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J.P. and the Fat Cats
If Goldman Sachs had packaged up some swill and sold it to the public
they would be in a world of hurt. But that is not what happened. The
Abacus deal was sold to sophisticated investors. There were no widows or
orphans in this story.
The Subscription Agreement on a deal like this requires the buyer to
make a number of representations and warranties. Basically they say that
the buyer has the power to do this, that any approvals that may be
required have been obtained, that they have received complete copies of
the execution document and all other related documents. And most
importantly, that they understands the risks that have been identified.
There is no defense that says, “Goldman said it was okay”. There
is no defense that says, “The rating Agencies said it was okay”.
We have created a big casino with big players who have absolutely
monstrous piles of chips in front of them. I have no problem if they
battle it out with themselves. To some extent this pool of fast cash
equity makes our system work. If anyone thinks that this is not a
predatory environment they are just wrong. If you play in this world and
you are the “dumb money” you deserve to get knocked out the tournament.
Christopher Whalen at Institutional Risk Analytics said today that he
expected to see some legal action against the sell side player in the
Abacus story, John Paulson (“JP”). While I respect Mr. Whalen’s views on
most matters I am going to disagree with him on this. JP is going to
take a walk on this one. The SEC has said as much already. It is not a
crime to be a predator.
But there are rules that should not be broken. Powerful players can’t
take their wars and predatory ways out on the little guys. No widows and
orphans can get hurt or taken advantage of. And that takes us to JP’s
successful buy side investment. He teamed up with a bunch of powerful
fat cats and bought a big portfolio of troubled mortgages from the FDIC.
The FDIC got the mortgages from the failed IndyMac Bank.
It is safe to assume that early on in the process the SEC must have
considered some sort of complaint against JP. The conclusion is that
there is nothing wrong with engineering a short position. Those out
there that would like to see a ban on naked derivative shorts (i.e. CDS)
should take note. The SEC just endorsed this practice.
That said I am sure that there are some in high office who would have
liked to knock JP down a few notches. To many eyes this will look like
he is the bank robber that got away with a big haul and laughed at the
cops. Possibly those that feel this way should look at JP’s big buy side
trade.
On 12/17/2008 The FDIC announced that it had reached a definitive
agreement with IMB Management Holdings, LP (love the name) to
acquire a substantial portion of the Indymac residential loan portfolio.
The deal was finalized on March 19, 2009. The final purchaser was
OneWest bank. This bank was controlled by the IMB partnership. Some
thoughts on this deal:
-At the time it was agreed to the FDIC admitted that there were no other
buyers around. So the worst bid (aka “least costly”) was also the best
bid.
"The current economic climate is challenging for selling
assets, but this agreement achieves the goals that were set out by the
Chairman.”“It was determined that the bid from IMB Management Holdings, LP, was
the least costly to the Deposit Insurance Fund.”
-In Schedule 202 of the “Loan
Sale Agreement” is the following information regarding the
purchase price of the assets from Indymac. Based on these numbers you
would have to agree that JP bought low.
-There is evidence that the FDIC has had some “sellers remorse” on the
sale of Indymac assets. On 2/21/2010 they did a $2 billion deal where
they sold more underwater mortgages. Based on the over collateralization
of that transaction it would appear that similar pricing (haircuts) to
the OneWest discounts were established. There was a big difference
between the OneWest deal and the CMO that was recently done. This time
around the FDIC kept the equity. What upside is in the portfolio is
theirs to keep. The FDIC kept the equity on a $2b deal but gave it away
to One West in a $16b deal. Way to go JP&Co.
-There has been some criticism of the FDIC/OneWest deal. Some have
suggested that the new owners of the Indymac mortgages have not been
treating the old customers very well. For example:
A
judge in Riverhead, N.Y., went so far as to cancel a Long Island
couple’s loan obligation in November, saying OneWest, which was the loan
servicer, had failed to cooperate in efforts to avoid foreclosure and
calling the bank’s actions “harsh, repugnant, shocking and repulsive.”
The following story is from an individual who I think got screwed
royally by OneWest. This specific example took place after the Letter of
Intent between One West and the FDIC were executed.
Borrower Status: Non-performing first mortgage.
Loan Balance as of 3/2009: $292,000
Cost of loan to One West: 55% or $160,600.
All cash settlement offer made to OneWest: $286,000.
Immediate gain to OneWest: $125,400, or a 78% return.
Stated reason why the settlement offer was rejected by One West:
“Only full payment will be accepted by the ‘Investors’.”
The Who’s Who list of Fat Cats who put up the $1.3b to make this magic
happen:
In case you can’t read that I’ll recap the players in this Consortium:
Steve Mnunchin – Goldman Alum - Billionaire
John Paulson – Goldman Alum - Billionaire
J. Christopher Flowers - Goldman Alum – Billionaire
Robert Leeds – Goldman Alum – Billionaire
Michael Dell – Dell Computer – Goldman Client – Billionaire
George Soros – Big Goldman Client – Billionaire
That is a team of fat cats. Collectively they probably give a few
hundred million a year to important charities. Soros is trying to give
it all away. But on every Monday this group goes back to work screwing
the little guys in this world who have no chance at all to stand up to
them. For the life of me I can’t figure this state of mind out. Who
wants to make money squashing bugs? These guys are billionaires yet they
are sucking dimes from small fry.
Should some powers to be like to take a shot at JP and some other fat
cats for what they have contributed of late to the general welfare they
should look at OneWest. If there is any doubt that this is a winner for
JP and the “Consortium” consider that the bank earned $1.6B (120% return
on the initial investment) in just 12 months. From now on it is just
gravy for the rich boys.
Possibly someone should talk to that Judge in Riverhead. I doubt he
used the words: “harsh, repugnant, shocking and repulsive”,
without some facts behind it. Alternatively they could talk to my
friend who got stomped on by the Consortium. He went bankrupt; the house
is still for sale. His words to me on this: “I have been screwed
over and broken all over $6000.”
I would add another description to OneWest and the big money that owns
it. Greedy. The fat cats of this world should take their gains from
other sophisticated investors. It’s a low-rent move when they ride herd
outside where they should be. That money is tainted, and they know it.
- advertisements -





Well you may throw your rock and hide your hand
Workin' in the dark against your fellow man
But as sure as God made black and white
What's done in the dark will be brought to the light
Arthur Levitt said just about the same thing yesterday on Bloomberg radio
Thank you Bruce for bringing back some sober analysis to this place. It was getting a litte silly around here.
Although I have been more or less advocating your position in these pages regarding Paulson on the Abacus CDO but I wasn't aware of the OneWest deal and I doubt many ZH readers were either. It sure looks nasty to me - at least where it concerns this one individual (like something a government bureaucracy might do to you!).
There's nothing wrong with singling one firm or individual (Paulson) and say this action was legit and this action was beyond the pale and here's why. ZH would gain much more authority if it were more specific and discriminating with it's bile and defended principals even when it involves people/firms it doesn't like. This mob-for-blood crap has been lame.
Best ZeroHedge article in weeks.
So, ACA and IKN shareholders or respectively, the Brit and German taxpayers ultimately backstopping (it's all the rage these days) their (arranged) losses in the casino did not include widows and orphans?
Think you overshot the argument here.
I don't think those two blew up because of JP. There was a lot more inside those two then just this pile of crap. But my point was if you can sign your name to a $150mm buy you better know what you are getting into. The signs were well on the wall when these deals were inked. Sophisticated Investors that make dumb mistakes deserve to die.
JP did not create the world of systemic risk. That just exists. It is a consequence of the big casino. If you want to change that well enough. But the rules as of today are what we have to live with.
In my opinion if we passed a law that this would never happen again (impossible) and that law was made effective around the globe (impossible) the economy would slowly wind down to a level that we would all hate. There is a lot of risk out there. It has to go someplace.
Someone HAS to buy busted mortgages. To do that they might have to be short in the first place to do it. It is the way things work.
With all due respect, I have to disagree with you on this one Bruce. The Fed has purchased 1.3T worth of garbage off of bank balance sheets at prices way above market value. This is in addition to the at par payouts that have been funneled through AIG to GS and others. Who will end up footing the bill for the billions that went from AIG to GS bonusus? Taxpayers. Who will make up the difference between what the Fed paid for their 1.3T of morgtage compost and what these assets actually end up being worth? The taxpayer in the form of higher taxes or inflation. While billions from AIG to GS may not sound like a lot to you, it sounds like billions too much to me. As for the 1.3T of securities the Fed purchased, I think we can all agree thats a ton of money.
Ben Bernanke just read this and puked. The $1.3b he bought were AAA MBS issued by a government controlled entity that has the full faith and credit of the American government.
But of course we are going to lose a fortune making good on the crap that the Fed now owns. Those losses will be made up of thousands of individual mortgages, 10-20% of those will go bust. I can't see how you can blame JP for that one. He is just an opportunist that took advantage of it.
I am a two bit player. But in the fall of 07 and throughout 2008 I was short both Fannie and Freddie common stock. I, like JP, saw something coming. Last I heard there is nothing wrong with being an opportunist. What is wrong is making a buck off a little guy in the process.
Thanks for the post. And just think..gyorgy schwartz uses the money he makes in a deal like this- to subvert Our Republic! ....plain and simple--soros is an economic terrorist.....and that's putting it nicely...
To me "bad monetary policy" sounds redundant...kinda' like 'bad monopoly policy'....what we should do is end the fed.
did you forget that WE BAILED THEM ALL OUT!!!! stop with the 'no one forced them to trade' sure fine, but let them burn and fail on the over leveraged bets on AIG.. the casino was broke.. you dont ask taxpayers to pay off gamblers!!!!!!!
also, CalPERS etc who knows if any pension funds got kickbacks, etc for throwing all their funds down the drain as well
I don't think the banks were actually gamblers. Not in the sense that Soros is for example. The banks were just stupid. They did not see what was going on. Chucky Boy Prince said as much recently. He had no clue. It took him by surprise. Clueless.
We bailed out knuckleheads that ran Fannie and Freddie into oblivion. Not the deep pocket guys I am referring to.
That sounds like revisionist history to me.
Well said Bruce, exceedingly well said. That GS sat in between some big ugly mofos each taking his own position and view of the market is NOT even much of an outrage, at the time they set up that vehicle GS was sure Paulson and Co. were nuts and would end in poverty, that why they kept some equity on the books, their view was to screw the short side...not the long. History tells the tale better....the situation you described should be unwind with extreme prejudice to "the investors" by the Courts and the Judiciary.
Consider the bigger picture. Because of this kind of gambling, large "sophisticated" investors were required to be bailed out at taxpayer expense. This bailout led directly to the final achievement of zero interest rate policy at the Fed. NOW, widows and orphans who live on the interest of their savings ARE being hurt. 0.02% returns on your money market savings are not enough to keep the cupboard full.
I did not see anyone the list of bailouts that was a fat cat. AIG was stupid, In the end that fiasco is not going to cost us much. The TARP was a joke to make the market think the banks were sound. It worked and now the banks have paid it back for the most part.
I am one of those that think that Ben B, Hank P and Timmy G. crapped in their pants at the wrong time. I don't think that all of those measures were justified. ZIRP is just a product of that. Ben B is still crapping away. In his view if the economy does not grow at 5% and stocks are not up 30% a year the economy is failing. He is wrong. He brought you ZIRP and he has sustained it far to long. Blame him for screwing the poor orphans. There is no reason in the world that short rates should not be 2% tomorrow morning. That will not happen for another year.
That is not fat cats at work. That is just bad monetary policy.
With all due respect, I have to disagree with you on this one Bruce. The Fed has purchased 1.3T worth of garbage off of bank balance sheets at prices way above market value. This is in addition to the at par payouts that have been funneled through AIG to GS and others. Who will end up footing the bill for the billions that went from AIG to GS bonusus? Taxpayers. Who will make up the difference between what the Fed paid for their 1.3T of morgtage compost and what these assets actually end up being worth? The taxpayer in the form of higher taxes or inflation. While billions from AIG to GS may not sound like a lot to you, it sounds like billions too much to me. As for the 1.3T of securities the Fed purchased, I think we can all agree thats a ton of money.
A nice video walk through of what Bruce described.
http://www.youtube.com/watch?v=ssl5yb7FewA
The rich get richer.
That cat should go to Jenny Craig. Should give up the booze, late nights, back alley parties and TV dinners. A treadmill would help aswell...