Guest Post: Goldman's Blueprint For Dumping Toxic Assets: How These CDOs Were Designed To Fail

Tyler Durden's picture

Submitted by David Fiderer

Goldman's Blueprint for Dumping Toxic Assets: How These CDOs Were Designed to Fail

"Although Goldman Sachs held various positions in residential
mortgage-related products in 2007, our short positions were not a 'bet
against our clients.'"

That claim, from Goldman's letter to its shareholders,
is easily refuted. The S.E.C. has brought fraud charges on one of
Goldman deals known as synthetic subprime mezzanine collateralized debt
obligations, or CDOs. While most of these deals remain shrouded in
secrecy, one of them, Anderson Mezzanine Funding 2007, Ltd.
lays out its blueprint in sufficient detail so that we can pinpoint how
and why this transaction's failure was never in doubt.

When the deal closed on March 20, 2007, there was virtual certainty
that investors would get wiped out and that Goldman would receive a
windfall. And that's exactly how things turned out. By December 2009,
Anderson Mezzanine's nominal value had shrunk by more than two-thirds,
from $307 million to $94 million, though remaining assets' fair market
value was far less. The investment portfolio, which held only two
performing assets, had an average credit rating of CC.

Anderson Mezzanine is by no means unique. More than $70 billion
worth of toxic assets were dumped into mezzanine CDOs during an
eight-month period between September 2006 and April 2007, when it
became obvious to Wall Street banks that the lower-rated slices, or
tranches, of mortgage-backed bonds were worthless. Other Goldman
deals--Hudson Mezzanine Funding I and Hudson Mezzanine Funding II,
various Abacus deals--were also designed to insulate the banks from
losses on assets it knew to be worthless.

Eventually The Risk of Failure Morphs Into Absolute Certainty

A CDO is like a mutual fund or a hedge fund. It's an investment
portfolio, which, subject to certain limitations, may be actively
managed. Sometimes a CDO, including Anderson, also acts like an
insurance company. It receives fees for insuring certain identifiable
risks, and, whenever called upon to pay out on an insured claim, it
will liquidate part of the investment portfolio.

But insurance companies take on risks when the outcome is in doubt.
Anderson Mezzanine was more like a life insurance company that insured
the lives of 61 patients with Stage IV lung cancer. Whenever a patient
died, Goldman, the insured beneficiary for all 61 patients, would
collect $5 million. If Anderson had insufficient cash on hand, Goldman
could dip into CDO's investment portfolio and decide which asset it
wanted to liquidate. If the asset could not be sold easily, Goldman
would arrange an auction, in which Goldman might end up as the winning

Cynics might argue that these arrangements smack of fraud and
abusive self-dealing, but Goldman could rightfully point to documents
that put investors on notice. All of these pitfalls were identified in

Playing the Ratings Game

But these pitfalls weren't exactly conspicuous. A potential investor
would need to spend a lot of time and effort deciphering the offering
circular and related documents, such as the Bond Indenture, the
Liquidation Agency Agreement, or the Forward Purchase Agreement, in
order to figure out what was really going on. He would also need to
conduct a financial analysis of the 61 different mortgage securities
being insured via credit default swaps.

Or he might take some shortcuts, and simply rely on the deal's
stellar ratings. The most senior tranches of the CDO, comprising 70% of
the capital structure, were rated AAA. After all, the rating agencies
had reviewed and rated all of the 61 insured mortgage bonds, so their
institutional memory and expertise was embedded inside the ratings
awarded the Anderson deal.


Anderson Mezzanine's structure, its business model, was defined by
credit ratings. Its investments, which were all acquired from Goldman
at par or close to par, were all rated AAA. The 61 mortgage securities
covered by credit default swaps were rated BBB or BBB-, except for one
CDO, which was rated BBB+. If any of those insured mortgage securities
were ever downgraded to CCC, Anderson was required to pay Goldman $5
million, the par value of the investment, in exchange for Goldman's
delivery of the underlying mortgage security. Again, this risk of
downgrade was part of the institutional knowledge that Moody's,
Standard & Poor's and Fitch brought to their ratings decisions on


Sixty-one credit default swaps, each for $5 million, total $305
million in contingent liabilities. Those obligations were backed up by
cash and investments totaling $306.5 million at closing. (Investors
contributed about $307.5 million, from which Goldman and others took
out $2 million in fees.) At first blush, the setup seemed like it
afforded scant margin for error, given that the AAA investment
portfolio was less than 1% larger than the credit default swap
obligations. But investors could take comfort in the fact that Goldman
had skin in the game. The bottom 10% of the capital structure--$21
million in equity plus $10 million in bonds rated BBB--would be funded
by Goldman itself. The other 90% of the deal was marketed to outsiders,
who bought tranches in the deal rated AAA, AA and A.

Insuring Assets For 30% More Than Their Mark-to-Market Value

For Goldman, $31 million spent on equity and BBB bonds was the cost
of putting the deal together. Given the market value of the securities
being insured, Goldman got a big windfall on day one. On March 20,
2007, the market value of the mortgage securities was about 70% of par,
or 70 cents on the dollar. Since the beginning of 2006, the valuations
of subprime mortgage securities had been benchmarked against a market
index known as the ABX. The BBB tranche of the ABX had not traded at par since November 2006. At the end of March 2007, the BBB and BBB- tranches of the ABX traded in the range of around 70.

Goldman was not the only Wall Street insider that invested in CDOs designed to produce windfalls. Other hedge funds, Magnetar and Paulson & Co., did the exact same thing.

Accountants would have picked up on the problem right away. Under
the new accounting rules, exotic instruments like Anderson Mezzanine
were required to be measured according their fair value. Since there
was very little trading of subprime securitizations, the FASB specifically directed that the ABX
be used as a proxy to ascertain fair value. For better or worse,
accounting rules could have mandated that investors recognize an
instant 30% loss, based on the fair value of the 61 assets insured via
credit default swaps.

Chronicles of Defaults Foretold

But accountants usually wait to receive the financial statements
before conducting any review. The wait for Anderson's statements was
exceptionally long. The first financial statement was issued on July
12, 2007, well after most companies had closed their books for the
first and second calendar quarters. As it happened, July 12, 2007 was
the first date that one of Anderson's credit default swaps became due
and payable. On July 12, 2007, Standard & Poor's downgraded Argent Securities Trust 2006-W4 M-9 from BBB to CCC.

The downgrade was no surprise. In fact, it was amazing that the
bonds had not been downgraded much earlier. Long before the Anderson
deal closed, it was obvious that the Argent bonds were worthless. In
February 2007, Argent 2006-W4 had attained a foreclosure rate of 9%.
For any mortgage deal, a 9% foreclosure rate in the first year is
astronomical, literally off the charts. By the time of the S&P
downgrade in July, the foreclosure rate had spiked to 11%.

Consider that it takes quite a while before a residential property
is foreclosed upon. In general, the foreclosure process cannot begin
unless a borrower has been delinquent in his payments for at least four
months. The process of resolving a loan default--from the date of
initial delinquency, to the date when foreclosure proceedings commence,
to the date when final sale proceeds are applied against the loan
balance to calculate the true loss--can take about a year. That's why
Moody's rule of thumb, for evaluating a pool of mortgages, was to
assume that only 3% of the losses were incurred in the first year.

It's worth remembering that all of these insured mortgage bonds were
comprised of 30-year, and sometimes 40-year, loans; and a lot of bad
things can happen over that timeframe. And subprime loans had all sorts
of features that virtually assured a high degree of nonperformance. In
many ways, Argent 2006-W4
was a typical subprime securitization, very much like those referenced
by the ABX. About 40% of the loans were "stated income" loans, also
known, for obvious reasons, as liar loans. About half the loans were
"cashouts," where the borrower increases the size of the loan on his
existing home. Cashouts are susceptible to inflated appraisals, since
they are not tied to the reality check of an arms length home purchase.

There were other signs that things would play out worse than
expected during the weeks preceding the closing date of Anderson
Mezzanine. The two largest subprime lenders had suddenly shut down
operations. On February 22, HSBC, the largest subprime lender,
announced that it was withdrawing form the market, after revealing a
stunning $10.5 billion loss. New Century Financial, the second-largest
subprime lender, faced a liquidity crisis following its announcement
that the firm was the target of a criminal investigation for securities

New Century was the originator for at least 10 of the 61 mortgage
bonds insured by Anderson Mezzanine. The foreclosure rate for a number
of the New Century bonds, like that of the Argent bonds, was
extraordinarily high. By February 2007, many of the New Century bonds
had attained a foreclosure rate that exceeded 5%.

The 5% threshold is important. Any subprime bond with an initial
rating of BBB or BBB-, including all the bonds insured by Anderson, is
located in the bottom 5% of the capital structure. Subprime bonds, for
all their complexity, followed a very standardized cookie cutter
capital structure, which was inevitably linked to credit ratings.


Even though large numbers of borrowers had stopped making their
monthly mortgage payments, the mortgage bonds were still paying out
interest and principal to investors. Within each mortgage bond, the
distribution of cash flows may be extraordinarily complex, based on
individualized reserve funds, delinquency triggers and default
triggers. While some homeowners had stopped paying, other homeowners
were prepaying their mortgages, providing sufficient cash to keep all
the bond investors current. Still, the business intent behind each of
these deals was that the lower-rated tranches, those rated BBB and
BBB-, would get wiped out before the higher-rated tranches,
representing 95% of the deal, lost a single dollar.

And since more foreclosures were happening sooner than expected, it
was inevitable that the bonds rated BBB and BBB- would get wiped out.
The capital structures allowed for almost no margin for error. The way
the deals were structured, every $100 in debt was backed up by $103 in
mortgages. There was a $3 dollar equity cushion. Yet the rating
agencies had assumed a 6% credit loss, meaning that every $100 would
lose $6 from defaults. How could a $3 equity cushion offset a $6 loss?
The idea was that the losses would be spread out over time, say $1 each
year, so that interest income earned over subsequent periods would
offset future losses from defaults. But if the losses were frontloaded,
due to high-than-expected foreclosures in the first year, it quickly
becomes obvious that the $3 equity cushion will not insulate the
lower-rated tranches from suffering losses.

A 5% foreclosure rate does not translate into 5% in losses. But a 5%
foreclosure rate in the first year is a distillation of several other
trends--higher-than-expected delinquency rates, foreclosure rates and
prepayment rates--that, when taken together, all foretold the
inevitability of major losses in the tranches rated BBB and BBB-. Put
another way, if a subprime mortgage bond suffered a 5% foreclosure rate
in its first year, it didn't really matter if housing prices
stabilized, got better, or got worse. There simply was no way to
mathematically construct a plausible scenario where the lower-rated
tranches came out whole.

That's why it was certain by March 2007 that the BBB tranches would
get wiped out. Yet, at the time that Anderson Mezzanine closed, all 61
mortgage deals were still rated investment grade. In October 2007, 14
additional subprime bonds were downgraded to CCC and 14 additional
credit default swaps became due and payable to Goldman Sachs. In
January, an additional 10 downgrades triggered an additional $50
million payable to Goldman.

The Mad Rush to Dump Worthless Assets Into CDOs

Anyone who had done a cursory analysis of the 61 mortgage bonds
could see that it was only a matter of time before the bonds would be
downgraded, and that they would default. As it happened, Goldman, and
the other large investment banks were in a race against time. After
HSBC and New Century had announced their disastrous results, Wall
Street banks went into overdrive. During March 2007, they sold almost
$21 billion worth of mezzanine CDOs, triple February's volume and a new
monthly record.

The rating agencies were swamped. They were asked to review and rate
31 mezzanine CDOs issued during a five-week period, between February 28
and April 5, 2007. "It was a massive volume and we did not have the
capacity to handle it," one rating agency executive confided to me. The
agency analysts were certain susceptible to pressure from their Wall
Street clients. One noted expert on structured finance and CDOs had
spoken of a bank that trained its people how to pressure analysts at
the rating agencies to get higher ratings for its CDOs.

Investors in many of the mezzanine CDOs issued during that five-week
period have subsequently brought lawsuits alleging fraud on behalf of
the underwriting banks, and, in some instances, the rating agencies as

Anderson's Declining Asset Portfolio

Anderson Mezzanine assumed two kinds of credit risks. There was the
risk that 61 mortgage securities would fail, or at least be downgraded
to CCC. There was also the risk that the structured securities held in
Anderson's investment portfolio would either default or, if ever
liquidated, sell at a discount. Unlike the 61 credit default swaps, we
cannot identify the investments, specially selected by Goldman, which
were acquired by Anderson. We know of a few investment criteria. All of
the newly acquired assets were to be rated AAA. All of the investments
were to be structured securitizations, holding pieces of loans in
residential real estate, commercial real estate, or some other
structured deal with an insurance guaranty. No more than 12.5% of the
portfolio could be in CDOs. Though the 61 credit default swaps
obligations were fixed at closing, substitutions were allowed within
the AAA investment portfolio.

The structure made no pretense of risk diversification. The minimum
number of investments in the AAA portfolio was two. Or rather, no more
than 50% of the investments could have indirect exposure to a single
issuer of mortgage securities, a single mortgage servicer, or a single
swap counterparty.

Though we cannot identify Anderson's AAA holdings, we do know that
that by July 2007, when Anderson's investors received their first
monthly statement, market prices for structured mortgage deals were
beginning to collapse. As more credit default swaps became payable,
with CCC downgrades announced in October 2007, January 2008 and later,
the market prices of all structured real estate deals kept declining.

Nominally, whenever a credit default swap became due and payable to
Goldman, Anderson did not hand over $5 million in exchange for nothing.
These were physical delivery swaps, meaning that Goldman would exchange
a mortgage bond, which once had a par value of $5 million, in exchange
for $5 million in cash. Now presumably, Anderson's newly acquired
mortgage bond had some value, albeit a small fraction of the original
$5 million. Anderson was required to sell that distressed bond in the
marketplace. The party in charge of selling that distressed bond was
Goldman Sachs, though it could take its sweet time about. Goldman had a
one-year deadline for closing the sale.

On June 12, 2009,
Anderson Mezzanine alerted investors that there was insufficient cash
to make debt service on behalf of investors in the tranche initially rated
AA. But those investors had been disabused of any hope of getting their
money back at a much earlier date.


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anynonmous's picture

"Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a 'bet against our clients.'"


No, Honest, we weren't betting against out clients... we weren't betting against anyone.. we never bet

bad craziness's picture

Fried squid (fried calamari, calamari) is a dish in Mediterranean cuisine. It consists of batter-coated, deep fried squid, fried for less than two minutes to prevent toughness. It is served plain, with salt and lemon on the side.

I'm hungry for calamari.

anynonmous's picture

Two good links on the AirTravel Volcano situation


and their Twitter feed (which ironically is down)


Twitter blackout until 09.00 CET 19APR thanks for following + details at # having a bug with our website so complete press update not live yet - but most of it was posted here about 4 hours ago via web

putbuyer's picture

Great job putting this together. Well written too

Amish Hacker's picture

I'll second that. It reads like one of those mystery stories where you already know who dunnit, but now you find out, to your horror, that it was with the candlestick in the library. I'm not sure I'll be able to sleep tonight after reading that.

DollrZar's picture

I heart goldman sachs

three chord sloth's picture

I heart red-hot pokers up my ass.

Pure Evil's picture

Ok, I think you're looking for the Huffington Post.

three chord sloth's picture

Nah... there's a limit to what even I can bear...

Pure Evil's picture

You definitely have to give GS a AAA rating for ingenuity on how to fleece its clients.

parallaxview's picture

unbelievable. well done.

Jack H Barnes's picture

Thanks for spending the time to write that and sharing it here. 

Here is too some deep fried Calimari in the coming days...

Life is a deep fryer, Karma is the oil...

SayTabserb's picture

Tony Soprano:  Black leather jacket.

Lloyd Blankfein: YSL chalk stripe suit.

Tony:  Open collar.

Blanfein:  Hermes necktie.

Tony:  Territory, Jersey.

Lloyd:  Lower Manhattan.

Tony:  Bribery & Extortion.

Lloyd:  Fraud & deception.

Tony:  Harassed by feds.

Lloyd:  Owns the feds.


Lux Fiat's picture

The footage on Bloomberg of Blankfein walking down the street with a trenchcoat and baseball cap on - his attire was eerily reminiscent of the attire worn by Madoff when he was unsuccessfully trying to dodge the press after the news of his fraud broke.  No swarms of press around Blankfein - yet.

JW n FL's picture

Is it only me or does this Fraud... that is in the multiples of $100's of millions... and in Multiples of deals which I can safely assume add up to multiples of Billions... sound a little more like a criminal case than a civil case?


I sold someone a Bomb... that I built... so that the Bomb could be re-sold, by a fellow bomb maker... and then insured that the bomb would go off after I sold it, to a reseller who also insured the bomb yet again to go off.


A.I.G. the insurance company for Bomb makers everywhere... Thank God (or Goldman) that A.I.G. did not care about insuring Bombs... and why would A.I.G. care what they insure? they made their quarterly bonuses and chapter 7 -11... is a shareholder issue... dumb shareholders. I mean tax payers... I mean both! but lucky us all, we now own all this and more trash, we... the tax payers own everything that didn’t make money. Why would Goldman write down losses when they can dump the non-winners into the tax payer par window? No wonder profits are up and no monies where put aside for settlement(s)... they are doing God's work.. why would they need to build a war chest to pay out for the known Fraud(s) committed.


Criminal or Civil? I really feel very strongly about Goldman being a Criminal ongoing enterprise with the support of a very well financed lobby (thru tax payer dollars) and thusly the everlasting support of the American Tax Payer!



Goldman Sachs

Client Profile: Summary, 2007
Major Political Contributor

Top of Form

Bottom of Form



Specific Issues

No. of Reports*

Energy & Nuclear Power


















Copyright, Patent & Trademark



Fed Budget & Appropriations






Government Issues












Gaming, Gambling & Casinos



Environment & Superfund





Goldman Sachs

Client Profile: Summary, 2008
Major Political Contributor

Top of Form


The Banks are using profits to pay for their Lobby? not the 0% Fed Window?

**** "In the first three months of 2009, the financial sector spent $104.7 million to lobby Congress and the administration, down 8% from the same period last year" ****

So that I am clear... 2008 was a vintage year for Banks? they made soooooooooooooooooooooo much money on 2008 that in the first 3 months of 2009... they could drop $104.7 MILLION DOLLARS?


Is it legal for Goldman (and others) to use Tax Payer Bailout Dollars to Lobby? with against the same Tax Payers that Bailed them out?

Alienated Serf's picture

fwiw, the criminal conviction standard (beyond a shadow of a doubt) is MUCH harder to prove then civil (preponderance of th evidence).  the feds NEVER go criminal unless they know thye can win.  they have a 95% conviction rate...  hopefully enough info comes out to upgrade to criminal. 

JW n FL's picture

William... you are brilliant and the art work over on your site makes me cry laughing... keep up the Great / Fantastic Work!

Thank You! William!

Sincerely, JW

JW n FL's picture

Here are our Tax Dollars hard at work...


Report Content of Specific Issue field

H. R. 1424, Emergency Economic Stabilization Act of 2008.



H.R. 3221, Foreclosure Prevention Act of 2008, all sections; credit default swaps clearing; covered bonds; bond market liquidity; credit rating agencies; sovereign wealth funds; general economic conditions; P.L. 110-227, Ensuring Continued Access to Student Loans Act of 2008, all sections; H.R. 5914, Student Loan Access Act of 2008, all sections; active financing; investment banking issues; over-the-counter derivatives; S. 1356, Industrial Bank Holding Company Act of 2007, all sections; rules on specialists; financial reform.



Regulation of U.S. securities markets, including market structure and exchange-traded funds. Securitization of mortgages, including H.R.3915, the "Mortgage Reform and Anti-Predatory Lending Act of 2007," S.2452, the "Home Ownership Preservation and Protection Act of 2007," and HR 3221, the "American Housing Rescue and Foreclosure Prevention Act of 2008." Financial system stability and liquidity, including HR 1424, the "Emergency Economic Stabilization Act of 2008."



Regulation of U.S. securities markets, including market structure and exchange-traded funds. Securitization of mortgages, including H.R.3915, the "Mortgage Reform and Anti-Predatory Lending Act of 2007," S.2452, the "Home Ownership Preservation and Protection Act of 2007," and HR 3221, the "American Housing Rescue and Foreclosure Prevention Act of 2008."



Regulation of U.S. securities markets, including market structure and exchange-traded funds. Securitization of mortgages, including H.R.3915, the "Mortgage Reform and Anti-Predatory Lending Act of 2007" and S.2452, the "Home Ownership Preservation and Protection Act of 2007."



H. R. 3997/H.R. 1424, Emergency Economic Stabilization Act of 2008.



H.R. 3221, Foreclosure Prevention Act of 2008, all sections; sovereign wealth funds; general economic conditions; P.L. 110-227, Ensuring Continued Access to Student Loans Act of 2008, all sections; H.R. 5914, Student Loan Access Act of 2008, all sections; S. 1356, Industrial Bank Holding Company Act of 2007, all sections; financial reform; H.R. 1424, Emergency Economic Stabalization Act, all sections; US-Australia Mutual Recognition Agreement.



Regulation of U.S. securities markets, including market structure and exchange-traded funds. Securitization of mortgages, including H.R.3915, the "Mortgage Reform and Anti-Predatory Lending Act of 2007," S.2452, the "Home Ownership Preservation and Protection Act of 2007," and HR 3221, the "American Housing Rescue and Foreclosure Prevention Act of 2008." Financial system stability and liquidity, including HR 1424, the "Emergency Economic Stabilization Act of 2008."



Financial services legislation



H.R. 3221, Foreclosure Prevention Act of 2008, all sections; sovereign wealth funds; general economic conditions; P.L. 110-227, Ensuring Continued Access to Student Loans Act of 2008, all sections; H.R. 5914, Student Loan Access Act of 2008, all sections; S. 1356, Industrial Bank Holding Company Act of 2007, all sections; financial reform; H.R. 1424, Emergency Economic Stabalization Act, all sections; US-Australia Mutual Recognition Agreement.



Financial services legislation



Financial services legislation



CFTC oversight - Congressional review of this issue. Credit swaps - Congressional review of this issue; Executive Branch action concerning this issue. Auto bailout - HR 7005, Alternative Minimum Tax Relief Act of 2008; HR 7321, Auto Industry Financing and Restructuring Act; Executive Branch action concerning this issue. Financial economic package - HR 1424, To provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy.



CFTC fees provision - HCon Res 312, Concurrent resolution on the budget for fiscal year 2009; SCon Res 70, Setting forth the congressional budget for the United States Government for fiscal year 2009.



Financial economic package - HR 3997, Heroes Earnings Assistance and Relief Tax Act of 2007; HR 1424, To amend section 712 of the Employee Retirement Income Security Act of 1974, section 2705 of the Public Health Service Act, section 9812 of the Internal Revenue Code of 1986.



Commodity Exchange Act - HR 2419, Farm Bill Extension Act of 2007; HR 6124, Food, Conservation, and Energy Act of 2008. Investment bank proposals - Executive Branch actions re this issue.



Financial services legislation



H.R. 698, Industrial Bank Holding Company Act of 2007, all sections; S. 1356, Industrial Bank Holding Company Act of 2007, all sections; exchange traded notes; covered bonds; credit markets; market structure; credit rating agencies; sovereign wealth funds; auction rate securities; S. 1926, National Infrastructure Bank Act of 2007, all sections; H.R. 3896, National Infrastructure Development Act of 2007, all sections; securities law issues; rules on specialists.





I guess you could say that these pushes by Goldman could be seen as a much broader market manipulation?

jg's picture

Great job laying this out, guys.

Seems incriminating to me, that the collateral was worth 70% on day one, while it was sold at par.

SEC:  fry 'em.

SayTabserb's picture

The SEC is a good start. But as JW asks up above, isn't this a RICO rap?  Does Obama have a Department of Justice? An Attorney General? If so, do they ever do anything at all?

chindit13's picture

Some people are born to be customers.

While perhaps legal, all of this is of questionable morality.  Or maybe it's not.

In the WS pecking order, there are the big HF's and the big IB's, and then there's everyone else.  The Ratings Agencies and Monolines exist merely to allow the top level of the pecking order to legally abuse those for whom the top tier has nothing but contempt.

Making things as convoluted as possible, bullying the ratings agencies, and stuffing the system with more deals than it has the time to address properly reduces "bets" to pretty much sure things.

The system allows it.  Do we want it to continue or not?

Implicit simplicit's picture

 The sec must have thought this through very thoroughly and ran the possible counter arguments that gs will use. They probably have some communicated indictment of guilt that is irrefutable as the law is stated or prescidented.  

Paulson and the rating agency need to be indicted also. The whole system is so corrupt.

Ned Zeppelin's picture

It is long past time for the prosecutors.  I'm long rope, tall trees and lamp posts.

kennard's picture

Caveat emptor for all of this.

The cause of the crisis was politically-motivated bad lending practises. The rest was just people being people.

IE's picture

If you mean encouraging undeserved access to credit and pumping markets with overly low interest rates by whichever party has been in power, in order to sustain the ponzi - then I totally agree with you.

If you're meaining that this all falls on Barney Frank & the Dems only - then you're wrong.

Madhouse's picture

Hi quality post. Thank you.

TO GS: Not hoping you go out of biz but give us the AIG $12 billion back. That was your counterparty risk, not my kids bill. And put a leash on your people. AIG, Greece, now Paulsen, ..the list is disgustingy long..

hamurobby's picture


Some minor observations while zipping through the document, which  by the way, was waaay over my head.

This would have worried me a bit.








This too, considering they were being issued in the Caymans, not in the US. (in other words, you can issue them from here, but not to anyone who lives here?)


No invitation may be made to the public in the Cayman Islands to subscribe for the Notes.




This first sentence here on page 37 ( I think ) would have had me a bit worried, but maybe I am reading it wrong. I really have no interest in bonds, but these seem pretty risky to me by the nature of the wording. I know greed is blinding, but when its MY money, I would at least get a second opinion?  I need a lawyer to esplain all this to me, or, does anyone have the english version for the layman? :-) 


          CDS Transactions generally have

probability of default, recovery upon default and expected loss characteristics, which are closely correlated to the

corresponding Reference Obligation, but may have different maturity dates, coupons, payment dates or other non

credit characteristics than the corresponding Reference Obligation. In addition to the credit risks associated with

holding the Reference Obligation, with respect to CDS Transactions, the Issuer will usually have a contractual

relationship only with the related Credit Protection Buyer, and not with the Reference Obligor of the Reference

Obligation. Due to the fact that a CDS Transaction may be illiquid or may not be terminable on demand (or

terminable on demand only upon payment of a substantial fee by the Issuer), the Issuer’s ability to dispose of a CDS

Transaction, if circumstances arise permitting such disposal, may be limited. Any settlement payments and

termination payments payable by the Issuer (net of any termination payments owing by the Credit Protection Buyer)

to the Credit Protection Buyer will reduce the amount available to pay the Holders of the Income Notes and the

Secured Notes in inverse order of seniority. The Issuer generally will have no right to directly enforce compliance

by the Reference Obligor with the terms of the Reference Obligation nor any rights of set off against the Reference

Obligor, nor have any voting rights with respect to the Reference Obligation. The Issuer will not directly benefit

from the collateral supporting the Reference Obligation and will not have the benefit of the remedies that would

normally be available to a holder of such Reference Obligation.


I guess I would think that in 07 that mostly AAA and aaa investments wouldnt be a bad thing to insure, considering the money being made in real estate at the time, I would believe that, coupled with GS having skin in the game and that GS makes lots of money,  that I could overlook the scary launguage in the document. Yep GS is shiot, but dam, I would have been a little skeptical,...maybe, hindsight is 20-20.




andy55's picture

A skillfully crafted writeup! Amazing work!!

exportbank's picture

In the struggle between Yield and Morality - Yield always wins. 

jules from aus's picture

so... just a few politicians will have to start some serious reflection into this whole GS house of cards that is slowly but surely coming apart

those politicians will need to search their church manufactured souls as to whether they get in behind the populous rage against GS and "it's fraud, stupid" and start assisting with the momentum game for pushing this GS pile of shit through every investigation and court room in the land

for many a politician i think their relfections will go something like this"

"I wouldn't mind so much, except I never got a penny out of everything they did, so they can be damned..."

so keep an eye on which politicians have had a history of their pockets being lined and those that haven't - the latter will get in with the rage first - the former will be the last to jump, and only after they are pretty certain their well has run dry with GS


good luck

jules from aus's picture

as the the Ratings Agencies...

i'm personally sick and tired of hearing them represented as being manipulated by the big banks

as professional organisations they had duties and responsibilities to just be damn honest - to tell the truth

this whole 'oh, there was so much pressure being placed on us by the banks' is a load of horse crap

the more the banks needed stuff rated, the more fees the RAs earnt, and the bigger the bonuses to senior management of those RAs

quite simply the RAs started to cut so many corners they created holes to simply dump this toxic crap immediately through as soon as it appeared on their doorsteps

in the process they became unreliable to point of being criminally negligent - and it's that simple

their complicity then should be seen as accessories to ongoing money laundering and fraud

how much simpler does anyone need to say it?


good luck

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