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Did John Paulson Receive Preferential Terms From Dealers When Selling Lehman Bonds?

Tyler Durden's picture




 

Last night, the FT penned a rather curious, not to mention 2 month delayed, PR puff piece, discussing Paulson's success in investing in Lehman bonds, ostensibly to offset the firm's recent horrendous investing performance (Sino Forest, Bank of America and Premier Foods to name a few). While it is true that Paulson was one of the very first investors in Lehman bonds following the banks bankruptcy on September 15 some of the math in the FT piece is rather misleading. We will present a detailed analysis and a more objective version of Lehman bond trading history when we bring to our readers the complete breakdown of trading as disclosed in the Lehman 2019 ad hoc committee response (thank you Northwest airlines) that hit the Lehman docket on April 19. However, in the meantime we wanted to bring to both readers', and regulators' attention one rather peculiar piece of information that has emerged as a result of the trading disclosure provided by the firms in the Lehman ad hoc creditor committee, in this case Paulson and Taconic, which hold over $4 billion and just under $2 billion in face value of Lehman General Unsecured Claims. Specifically, it appears that when trading out of Lehman bonds, Paulson may have obtained highly preferential terms which were certainly not available to other hedge funds, beginning the question: were (are?) dealers willing to assume losses on transactions with Paulson (to the detriment of other market players), simply to be in the hedge fund manager's good books? We don't know. But here is the data.

As anyone who has traded corporate bonds knows, a market making dealer run on any issue will always indicate a bid and an ask, sometimes accompanies by size on either side, or both, which the dealer is willing to commit. For example a market represented as 20x22 would mean the dealer can sell a bond at 22 and buy it at 20 (and inversely for the client, who would be able to sell at 20 and buy at 22). Which, as the right side of the table below shows, is precisely what Taconic likely saw when it tried to buy $25 million worth of face Lehman bonds on January 6, 2010: at a prevailing price of 20.13, Taconic was likely seeing indications of something like 18x20, meaning the dealer had bonds to sell at around 20 cents on the dollar.

So far so good.

Yet where it gets odd is when John Paulson tried to sell $400 million face of the same issue, on the same day, courtesy of a massively accumulated position over the past year, which at one point hit a cumulative total of $6.4 billion in April 2009. So Paulson proceeded to sell, and while on would expect that the price he should get based on the Taconic clearing price would be well south of 20, he in fact, sold this massive amount, at 23.0%, meaning somehow JP found a broker who is either willing to take a big loss, by having a market that had a 23 bid, and who knows what offer, or there was a massive disconnect in the Lehman bond market on January 6.

The table below shows all of Paulson's January 6, 2010 Lehman bond transactions, incidentally all sales, and compares them to Taconic's full January 6, 2010 Lehman bond transactions, all buys. The table says it all. This is just one daily snapshot. This pattern recurs all over the calendar, with Paulson constantly appearing to get preferential terms to other cross-referenced dealer clients.

The simple math is that the worst bid/offer in the Lehman GUC market on January 6, 2010, was something like 18 by 25, a ridiculous spread that should raise every red flag with the regulators, yet which of course won't.

If nothing else, perhaps some non-porn addicted SEC overseer should inquire just how the dealer bid could have been over 10% above the offer, in the same market, in the same day, and in the same issue.

We won't hold our breath.

We will shortly present our other findings from the Lehman bond trading history, which will demonstrate without a shadow of a doubt how prominent hedge funds engage in daily churn of bonds merely to create a fake perception of interest into which they then promptly proceed to dump their holdings, all within the same day.

 

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Tue, 07/05/2011 - 15:30 | 1427455 Tejano
Tejano's picture

Of course he did.

Tue, 07/05/2011 - 15:31 | 1427459 Popo
Popo's picture

Does the Pope wear a funny looking hat?

Tue, 07/05/2011 - 16:27 | 1427615 Oh regional Indian
Oh regional Indian's picture

The best one I've heard "Is the pope the head of the gay mafia?".

Did he? First poster got it right!

I found a brilliant e-book I'll share when I re-find. Eye/mind-popping. Very much on topic with the like of JP, the Other J6P and their inside games.

ORI

http://aadivaahan.wordpress.com/2011/07/04/a-year-and-a-day-later/

 

Tue, 07/05/2011 - 15:31 | 1427463 Piranhanoia
Piranhanoia's picture

The rhetorical question burns. 

Tue, 07/05/2011 - 15:32 | 1427466 Cognitive Dissonance
Cognitive Dissonance's picture

Does a bear get run over on Wall Street?

Tue, 07/05/2011 - 15:34 | 1427478 JW n FL
JW n FL's picture

Noooooooooooo!

 

Just because You Constitutional Lovers / Terrorists dont get the same rigged terms while the SEC looks the other way does Not! mean he is Favored.. it just means that You Constitutional Loving Terrorists are being undermined Financially for the Safety of America the Great Police State!

 

Losers always Bitch like little girls! Now go buy some Gold and Complain about how your rights are being stepped on buy the winners some more!

Tue, 07/05/2011 - 16:19 | 1427595 JW n FL
JW n FL's picture

http://www.finalternatives.com/node/17280

 

Despite a run of unfavorable test results, Harbinger Capital Partners' wireless venture was able to raise hundreds of millions more as it struggles to demonstrate its system can work without disrupting global positioning systems.

 

The Federal Communications Commission has required that LightSquared cover 260 million people by 2016, targets the company has pledged to easily beat.

 

http://www.lightsquared.com/

 

High speed spying for ALL! Americans!! coming to a hand held device in your pocket very soon!

Tue, 07/05/2011 - 15:39 | 1427490 SDRII
SDRII's picture

IPO allocation logs tell the same story - rinse wash repeat

Tue, 07/05/2011 - 16:31 | 1427632 Oh regional Indian
Oh regional Indian's picture

I found Accredited investor the cruelest cut. No accredited, what was the term... you had to have a minimum of a mill $ outside primary home.
What a scam. Some trust fund dumbass could get into all those Sillycon Valley IPO's but not us Non-accredited or whatever investors.

i did lose money on Webvan though! ;-)

Remember Webvan anyone? Remember what Apple was trading at those days?
Ha!
ORi

Tue, 07/05/2011 - 15:39 | 1427491 Gringo Viejo
Gringo Viejo's picture

Is Nancy Grace an illegal immigrant's idea of Cleopatra?

Tue, 07/05/2011 - 15:44 | 1427493 baby_BLYTHE
baby_BLYTHE's picture

Does the FED mark-to-market?

Tue, 07/05/2011 - 15:40 | 1427498 YesWeKahn
YesWeKahn's picture

How about a good deal on a block trade? Does that ever happen?

Tue, 07/05/2011 - 15:41 | 1427500 Robslob
Robslob's picture

And the defense rests it's case

Tue, 07/05/2011 - 15:42 | 1427503 Bay of Pigs
Bay of Pigs's picture

I assume he's personal friends with Mary Shapiro.

I wonder if she calls him Big John?

Tue, 07/05/2011 - 15:42 | 1427504 Deepskyy
Deepskyy's picture

Do bears poop on the Pope?

 

Tue, 07/05/2011 - 15:43 | 1427505 MrBinkeyWhat
MrBinkeyWhat's picture

WOW! Do you really mean that the banksters get preferential treatment? This is SHOCKING, just SHOCKING!

I suggest spending a little time with WilliamBonzai7, just to give things perspective. Artists...

Tue, 07/05/2011 - 15:46 | 1427514 MrBinkeyWhat
MrBinkeyWhat's picture

Apparently I did not spend enough time with Monty Python today. Maybe some vodka instead. Sigh..."What a world...what a world" *Red Witch from Wizard of Oz"

Tue, 07/05/2011 - 15:49 | 1427521 SheepDog-One
SheepDog-One's picture

Try triple tequillas, pretty good for mania market closings.

Tue, 07/05/2011 - 15:55 | 1427536 MrBinkeyWhat
MrBinkeyWhat's picture

SDO... There is a personal tale of woe surrounding tequilla. Otherwise...pretty fukking great idea!

Peace!

Tue, 07/05/2011 - 16:01 | 1427550 Cognitive Dissonance
Cognitive Dissonance's picture

I had a real close encounter with some cherry brandy when I was a young dumb ass. Now that I'm an old dumb ass I stay away from it entirely.

Who said old dumb asses can't learn new tricks?

Tue, 07/05/2011 - 15:43 | 1427507 Gubbmint Cheese
Gubbmint Cheese's picture

He crossed the LEH position into his personal 401(k)...

:p

Tue, 07/05/2011 - 15:47 | 1427516 Dr. Engali
Dr. Engali's picture

Volume pricing.

Tue, 07/05/2011 - 15:58 | 1427518 SheepDog-One
SheepDog-One's picture

'I feel SHOCKED!' Pepper Brooks, Dodgeball

Tue, 07/05/2011 - 15:53 | 1427526 besodemuerte
besodemuerte's picture

Does Timmy ignore his taxes?

Tue, 07/05/2011 - 15:54 | 1427529 vast-dom
vast-dom's picture

Hey Tyler change the title of this post to:

 

"HOW J. Paulson Received Pref Treatment [...]"

 

Okay? Don't wimp out on me now! Or I'll burn a vag into your other hand!

Tue, 07/05/2011 - 15:57 | 1427544 KidDynamite
KidDynamite's picture

do you have a typo in this post, Tyler?

"For example a market represented as 20x22 would mean the dealer can buy a bond at 22 and sell it at 20"

buy and sell should be reversed - or "dealer" should be changed to "customer"

more importantly, what did you mean when you wrote:

"So Paulson proceeded to sell, and while on(e) would expect that the price he should get based on the Taconic clearing price would be well north of 20"

If Taconic bought (small size) at slightly higher than 20, then why would you expect Paulson to be able to sell significantly larger size at a price well north of 20?  It should be well south of 20, no?  He's a)selling and b) selling much larger size than Taconic was buying

Tue, 07/05/2011 - 16:01 | 1427551 Tyler Durden
Tyler Durden's picture

You are correct. Bizarro up-down/left-rightness equivalency demonstrated.

Tue, 07/05/2011 - 16:26 | 1427616 agrotera
agrotera's picture

...there is such a long list of things that COULD be investigated if we didn't have regulators that appear to be CAPTURED (bought off, corrupted) by the toobigtofail privetly owned Federal Reserve cartel......

...see failure to deliver stock certificates 3 days prior to Bear Stearn and Lehman's demise on www.deepcapture.com when you view  Deep Capture the Movie".

...how about Lehman getting scrapped and sold for cheap to Barclay's yet MER got 0.66% of a BAC share for their bankrupt company.

....Paulson claims to the public that we can't socialize the banks, yet it is OK to gut the country to keep bankrupt entities alive vs. have a short term, 3-5 year treasury facility to unwind the corrupted defunct entities?  And we are to believe the TRILLIONS paid out to keep  these entities alive is for the good of the country?  Paulson's dictate puts our country in jeopardy since debt burden weakens a country, and everyone in the world knows that keeping these banks alive at the US taxpayers expense is a scam, and as such, the value of our country and it's currency (integrity) have been going down down down.

Tue, 07/05/2011 - 16:38 | 1427654 long-shorty
long-shorty's picture

Not directly pertinent here, but THESE DAMN THINGS (bonds) SHOULD TRADE ON EXCHANGES!!!

(But then bond traders wouldn't make obscene spreads.)

Tue, 07/05/2011 - 20:41 | 1428226 unununium
unununium's picture

How many GS insiders have accounts at Paulson?

As part of the Abacus settlement, did Paulson have to disclose his client list, so regulators could see who ultimately profited?  Surely he did, right???

Tue, 07/05/2011 - 21:18 | 1428309 jmoney
jmoney's picture

Interesting data...welcome to the distressed market. Illiquid with massive spreads. It is certainly good to know your dealers. Nothing illegal here, but I'd be pissed if I was Taconic or the other funds that (only?)saw/took the other sides of these markets.

Bottom line, it is still good to be a distressed trader/salesperson at a broker/dealer...no wonder this stuff hasn't moved to an electronic arena faster.

Tue, 07/05/2011 - 22:00 | 1428415 Rick64
Rick64's picture

 meaning somehow JP found a broker who is either willing to take a big loss,

 I would put the odds with one of the TBTFs unloading the crap and soaking it up, since they knew they would be bailed out.

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