instance, I'll call them crooks because that's what they were. All the kvetching about 'having a long position' and 'losing money, too' is bullshit... they were bias short (meaning they stood to make far more on the short than the long). Further, by acting as or, in the case of Paulson, alluding to being the equity in the trade means that they were engineering not only the nature of the trade but also putting just enough into it to defraud people into thinking their interest was legitimate and matched that of the other investors.

    It was a classic confidence game and yeah, it should be prosecuted under RICO. Which gives the US Attorney in Manhattan something fun to do over the summer.

    Just as a side note to explain my interest in all this, I work in banking for a depository. This kind of crap pisses me off but that's not my only interest... The push on the Republican side to privatize our infrastructure in Texas is leading us down this same road with many of the same players. I'd love to think that our elected and appointed officials are smart enough to smell the sourness of a trade but like every taxpayer in this state, I can't afford that luxury. That and I already know what they gave up in negotiations on infrastructure projects the first time around. Republican officials in Texas are never happier than when they are giving away the store to a private company for pennies on the dollar and making sure that taxpayers get stuck with the difference.


    Posted by mcblogger at April 20, 2010 09:21 PM

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