Guest Post: The CDOs That Destroyed AIG: The Big Short Doesn't Quite Reveal What They Knew And When They Knew It

Tyler Durden's picture

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fritz's picture

Don't expect congress or federal agencies to take any action.

Government fraudsters make Bernie Madoff look like a novice. 

Jake3463's picture

Before getting the pink slip in August 2009, I was an auditor.  This entire notion of looking forward makes me laugh. 

Barack Obama better wake up real quick.  If there is one thing Republicans don't do with political opponents is look forward and his Treasury Secretary buddy is a prime target for them to beat up on as a distraction of fights with him if they take the House of Representatives and they will beat up on him.

jeff montanye's picture

it's healthy that there is at least one opposition party in the u.s.  the just possible silver lining in obama's copying of bush's policies in the financial, military and national security realms is that to oppose obama most effectively (versus "what the people want") the republicans will repudiate the policies (only to a degree and without saying so).  maybe that's why ron paul came in first at the conservative convention.  one can dream.

bruiserND's picture

"The best way to start to get to the bottom of all this is to pass a law that requires all performance reports of all private label mortgage securitizations, past and present, be made public. Second, as I wrote previously, there should be a national registry for every ownership claim, including every derivative claim, on a mortgage securitization."

David Fiderer is brilliant.

You also can reverse engineer all this crap and quantify the damages and tear up the CDS's that were fraudulent money transfers to "speculators".

To do this would restore trust and confidence in the system as well as put perpetrators behind bars.

The other option is anarchy which I believe is the highest probability option since our"government" has been captured by a Bankster Oligarchy.

The good news is that once the anarchy option is excercised all the Banksters will be hanging by their achillies tendons from lamp posts.

illyia's picture

Wow. What an article.

And, only two comments? Make that three.

This is the real story of the century.

Thanks, David Fiderer. More, please!

Miles Kendig's picture

Or as Lloyd Blankfein testified, "what we did in that business was underwrite to [] the most sophisticated investors who sought that exposure."

There is no such thing as a "sophisticated investor", just degrees of knowledge, skills and abilities.

BDig's picture

Being classified as a "sophisticated" investor is equivalent to signing a release of liability form.

rawsienna's picture

It was well known on the street that the AIG and rating agencies were a bunch of idiots and that the lower rated tranches of the subprime CDO deals were garbage. As early as Feb 2007, when TABX (a synthetic CDO based on ABX BBB and BBB- tranches) started to trade, the demand to short the 40-100% attachment (rated AAA FYI) was so huge that I believe it traded down 5 points on its first day (worth zero today). Everyone knew - not just Goldman and DB, they were just smarter than everybody else. Other such as LEH, BEar, ML were too busy thinking that their originate to distribute model along with the new issue CDO machine would make em enough money to offset the losses. THey were wrong. 

Bottom line,most of these CEO's didnt want to know the truth.  They just wanted their check. Like I said, give Goldman and DB credit for being smart enough to short enough of the crap (along with AIG and other financial stocks) to protect themselves. The real problem were the idiots running risk at the other places.

Mercury's picture

Securities, cash flows, obligations etc. shouldn't be able to be obscured into oblivion by CDOs or anything else.  You should be able to look at a mortgage and figure out who is obligated to whom in about 30 seconds (through some national registry or whatever.)

However, if you're alone in a room with Goldman Sachs and they sell you something you don't understand, that's a bad sign. It's hard to gin up too much sympathy for AIG in this regard.

And Michael Lewis: subprime lenders may be scumbags and the upper class of American capitalism may have been complicit but without the Feds pushing and poking financial institutions to extend mortgages to certain, pre-selected groups of people and without the government blessed oligopoly of the ratings agencies in a unique position to turn shit into shine, it's hard to see how this all wouldn't have self corrected a long time ago.

naiverealist's picture

This goes in line with when you are at a poker table and can't figure out who the sucker is, then it is you.

Great article!

bruiserND's picture

Fight back !

Landmark Decision: Massive Relief for Homeowners and Trouble for the Banks.
BoyChristmas's picture

Asymmetric information, I told my professor two years ago that was the foundation for the crisis. European pension funds couldn't research the collateral in a CDO so instead they rely on historical performance and the pitch of some Goldman bond salesman. 

Tried to actually write a paper on the lack of data, specifically performance tracking...of course I quickly found out all the data cost 6 figures and once you get past the first level of securitization its a rat maze.

rlall's picture

Great Article

Interesting related post by Simon Johnson on Huffpost discussing Sen. Kaufman speech on fin regulation

"Following these transactions, Goldman Sachs and other investment banks underwrote billions of Euros in bonds for Greece. The questions being raised include whether some of these bond offering documents disclosed the true nature of these swaps to investors, and, if not, whether the failure to do so was material."

"These bonds were issued under Greek law, and there is nothing necessarily illegal about not disclosing this information to bond investors in Europe. At least some of these bonds, however, were likely sold to American investors, so they may therefore still be subject to applicable U.S. securities law. While "qualified institutional buyers" (QIBs) in the U.S. are able to purchase bonds (like the ones issued by Greece) and other securities not registered with the SEC under Securities Act of 1933, the sale of these bonds would still be governed by other requirements of U.S. law. Specifically, they presumably would be subject to the prohibition against the sale of securities to U.S. investors while deliberately withholding material adverse information." -Sen Kaufman

This sounds like a potential violation of Rule 10b-5 -- you are simply not allowed to sell securities in the United States while withholding material adverse information, i.e., what any reasonable investor would want to know (like the true indebtedness of a government, when you are being pitched on a sovereign debt issue). In fact, such actions are frequently considered serious fraud -- at least when the people involved aren't as powerful as Goldman Sachs. - Simon Johnson

Gromit's picture

In July 2007 Markit was quoting BBB CDS in the sixties - but AA and AAA were still at 99 something......

Indeed the trade that killed many hedge funds in early 2008 was long BBB, short AAA. Peloton comes to mind.

I post this because the general tendency here and elsewhere is to claim sone sort of fraudulent conspiracy to bring down AIG etc. I reckon the truth is a little less spectacular, no-one at that time thought AAA would blow up, GS bought the CDS because it enabled them to sell a securitization for a little more money than the cost of buying the CDS  because the rating agencies gave  higher ratings.

And AIG added a penny or two on quarterly earnings.


BDig's picture

Excellent article!  Thank you.

mark456's picture

ucvhost is a leading web site hosting service provider that is known to provide reliable and affordable hosting packages to customers. The company believes in providing absolute and superior control to the customer as well as complete security and flexibility through its many packages. cheap vps Moreover, the company provides technical support as well as customer service 24x7, in order to enable its customers to easily upgrade their software, install it or even solve their problems. ucvhost offers the following different packages to its customers

mbtshoe's picture

Welcome to visit So cute and how stylish they are! The peep toe shoes are various styles such as peep toe pumps. These peep toe high heels can make you crazy which are so sexy! For example, red peep toe pumps are so charming! The black peep toe pumps are so calssical! White peep toe pumps are so pure! The wedge peep toe shoes can bring you different comfortable feeling! We offer many series of sandals high heels such as Alexander McQueen Shoes, manolo blahniks, manolo blahnik wedding shoes and christian louboutin slingbacks. The peep toe slingback are hot sale this summer! Welcome to shop or buy fashionable sandals high heels shoes!