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Did Paulson Have A $2 Billion Bear Stearns CDS Short In Late 2006? Novel Observations On Abacusgate
Reading a 901 page Goldman document production (cover to cover) at 36,000 feet has proven to be both relaxing and quite productive. Among the plethora of emails, documents and memoranda, we may have stumbled upon something that could prove to be an even "bigger short" for John Paulson than RMBS: a $2 billion postion in Bear CDS initiated prior to January 2007, as well as all other financial firms. Additionally, we discover that arguably the world's richest hedge fund manager (for a reason) was prophetically putting on bank counterparty hedges as early late 2006, up to and including Goldman Sachs itself. Most relevantly, in what could be damaging disclosure by Fabrice Tourre, the Frenchman notes that as a result of Paulson's mistrust of Goldman's counterparty risk, the Abacus AC1 deal was structured in a novel way in which "they would be acting as protection buyer, facing the ABACUS SPV (as opposed to a structure where Goldman is protection buyer as is usually the case)." This little legalistic variation could make a world of difference in an Attorney General's hands. It may be time to very carefully read the indenture of AC1 and compare it with those of 2006 and earlier "Abaci."
An email thread from January 6, 2007, which features all the usual suspects (Tourre, Sparks, Swenson, Lehman, Rosenblum and Ostrem), located on page 755 of 901, has proven to be a cornucopia of information into the Goldman, and Paulson, thought process.
Starting at the bottom:
From: Tourre, Fabrice
To: Sparks, Daniel; Swenson, Michael; Lehman, David A; Rosenblum, David J; Ostrem,Peter L
Cc: ficc-mtqcorr-desk
Sent: Sat Jan 06 19 : 06 :41 2007
Subject: Post on PaulsonDavid Gerst, Cactus Razzi and I had a meeting with John Paulson and his team last Friday. The meeting was attended by [redacted] and [redacted] at [redacted]. The purpose of the meeting was for the Paulson team to meet [redacted] and understand whether [redacted] could be a good candidate for acting as portfolio selection agent for an ABACUS COO trade where all the risk would be provided by Paulson.
At the end of the meeting, the Paulson team told us that they were happy to have met [redacted] and assuming that (1) [redacted] could get comfortable with a sufficient number of obligations that Paulson is looking to buy protection on in ABACUS format , (2) [redacted] could get comfortable being in the market as early as end of January with a transaction under which [redacted] is disclosed as Portfolio Selection Agent (without any credit risk removal rights), and (3) Paulson, Goldman and [redacted] agrees on [redacted]'s required compensation for a transaction like this, then Paulson will want to proceed with [redacted] as soon as possible and be in the market as soon as possible .
We now know that the redacted firm is GSC, and that before ACA, Paulson would have been perfectly happy to go with GSC as portfolio agent: in fact he didn't care who the agent was as long as one existed, (and was not Goldman). The man just wanted to put on his big short (not to be confused with his bigger short, discussed shortly), and have somebody willing on the other side. In an email from January 29 (p. 480 of discovery), Fabrice writes:
As you know, a couple of weeks ago we had approached GSC to ask them to act as portfolio selection agent for that Paulson-sponsored trade, and GSC had declined given their negative views on most of the credits that Paulson had selected.
Sure enough, Tourre scrambled and promptly discovered Laura from ACA, who proved that 22 years of industry expertise is never a hindrance to blowing up your firm in record time, and ended up being a willing receptacle for Goldman's and Paulson's toxic detritus. We will leave the specifics of whether or not she was flimflammed by Tourre: after all that is at the heart of the civil, and now criminal case against Goldman. Although if Tourre's court testimony is as full of contradictions as his Senatorial one, we hope the Goldman whiz kid is a better buyer of Bail Bond insurance.
Going back to Tourre's long ago email. He concludes it with this rather stunning paragraph, which shoul be an eye opener to all who are following the Goldman case:
One issue remains w.r.t. this Paulson-sponsored transaction: it is related to the fact that Paulson is concerned about Goldman's counterparty risk in this illiquid CDO transaction, even with the existing CSA [ISDA Credit Support Annex] that is binding Goldman and Paulson. For this reason they are asking us to structure a trade under which they would be acting as protection buyer, facing the ABACUS SPV (as opposed to a structure where Goldman is the protection buyer as is usually the case). As an FYI, for single name CDS trades that Paulson is executing with dealers such as Goldman, [redacted] and [redacted] they are buying large amounts of corporate CDS protection (on the broker dealer reference entities) to hedge their counterparty credit risk!!!
Where to begin. Already in 2006 JP was distrustful not only of the crappy banks, but of all banks, top trading partner Goldman included. It is amusing that when faced with a question of how he approaches Goldman from a trading standpoint, Jim Chanos said he "never shorts his business partners." Ironically, a much more ruthless (and cynics could add richer) Paulson had no such qualms, and was openly insuring against a Goldman default. Yet as we pointed out above, the main observation here is that Goldman essentially changed the legal framework of Abacus when juxtaposed with previous Abacus-type transactions, and by implication all Goldman structured CDO deals: "they are asking us to structure a trade under which they would be
acting as protection buyer, facing the ABACUS SPV (as opposed to a
structure where Goldman is the protection buyer as is usually the case)."
Now this is interesting, because either Paulson changed his mind on this critical matter, or the transaction was misrepresented. As can be seen from the schematic for both AC1 (the 2007 Abacus), and the Abacus 11 from mid-2006 (we pulled the chart from the Credit Committee Memo on page 565 of the presentation), the protection buyer in both cases is in fact GSCM. This makes sense for the 2006 deal. It refutes completely how Paulson was envisioning structure of the AC1 deal.
Here is the 2006 Abacus schematic:
And here is the identical boilerplate for the 2007 Abacus deal:
We doubt that Paulson agreed to let the fine print stay on such a critical issue for him. If indeed he was buying up protection as a hedge for all corporate deals, he would certainly with to disintermediate Goldman from the process. Either way, this could be a rather substantial variation in the Reg-S/144A language of the prospectus, which would ostensibly go straight to a 10(b)-5 violation issue. Ultimately, if there was in fact predetermined legalistic commingling and/or misrepresentation of the initial protection buyer, that could make the legal defense case much more problematic.
One tangential question we have in this regard is how has Goldman's Abacus outside counsel McKee Nelson not gotten an iota of press coverage so far. As the Mortgage Capital Committee memo from March 12, 2007 discloses (p. 505), "The transaction disclosure notes the various capacities in which Goldman entities act as counterparty to the transactions and the risk factors section notes the potential for conflicts of interest. As with prior ABACUS transactions, we receive advice of outside counsel (McKee Nelson) regarding disclosure in ABACUS securities offerings and all such disclosure will be reviewed and approved by Tim Saunders in Legal.
"
Another tangent: in his email from February 8, 2007, David Rosenblum proves he is unbelievably prophetic. A day earlier, with regards to the Abacus process, Fab Tourre wonders (p. 482):
Gerstie and I are finishing up engagement letters with ACA and Paulson for the large RMBS CDO ABACUS trade that will help Paulson short senior tranches off a reference portfolio of Baa2 subprime RMBS risk selected by ACA. We intend to go out in the market and distribute ABACUS notes off this trade starting on February 23. At the time we distribute, we will cross the tranches into Paulson -- therefore no commitment for us to take down any risk. Happy to sit down tomorrow to walk you through the economics. Do you need us to go to Mortgage Capital Committee for this trade? Let us know, thanks.
To which Rosenblum responds:
Still reputational risk, so I suggest yes to MCC.
Good call David.
Anyway, all these are issues for the disclosure lawyers, and scandal media to debate. Even though we are merely the former, and in our free time we allegedly ghost write for MTV miniseries, we will leave this topic to bigger experts in the field.
What we will focus on however, is Michael Swenson's response to Fab in early January 2007:
I can not believe it!!! Absolutely amazing.
Believe it Swennie. Less than two years later the government will have to come and bail you out, once again vindicating Paulson for being the most prophetic person on Wall Street in the 2005-2008 period.
And it continues. Fab next describes the GSC meeting in detail. And here is where you should pay very close attention.
The meeting itself was surreal. Am hearing that Paulson bought $2bn of [redacted] CDS protection, sucking all the liquidity on that name in the corporate CDS market. Also, on the side [redacted] mentioned to me that he had heard from many different sources that one reason why the ABX market was trading down so much in December was related to [redacted] building a sizable short and buying large amounts of ABX protection from the market.
The first bolded [redacted] is the 64k question as this would set off a chain of events of everyone copycatting Paulson into shorting whatever he was shorting. His Oracular star was ont he rise. And the anwer is provded by Michael Swenson's response following 4 minutes after the Fab email.
I wonder who gave bear the liquidity
In other words, who sold the protection... on Bear Stearns. Was Paulson massively short Bear as early as 2006? If so, the amount of money he made shorting RMBS may pale in comparison with how much he likely made on the short synthetic side in financials.
As the chart below demonstrates, Bear CDS in late 2006 was trading around 18 bps. Days before it was handed off to JPM for pennies it hit a record 751 bps.
As $2 billion notional has a DV01 of about $800,000, assuming that paulson sold at or near the top he made nearly $600 million by shorting Bear via purchasing its CDS. Surely, as Fab disclosed earlier, he did not stop there, and was long protection each and every bank he was trading with. That financial short trade alone likely netted about $3-4 billion in total.
What is funny, is that an ever ready to piggyback on any good idea Goldman Sachs, decided to do precisely what Paulson was doing. As disclosed on p. 765, by March 27 Goldman was accumulating a massive short in Bear share, to the tune of an $18.6 profit in Jump To Default, i.e., should the firm fail.
By July 27, this number had nearly doubled to $33. Yet observe which firm had the highest JTD value at this date: none other than rating agency Moody's, in which Goldman had accumulated a whopping short position.
So much for nobody having heard of Paulson as CNBC claims: Goldman's entire prop trading strategy in late 2006 and early 2007 was determined exclusively by JP's actions - after all, unlike all other obsequious Goldman clients, Paulson would not bat an eyelid before shorting Goldman. And however Goldman is positioned on prop, so the entire market soon follows. We wonder at what point Goldman decided to start accumulating AIG CDS, and whether that trade was also predicated by following the "Paulson" example. To be sure, there are 1,999,099 discovery pages still held by the Senate and the SEC. We urge them to release these pages immediately so that every action of Goldman Sachs can be deconstructed by the objective public.
And in parting, we wanted to leave you with this eail from Peter Kraus to Lloyd Blankein, in which Krais implicitly acknowledges that the firm is a monopolist, and that clients really have no choice than to stay with his firm (p.655):
From: Kraus, Peter
Sent: Wednesday, September 26,2007 10:15 PM
To: Blankfein, Lloyd
Subject: Re: Fortune: How Goldman Sachs defies gravityI met with 10+ individual prospects and clients (and 5 institutional
clients) since earnings were announced. The institutions don't and I
wouldn't expect them to, make any comments like ur good at making money
for urself but not us. The individuals do sometimes, but while it
requires the utmost humility from us in response I feel very strongly
it binds clients even closer to the firm, because the alternative of
take ur money to a firm who is an under performer and not the best,
just isn't reasonable. Client's ultimately believe association with the
best is good for them in the long run.
Thank you Peter, we completely agree: it is very "unreasonable" for anybody to think about leaving the monopolist. After all (and by implication) - just where the hell could will they go?
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so goldman sachs = mafia
brilliant
The burning question in my mind is, will these men call their Mother next weekend and apologize for being so bad?
Bear was the largest shareholder of ACA. He was facing ACA and knew ACA was doomed? ACA sharholders should be fuming - why did ACA not put Paulson in comp so they could get best possible price? THey took down many of the AAA's and they could have lost less money. Seems like ACA was some sort of front company created to take down CDO risk, collect management fees and put off risk to shareholders.
What, the ACA CEO + Goldman Counsel + Pillow wasn't your first clue? I would like to see what Roseman walked away with after ACA blew up.
I ♥ Paulson
Can the massive short of Bear even move a tick without the DTCC burying their head in the sand on insidious naked short selling?
Goldman cannot counterfeit US Dollars or Euros or Gold, or can they, but it sure as hells looks like you can counterfeit any stock you want with naked short selling.
Irony of Ironies
I was just checking the price of GS and to my surprise GS is also the stock symbol of Rosies' employer
Can't get past the fact that this Kraus dude is probably a gazillionaire, yet he writes the CEO in LOLspeak and is apparently unaware of the difference between plural and possessive.
Sounds like a man with a quick mind might just be able to pass an interestingly wurded contract past said milliardonaire and walk away with his cookie jar.
Yeah he must be . Sounds like the same dud whio move to ML and worked there for 2 weeks before it was sold to BofA triggering his golden parachute. 25 mil for 2 weeks work. Thats the ticket!
I would love to see his email to blankfein printed on the front page of the WSJ and NYT... there wouldn't be a need for a civil or criminal case after that.
"At the time we distribute, we will cross the tranches into Paulson -- therefore no commitment for us to take down any risk".
So, if Goldman had no risk on their books, having transferred it to Paulson, their short position with AIG was naked short, not a hedge (as argued by Blankfein et al), surely? And thus, they knew that what they had sold was likely to collapse?
DavidC
And their excuse is that as a market maker (not an investment advisor or fiduciary) it didn't matter what they knew, just that they were simply providing a service for a client while also working their own book. The question is what they told the parties in the market they were making.
Financial crooks always ask the same question. What are the rules. Just tell me the rules and I will figure out a way to make money, even if that means I bend (or break) the rules. They often see the rules as a way to exclude and restrain the competition, not as a constraint upon themselves.
CD, this one is for you. It goes straight to the heart of what you speak - WE WANT TO BE LIED TO!
http://nypress.com/article-21163-fraudonomics.html
Enjoy!
Thank you!
A quote from the article. Sounds like the drum I've been beating.
"So they hung Lehman out in the free-market, and BAM! The. Shit. Hit. The. Fan. No shit, dudes—the free market is for suckers, didn’t your daddy teach you idiots that? Not only did Lehman collapse—everything collapsed; confidence in the entire system collapsed. And here’s what I’m trying to explain to simpletons like you: Our economy is just a confidence game. Don’t ask me how it got this way, don’t care.”
Now comes the important part. Everyone now knows that the powers that be will not only bail out the banks but they will bail out all current and future fraud. So the game is now on one hundred fold. The sky is now the limit because the whites of the (fraud) eyes have been seen and no one fired the second shot after Lehman.
Game on baby, game on.
as is common in criminal law, their defense is their confession
"as usually is the case"... and is also common, their own words may impeach them
A time to rejoice (and mix metaphors). The dams have opened, enough catalyst has made the reaction critical. Expect more and more of those victimized to dig, discover, and go ballistic.
Legalities no longer matter, considering the materially immoral and illegal acts by Squid and its ilk, even while softfooting it at the edge of the precipice of securities law. There ought to be an avalanche of civil and criminal proceedings, a whirlwind of discovery, and hopefully a centralized website of interrogatories and depositions to enlighten more and more victims and fuel even more lawsuits.
Bury them!
Plural's? Possessives's?
DavidC
Bravo for your intercontinental reading marathon TD and the detective work you're doing...
YOU ARE DOING WHAT MY GOVERNMENT SHOULD BE DOING and hopefully they are, or at least have ZH in their feed readers, the lazy bastards... I suppose it's clear by now that some people who 'matter' have helpers who do in fact read ZH closely.
incorrectamundo! government should not be wiping your ass for you OR any other task.
lol :)
Folks like Tyler who do the detective work should file their own charges in the matter, make their own arrests, bring the miscreant to independent "C"itizen trial, and receive booty if they win or loose their ass if they loose and have slandered the accused.
Generally, loose asses come from Latin American travel, not Europe, which is where Tyler is headed. That is, unless, he succumbs to the advances of the many horny homosexuals on the TGV.
Otherwise, I like your thinking.
Disintermediation, bitches!!!!!!!!!!!
Seriously, it's not porn! Why would the SEC be interested?
This is one of the finest pieces of financial reporting I have ever read and I am almost 60. You gotta give Paulson some credit here.
What keeps rattling in my mind is Matt Taibbi's piece on naked short selling, where he writes about how someone made $200+ million in about a week's time shorting Lehman; and of course, how the SEC has done nothing about it. I wonder if the trail isn't beginning to get warm?
Picture if you will Jim Carrey as The Mask as John Paulson (to wit):
"Can't make the scene, if ya don't have the green."
"Somebody stop me!" (see that brick wall now eh, John?)
"Smokin'" (yup, you were, but prepare via Newton's equal, but opposite to be smoked.)
Love that movie!
The derivatives lobbying organization is hiding the decline in the reform bill. They're playing every card they have, starting with this "Goldman did it" nonsense. Goldman is the sponge that is sucking up all the attention while the DTCC changes nothing in regards to naked short selling.
The same game will continue. If you can counterfeit a stock, what else can you counterfeit? What about bonds?
We have powerful players that are seeking to undermine capital markets through the exploitation of every last loop hole that allows them to counterfeit legitimate capital.
We're in a world war right now. We just don't know it yet. In 12 months the shooting will commence. And it won't be in Iran.
How could you tell that something was wrong at Enron? The tell was Andrew Fastow in charge of the books. You don't learn how to count up while you're the one structing the finances at Continental Bank of Illinois.
There is nothing uglier than opening a refrigerator that has lost power and been closed up tight for a few months. You haven't smelled putrid until you get a whiff of that. I suspect if there is enough political will (always in short supply) we may all be a bit shocked how bad the smell will get as the door is pried open.
How about 15 dead bodies in water in 105 degree heat after three days?
That beats your refrigerator any day.
I experienced that 40 years ago and I can still smell them and see them.
Glad I wasted my time fighting for this system.
I appreciate your comment but it wasn't intended to be a competition, just an illustration of the stink. I suspect your comment about fighting for the system means military service. If so, I'm sorry you are now seeing what it was you were "fighting" for, which most certainly wasn't what you were lead to believe, beginning in kindergarten.
Now is the time to fight for what "it" needs to be, a nation of engaged and aware people, not what the Ponzi tells us it is. You know how effective a small group of determined men and women can be if they are properly motivated and trained. We must become and we can become this force.
This is precisely why sites like ZH are so dangerous to the Ponzi and why they fight against them with trolls, operatives and denial of service attacks. Understand that the level of opposition means we are winning, not that we have lost.
This whole episode remids me of the scene from Godfather ( part2 I think) - where Michel conducts an all out war on all his enemies and wipes them all out.
there i was in 2006 saying to myself that a "negative amortization mortgage" was the stupidest thing ever invented.
little did i know.
next time, i guess.
we should call you Ohio cuz your 4 years behind.
or you can call me Daft.
what is the "vote with a bullet" movement?
Someone really needs to analyse this whole episode tracing the main characters:
1. Hank paulson - Treasury Sec
2. John Thain - NYSE chief - then ML CEO ( golden Commode fame)
3. Tom Montag - Debt Capital Markets wizard extraordinaire - GS then ML- currently at BofA - subject of many of these emails
4. Peter Kraus - went to work for Montag at ML , left with 25 mil after 2 weeks
5. The ex AIG CEO dude - also on GS board ( whats his name ?)
6. Steve Friedman - NY Fed - " negotiating the AIG bailout" while trading GS stock on his personal account as events unfolded.
7. Robert Rubin: Shiticorpse board - trusted adviser to many whitehouses. Deep connections.
8. Robert Steel: GS Board member - to Wachovia - sold to Wells fargo
9. Numerous ex- partners strategically positioned at hedge funds with large amounts of trading capital.
All blood brothers sworn into the holy order of GS.
Perhaps decided to capitalize on a moment in history ( 2008) with the most incompetent president in US history, neutered regulatory apparatus and a country at war on two fronts and their team strategically positioned at every table that mattered.
Is GS similar to Skull and Bones?
I'd like to see the communication between all the top cats in Govt and banking when discussing the fall of Bear and Lehman.
Blankfein: hank, we have a huge short on Bear.
Hank: ok then, bear is gone.
anyone else?
Wamu CEO was right. If you aren't in the secret insider group, you will be left out in the cold by your government.
It's not what you know, but who you blow.
good work prime, looking at all that will prob clear the pic up a bit. hank, turbo and aig
Given that GSC is run by GS-alumnus, Fred Eckert, it's not surprising they gave this trade a wide berth. Eckert knows from experience that GS are the f**kers and their clients are the f**kees. Thanks, but no thanks.....
Damn, John Paulson was smart....
Say TD,
Re:
'As can be seen from the schematic for both AC1 (the 2007 Abacus), and the Abacus 11 from mid-2006 (we pulled the chart from the Credit Committee Memo on page 565 of the presentation), the protection buyer in both cases is in fact GSCM. This makes sense for the 2006 deal. It refutes completely how Paulson was envisioning structure of the AC1 deal. We doubt that Paulson agreed to let the fine print stay on such a critical issue for him. If indeed he was buying up protection as a hedge for all corporate deals, he would certainly with to disintermediate Goldman from the process. Either way, this could be a rather substantial variation in the Reg-S/144A language of the prospectus, which would ostensibly go straight to a 10(b)-5 violation issue. Ultimately, if there was in fact predetermined legalistic commingling and/or misrepresentation of the initial protection buyer, that could make the legal defense case much more problematic.'
Do you have the final offering for Abacus, specifically confirming the equity tranche where Paulson was going long, iterations don't matter worth s*&t. If in your archives please advise where.
Much thanks.
'