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Did John Perry Take The "Perceived" Paulson CDO Cap Structure Arbitrage To A Whole New Level In 2007?

Tyler Durden's picture




 

One of the critical observations that have emerged as a result of the
SEC action into Goldman is the realization that
various investors would take full advantage of perceived capital
structure arbitrage, not directly, but by implication: if fund X was
seen as an equity investor in a given product, be it structured in the
form of a CDO, or a boring corporation, with publicly traded
equity, that would imply to everyone else curious, that fund X was implicitly comfortable with every tranche in the balance sheet above the equity:
whether the mezz tranche, the deeply subordinated debt, and obviously
the very top or the supersenior debt tranche (secured or otherwise).
The ruse, the SEC claims, is that said Fund X would invest a token
equity amount, and make it plain for all to see, all the while shorting
the bejeezus out of securities above the equity tranche, knowing full
well that the equity would be wiped out, yet with partial or full
losses on the debt above, the shorts would end up making a profit multiples of times larger than the equity tranche loss. This is among the key points in the SEC complaint - we will not discuss it much, suffice
to say that it is more than obvious that when dealing with other (not
all that sophisticated) investors, this ruse would certainly work, as
the rest of the world would be logically satisfied that investor X
would not assume there would be impairments above the equity tranche, absent further disclosure. Yet what is interesting, and what we would like to touch upon, is a curious tangent of this "ruse" - as blog LittleSis points out, one
entity that could have taken the "Fund X" scheme to a whole new level
may be the hedge fund run by former Goldman Robert Rubin arb desk
protege Richard Perry. Perry, who made billions in 2007 by shorting
subprime, and most likely was involved in shorting CDOs (Goldman
underwritten or otherwise) in the same vein that Paulson and others
were doing, did not buy equity stakes in CDOs (that we know of).
Instead what he did was amass an equity stake directly in the CDO
wraparound company du jour: ACA Capital. Should Perry have wanted to convey an impression
to everyone else that ACA (and its holdings) were safe (and his
anonymous and Goldman conveyed bids on ACA CDO protection were
sufficiently low) what better way than to telegraph to the world in his
most recent 13F that he was building up a stake in ACA? Which as we
disclose below, between December 31 2006 and September 2007, is precisely what he was doing.

Below we demonstrate the holdings of ACA Capital shares by Perry Corp., as highlighted by the firm's public 13F filings.

Now it is no secret that Perry made billions shorting subprime. As the attached article points out:

Perry was one of a few on Wall Street, for instance, to start betting against subprime mortgages in late 2006. "We could see there was a lot of bad behavior by financial institutions," he says. Perry Capital shorted $3 billion in subprime securities, a bet that yielded $1 billion last year. His fund was up 11.7% after fees, according to investors, more than double the S&P 500's 5.5% gain. (He charges a 1.5% management fee, less than the 2% charged by most hedge funds, and the typical 20% of profits.)

Putting two and two together leads to the very critical questions that LittleSis present: "Which subprime securities did Perry short to score $1 billion? Were they Goldman Sachs CDOs? Was ACA involved?"

We have some of our own:

1. Did Perry (and other Goldman diaspora hedge funds - we are currently conducting an extensive analysis of all hedge funds that may have held "long" positions in firms like ACA in late 2006 and 2007) short ACA CDOs, even while holding a nearly 8% stake in the firm's common equity?

2. Was Goldman, or any other originator, using the Perry name (certainly much better known in 2007 than that of Paulson) to calm potential CDO longs (aka "lambs for the slaughter") by disclosing that the ex-Goldmanite was so bullish on ACA he not only had 2 million in long share holdings in Q1 and Q2 of 2007, a time when he was massively short CDOs and other synthetic instruments, but also doubled his ACA common holdings in Q3 of 2007 (the dollar value of his 3,625,000 shares on Sept. 30, 2007 was just $22 million - an amount that could be easily sacrificed if Perry would make billions by an implosion in ACA). 

3. Did Perry, by dint of his ACA minority stake, have special insight into the CDO holdings of ACA, all the while taking the opportunity to short the firm? This would be a flagrantly illegal practice.

All in all, if people are confused and impressed by the Paulson trade, they should be in awe of the Perry "mother of all cap structure trades" if indeed it turns out that he was shorting ACA (or other wrap firm held CDO) even as he was adding to ACA common. Let's not forget that Perry, in addition to having exquisitely close ties to Goldman, was also a nehpew of Bear Stearns CEO Jimmy Cayne - Bear was the biggest shareholder of ACA before it imploded.

 

 

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Tue, 04/27/2010 - 15:27 | 320246 rawsienna
rawsienna's picture

Now you are on to something.  ACA was set up by Bear and a fw others to finance CDO purchases funded with debt and stock.  IF the music didnt stop, they make money on the CDO and the fee business.  When it stops, the equity guys take the hit.  Dont know much about this perry guy but owning ACA stock was not consistent with his view on housing.

Tue, 04/27/2010 - 15:35 | 320256 tlil5774
tlil5774's picture

Richard Perry is just a brilliant investor that understood the coming real estate meltdown earlier than many others and put the right trade one (large potential gains if he was right, and more modest, easy to define losses if he was wrong). If Perry had special insight he would have made his bet MUCH larger. Maybe Perry was long ACA just because he wanted to hedge his larger short while paying for the short bet with some positive carry in case his short thesis was wrong.

Tue, 04/27/2010 - 15:58 | 320316 rawsienna
rawsienna's picture

maybe  - but why not just sell protection on better quality names than take AAA cdo risk. 

Tue, 04/27/2010 - 15:44 | 320275 CPJ13
CPJ13's picture

Oh this guy was good...

Tue, 04/27/2010 - 16:07 | 320338 greg merrill
greg merrill's picture

It is for this very reason I strongly discount all the 'public' filings by hedge funds and their holdings. As everyone who reads this board should know one can easily have a massive countervailing position that totally swamps the 'public' position.

I have say though, well played.

 

 

Tue, 04/27/2010 - 16:07 | 320339 Gromit
Gromit's picture

Why do you think mortgage insurers have been on a roll recently?

Could it be because controlling the company may help to determine which claims are paid?

Wed, 04/28/2010 - 00:55 | 321253 Jefferson
Jefferson's picture

Add the spousal relationship between ACA's CEO Alan Roseman and Goldman Sachs managing director Frances Bermanzohn into the mix and you have the makings of an incestuous "den of vipers and thieves."

 

Paging Mr. Holder. Anybody there? Ever heard of a subpoena?

Never mind!

Wed, 04/28/2010 - 01:03 | 321267 Jefferson
Jefferson's picture

Geithner worked for Rubin at Treasury and at the CFR, where Rubin was a high level officer working for Peterson, Geithner worked for Peterson at the NY Fed, where Peterson was chair. Peterson oversaw geithner and Rubin (Citi Goldman) as well as the criminal billionaire Greenberg also of CFR and AIG. Carla Hills and William Cohen worked for Peterson at the CFR, and served as board members at AIG, then both left abruptly before the crisis went down. What did they know when they left AIG, did they relate this to Peterson of CFR-NY Fed and Blackstone, Blackrock was instrumental in aiding the NY Fed in the crisis making millions, as did its arm leength affilate Blackstone. Its almost like Blackstone-AIG- Citi-Golman are one firm as they trade execs back and forth. This used to be called an investment pool, syndicate, or unification of interests, once illegal under US Antitrust law, and all the more interesting when all the evidence points to these unified corporate interests being controlled behind Peterson et alia, by anothe foreign investment pool so far unnamed.
Look at the major instiutional shareholders of these same firms, all the same, foreign, tied to Petrochina-aramco axis and the Caspian, and major recipients of federal largesse through the AIG bailout sending billions abroad to the same. A very well oiled, professional bipartisan fleecing of the American taxpayers, all the while the red-blue, lib-tea party debate goes on like a drama within a drama. Your blog is pure distraction from the real criminal activities of the transnational criminal syndicate.

posted by what's wrong at http://seminal.firedoglake.com/diary/43519

Wed, 04/28/2010 - 01:15 | 321277 Jefferson
Jefferson's picture

Good Tuesday morning. Before heading to Iowa (and overnighting in Des Moines), President Obama drops by the Roosevelt Room at 9:30 a.m. to greet members of his deficit commission, including chairman by Erskine Bowles and Alan Simpson. After their first formal day of work, Bowles and Simpson will be back together TOMORROW, interviewed by LESLEY STAHL at a star-studded, all-day Peter G. Peterson Foundation “National Fiscal Summit”: “Range of Voices to Include President Clinton [interviewed by Schieffer], OMB Dir. Peter Orszag [interviewed by Meacham], CAP CEO John Podesta, Sen. Judd Gregg, Rep. Paul Ryan, CBPP Dir. Robert Greenstein, fmr Treasury Sec. Robert Rubin, EPI President Lawrence Mishel, and fmr Federal Reserve Chairmen Paul Volcker and Alan Greenspan.” Plus Neera Tanden and Gwen Ifill! Request press credentials here

http://www.politico.com/playbook/

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