Surprises these days come from everywhere: one day we find that some of the wealthiest hedge fund managers are only so thanks to clever schemes involving the enabling of investment banks who have the biggest rolodex of "putzes," finding the last remaining "greater fools" available, another day we discover that a deal that Goldman had no qualms about, was passed on by what may well have been the last remaining ethical bank, Bear Stearns. Greg Zuckerman, as pointed out by Wall Street Manna, in his book "The Greatest Trade Ever" describes Paulson's meetings with Goldman, Bear and Deutsche to "ask if they could create CDOs that Paulson & Co. could essentially bet against. Ironically, it was Bear Stearns that rejected the offer: "[Bear Stearns trader Scott Eichel] worried that Paulson would want especially ugly mortgages for the CDOs, like a bettor asking a football owner to bench a star quarterback to improve the odds of his wager against the team ... he felt it would be improper." Eichel told Zuckerman, " 'It didn't pass our ethics standards; it was a reputation issue, and it didn't pass our moral compass." Sure enough, Goldman et al (allegedly) took down Bear shortly thereafter, and gave it away to Jamie Dimon for pennies on the dollar. In the world of Wall Street, where everyone tries to destroy the dumbest, those who play by some ethical historical rulebook all end up seeing a "run" on their liquidity sooner or later.
Some more observations on Paulson's "moral compass" or lack thereof as Simon Johnson would say:
Paulson felt unburdened by any moral compass. (Of course not. He aleady fixed the odds. He wasn't gambling!) Though he had made clear that the CDOs should be stuffed with only risky slices of debt, Paulson accepted no personal responsibility, claiming “it was a negotiation; we threw out some names, they threw out some names, but the bankers ultimately picked the collateral. We didn’t create the securities, we never sold the securities to investors…”
And as we pointed out, much to the chagrin of a certain clown on CNBC, Goldman may have lost $90 million on Abacus (on one tranche: nobody knows how much the prop desk made - after all Mr. van Praag will never discuss anything about Goldman's prop positions), but made $12 billion via AIG:
Here's the real blockbuster. Abacus wasn't just any old mortgage-backed security. It was one of a toxic group that nearly brought down insurance giant AIG, as the New York Times pointed out last December. Goldman Sachs sold credit-default swaps to Paulson, according to the SEC. That left Goldman holding the risk on Abacus. According to a nice breakdown by the Wall Street Journal this week, here's how Goldman handled it: "Goldman bought credit-default swaps from AIG to hedge the securities firm's positions in some of the [Abacus] pools. When many subprime borrowers began defaulting on their loans in 2007 and 2008, the Abacus CDOs dropped in value, and AIG had to post billions of dollars in cash collateral to Goldman."
And there you have it. Wall Street can count its lucky stars that the bulk of the population gets dizzy when discussing such "complex" things as CDOs, which of course are best left to the Federal Reserve to manage, lest us mere morts misunderstand just how all our tax money (and soon precious metals) are being used to fill the vaults of the big banks, in the biggest legalized money laundering scheme of all time. Otherwise, the revolution would have erupted a long time ago.