• Tim Knight from...
    12/21/2014 - 09:37
    The five remaining equity bears on Earth are all saying the same thing: "We'll get 'em in 2015." To which I ask: why? What's going to change?

CDO

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Judge Rakoff Is Back: Questions Fairness Of Citigroup's $285 Million CDO Settlement With The SEC





Jed Rakoff is well known to frequent readers of Zero Hedge: he is the judge who nearly brought down the SEC settlement with Bank of America over the whole bonus non-disclosure issue two years ago, and where Bank of America effectively acted under the duress of Hank Paulson and Ben Bernanke. Granted at the end of the day he sided with the status quo., but this may be his chance to redeem himself. Just out from Bloomberg:

  • CITIGROUP'S $285 MILLION SEC SETTLEMENT QUESTIONED BY JUDGE
  • CITIGROUP JUDGE ASKS PARTIES TO JUSTIFY FAIRNESS OF SETTLEMENT
  • SEC CLAIMED CITIGROUP MISLED INVESTORS IN $1 BILLION CDO
 
Tyler Durden's picture

European Swiss Army Knife CDO Square Cubed





Remember: when in doubt, baffle with bullshit. From Dow Jones:

  • EU Paper Confirms Looking At 2 EFSF Options, May Combine Them -Senior EU Source
  • EU Paper Says EFSF Option To Set Up Special Purpose Investment Vehicle -Senior EU Source
  • EU Paper Says EFSF Bond Insurance and Special Vehicle Options Could Be Combined - Senior EU Source
  • EU Paper Says Neither EFSF Leverage Option Requires Change To EFSF Rules -Senior EU Source
  • EU Paper Says EFSF SPIV Would Combine Public, Private Capital - Senior EU Source
  • EU Paper Says EFSF Could Set Up One Central Euro Zone SPIV - Senior EU Source
  • EU Paper Says EFSF SPIVs Could Be Set Up In Several Euro Zone Countries - Senior EU Source
  • EU Paper Says EFSF SPIVs Would Be Used For Bond Purchases, Bank Recapitalization - Senior EU Source
  • EU Paper Says EFSF Bond Insurance To Be Tradable Independently Of Bonds - Senior EU Source

It also has a Phillips-head screwdriver, opens cans, serves as a flashlight, dispenses crazy pills can be used as a garrote. And if you act now, you can get get a second one free for the low, low price of €1 trillion, leveraged infinitely courtesy of the world's most complex structured credit product ever conceived.

 
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Citi Joins Goldman And JPMorgan In Settling Fraudulent And Misleading CDO Practices: Wristslap Costs $285 Million





And so Citi becomes the third firm after Goldman and JPM to put all their gross CDO criminal (wait, allegedly, they neither admitted nor denied) activity behind them with a $285 million wristslap.

  • Citigroup will pay USD 285mln to settle SEC charges for misleading investors about selling CDOs related to housing market, according to SEC
  • Citigroup's main US broker-dealer unit misled investors about USD 1bln CDO tied to US housing market, in which Citigroup bet against investors.

It is unclear if the money used will be courtesy of FDIC-backed TLGP notes still on Citi's books. Either way, justice is now "served."

 
Tyler Durden's picture

The Latest Incarnation Of The European CDO Cubed Bailout "Swiss Army Knife": A Multi-Trillion Insurance Policy





A few weeks ago Steve Liesman ramped stocks higher for the day after he released a subsequently disproven rumor that the EFSF would become a CDO square, recycling private investments into sovereign debt. Well that rumor is now dead and buried, so it is time for the next one involving that uber multi-functional Swiss Army Knife which is the EFSF, and apparently has an infinite+1 number of applications, none of which involve actual cash funding. The source of this latest brilliant idea is Pimco parent, Allianz, which has trillions in fixed income exposure all over the world, so it is no wonder it is pushing hard for the world's taxpayers to bail it out. Only instead of a recycling cash, this time the EFSF will become Fed-Lite, "insuring" trillions in debt.

 
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Europe's Latest Rescue Deux Ex Machina: A CDO... SQUARED





Steve Liesman has just broken news of the latest European bail out mechanism which will likely push risk higher for at least a few hours. Why just a few hours? Because what according to Liesman the ECB is about to propose, is nothing short of not just a CDO, but a CDO SQUARED. We are still waiting for more information, but according to his description of what this last ditch bailout bazooka (before Eurobonds of course), is that the ECB will take the debt bought by sovereign governments and will issue EURs against EFSF/ESM bonds as collateral: this is in its simplest definition, a CDO Squared (because as we have described in the past, the EFSF is simply a CDO), which in turn means that the systemic leverage of the Eurozone is about to rise 8-fold. If you thought the capitalization of the ECB was bad before, you ain't seen nothing yet. Expect cubed and quadratic iterations by the end of the week when the half life of this latest bailout rumor dies out. Oh, and expect many more headlines out of Europe talking about bailouts and hyperinflation as noted earlier.

 
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Visualizing How Bank Of America's Reserve Accounting Errors Are One Giant "Subprime CDO "





About a month ago we penned an article titled (and asking) "Is Brian Lin The Next Incarnation Of Joe Cassano?" in which we sought to demonstrate just on what flimsy ground Bank of America has based its litigation reserve assumptions: a topic that since then has become the biggest sticking point in the BAC bull thesis. Considering that since then, Bank of America default risk has exploded by over 150% and the stock price has plummeted by half, at least some have grasped the severity of a situation when incremental flawed assumptions are magnified level after level, until we finally get what, as Manal Mehta terms it, is a Bank of America "Subprime CDO." Since this issue is extremely important to the future of the financial system (a bankruptcy of Bank of America would be hundreds of times more severe than Lehman's), below we present in visual, and thus easy to comprehend, format what we previously explaining in a narrative and which once again brings us to our question: will the man behind the BAC litigation reserve fraud be responsible for the next iteration of an AIG-type implosion?

 
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The CDO At The Heart Of The Eurozone Just Became Europe's Plunge Protection Team





There is only one section of the proposed European Bailout draft statement that is relevant to traders: Section 7, bullet 3 which says: "To improve the effectiveness of the EFSF and address contagion, we agree to increase the flexibility of the EFSF, allowing it to intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional circumstances and a unanimous decision of the EFSF Member States." Everything else is noise. Europe just legalized its own Plunge Protection Team and off balance sheet Quantitative Easing program with one signature. Good luck trading in this, or any, market which even the politicians now admit is nothing more than a central banking policy tool.

 
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Positive Sentiment Returns To Europe After "Bad CDO Bank" Idea Is Back On The Table





Risk is back on in Europe (and thus spilling over to the US), confirmed by both a tightening in PIIGS spreads across the board and a jump in the EURUSD by 100 pips from overnight lows following a rehash of the same old rumor that the EFSF, or Europe's "toxic bank" off the books CDO equivalent, will provide emergency credit for insolvent countries. With the European Parliament summit starting tomorrow at 1pm (moved back by an hour), there is anticipation that Europe will finally present a strong resolution to ongoing problems. The expectations are not lost on Europe itself: as Barroso said "The minimum we must do tomorrow is to provide clarity on the following: measures to ensure the sustainability of Greek public finances; feasibility and limits of private-sector involvement; scope for more flexible action through the European Financial Stability Facility, the EFSF; repair of the banking sector still needed; and measures to ensure the provision of liquidity to our banking system." Unfortunately just like every previous time, Europe will disappoint as there is no holistic resolution that does not involve the default of the PIIGS. In the meantime, as Bloomberg reports, "European officials are considering steps previously rejected by Germany, including the use of precautionary credit lines, to prevent the spread of the region’s debt crisis, a person close to the talks said. Other options up for discussion at tomorrow’s Brussels summit include enabling the main 440 billion euro ($624 billion) rescue fund to lend to recapitalize banks, said the person, who declined to be named because the talks are in progress. Nothing will be decided until leaders convene. Together with a second Greek aid package, the goal is to prove to markets that Europe has the will and the tools to prevent the crisis from engulfing Spain and Italy." With Italy already "engulfed" it shows just how badly behind the curve Europe still is.

 
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Why The Latest European Bailout, Aka "The Debt Buyback" Plan Is Also DOA, And Why The CDO At The Heart Of The Eurozone Is About To Become Extremely Toxic





Over time many have wondered why the ECB, in order to "extend and pretend", does not simply do an episode of QE and monetize bonds outright? Well, in addition to Germany's flashbacks to hyperinflation which have so far kept Trichet from pursuing an all too aggressive bond buyback program in the primary market, the ECB does have the Securities Market Programme (SMP) which however since inception has bought only €74 billion (this week the number is expected to rise, or, if it doesn't, it confirms that now China is directly buying European bonds in the secondary market). The problem with the SMP is that it was conceived as a modest marginal debt buying program, never intended to surpass much more than a few dozen billion in debt. Alas, by now it is becoming all too clear that the ECB will need to monetize hundreds of billions of insolvent PIIGS debt in order to extend and pretend forcefully enough so that a new bailout is not needed every other week. But how to do it without monetizing debt on the ECB's books? Enter the EFSF, or the off-balance sheet CDO "at the heart of the eurozone" which according to the latest iteration of the European rescue package (Remember that most recent DOA plan to rollover debt? Yep - that's dead) is precisely the mechanism by which Europe's own open market QE is about to take place. "European Central Bank Executive Board member Lorenzo Bini Smaghi suggested the EFSF be allowed to provide funds for a buy-back of bonds from the market, where prices have in some cases fallen 50 percent from levels at which the debt was issued. "This would allow the private sector to sell bonds at market prices, which are currently below nominal value. At the same time, the public sector could benefit monetarily," Bini Smaghi told Sunday's To Vima newspaper in an interview." Translated: another market clearing perversion courtesy of the same structured finance abominations that brought us here. The problem, unfortunately, is that Moody's announced nearly two and a half years ago that the whole distressed debt buyback approach is... a dead end, and will lead to the same "event of default" outcome that all the prior bailout plans would have achieved as well (we correctly surmised that Bailout #2 was DOA, about a month before the "efficient" market did). Here is why.

 
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Wolfgang Munchau On How The Greek Rollover "Deal" Is A Toxic CDO





A week ago, Zero Hedge penned "An MLEC In PIIGS' Clothing: The Latest Greek Bailout Proposal Picks Up Where the Super SIV Failed" in which we explained how the current fatally flawed proposal for a Greek bailout is nothing more than a structured vehicle, expected to remain off the books, and much more importantly, expected to not trigger rating agency ire, and kill the entire extend and pretend game: remember - an Event of Default by a rating agency, even a Technical one (completely irrelevant of what ISDA does with Greek CDS) means game over for the European Central Bank and its €2 trillion in "assets", not to mention the western financial system. Now, a week later, the FT's own Wolfgang Munchau explains why our observation of how toxic the "bailout plan" is was rather accurate: "This structure is still not quite so complex as some of the more elaborate CDOs we have encountered in the global financial crisis. If you take some time to work through the arrows and boxes, you see relatively quickly that this complex structure is not a private sector participation at all. Rather it is a private sector bail-out... I have no space for a large drawing with lots of boxes and arrows to explain the complexity of the vehicle, through which eurozone governments want to involve the private-sector banks in its next loan package." Munchau's conclusion: "If this was any other field of human activity, you would go to jail if you accepted, let alone made such an indecent offer." On the other hand, all is fair in love and perpetuating the ponzi Status QuoTM. Our follow-on observation that "The two things that are keeping the Eurozone afloat: an SPV and a CDO" alas appears also to be rather in line. And before the entire financial system collapses upon itself like a cheap lawnchair, this will be fondly remembered as one of the more prudent "rescue" mechanisms enacted to delay the inevitable.

 
Tyler Durden's picture

The CDO At The Heart Of The Eurozone





A few days ago, we demonstrated that the latest Greek bailout package is nothing more than recycled MLEC special purpose vehicle designed to cover up toxic assets off balance sheet, like that one that was supposed to wrap up the subprime toxic mess. Luckily that did not happen as all it would do is make the credit crash even more acute when it finally did hit. In the meantime, the other Frankenstein contraption proposed by Wall Street to contain the fallout of the PIIGS bankruptcy, is the EFSF, which also got a facelift a few weeks back, and which is effectively a CDO: the same instrument which caused European banks to now be insolvent after buying up all tranches offered them by Goldman et al in the 2005-2007 period, once US banks realized just how toxic the less than AAA tranches were. It is poetically ironic that the instrument that led to Europe's insolvency is now what is supposed to prevent (temporarily) its plunge into outright default. For all who are wondering what the details of the new and improved CDO at the heart of the Eurozone are, here is Nomura's Nikan Firoozye.

 
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JPM Settles Magnetar Charges Related To Misleading CDO Information With SEC For $153.6 Million





  • SEC TO HOLD CONFERENCE CALL TO DISCUSS ENFORCEMENT VS JP MORGAN
  • JP MORGAN TO PAY $153.6M TO SETTLE SEC CHARGES
  • JP MORGAN TO SETTLE SEC CHARGES ON MISLEADING IN CDO ON HOUSING
  • SEC CITES MISLEADING INVESTORS IN CDO TIED TO HOUSING MARKET
  • KHUZAMI: JPMORGAN FAILED TO DISCLOSE MAGNETAR'S ROLE, INTERESTS
  • KHUZAMI: JPMORGAN HAS REIMBURSED INVESTORS IN TAHOMA CDO
  • KHUZAMI SAYS SEC MISLED INVESTORS IN SQUARED CDO

Done and done. And now JPM is off the hook for ever and ever. In other news JPM made $153.6 million in profits since you clicked on this post. Of course, that's irrelevant as Bear Stearns will be stuck with the bill.

In other news, www.bangbus.com shares are surging on a rumor of an imminent $153.6 million investment from an unknown source

 
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Here Comes Abacus V 2011: Former Head Of JPM's Structured Products Desk To Be Charged With Securities Fraud For CDO Transactions





Considering it was the charges of securities fraud levelled at Goldman last year (subsequently settled) in late April that were the primary catalyst for the start in the market sell off, it would not be surprising that in a year which so far is following the script of 2010 verbatim, that we should get another allegation of insider trading by a major bank in something relating to CDO fraud, just to seal the guarantee on QE3. Well, guess what. We just did. As Bloomberg's Joshua Gallu and Jody Shenn noticed first, in the FINRA Brokercheck record of one Michael Llodra, there is a curious announcement. To wit: "MR. LLODRA RECEIVED A WELLS CALL FROM THE STAFF OF THE US SECURITIES AND EXCHANGE COMMISSION INFORMING HIM THAT THEY ARE CONSIDERING RECOMMENDING THE COMMISSION COMMENCE AN ACTION CHARGING HIM WITH VIOLATING CERTAIN PROVISIONS OF THE FEDERAL SECURITIES LAWS BASED ON HIS INVOLVEMENT IN THE SALE OF A STRUCTURED PRODUCT IN 2007." And just who is Mr. Michael Llodra? Oh only the global head of structured-product collateralized debt obligations at a little firm known as JPMorgan. And while JPMorgan has not been named yet, this news coming out a day ahead of JPM earnings is bad to quite bad. Recall that the Abacus process against Goldman started with the filing of Wells notices against Fab Tourre and his supervisor (which were never disclosed in time - a fact observed then by Zero Hedge - and subsequently ended up costing GS a little pocket change in FINRA appeasement fees). Does this mean the SEC is about to launch an all out assault against JPM at some point in the indeterminate future? Well, for an agency which is in dire need of improving its image, this just may be the case. Not to mention that the double beneficiary of this action would be none other than Goldman Sachs: a market sell off here would guarantee QE3 and certainly weaken the firm's primary competitor. Two birds with one porn-addicted regulator.

 
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SEC Investigating Citi CDO "Class V Funding III"





It seems more Wall Street settlements are coming (because nobody ever goes to prison for fraud in this country). ProPublica's Jake Bernstein and Jesse Eisinger report that the SEC is investigating Citigroup's role in a $1 billion deal that the bank created in the run-up to the financial crisis. The agency is looking at whether Citi improperly pushed an independent manager to put specific assets into the deal, according to people familiar with the probe. Of course, we expect that if this is indeed the case, then Citi is currently in negotiations with the SEC to have a settlement ready in hand the second there is a formal announcement.

 
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1,125,000,300 = The Number Of Pages Needed To Be Read For Every CDO Squared Purchase





One of Zero Hedge's all time favorite charts is the following, which demonstrates the full breadth of Wall Street "complexity" ingenuity, and highlights the incremental layering upon layering of hollow synthetic securities in the form of "leverage" that allowed the housing boom to explode to unprecedented levels, and to create artificial money flooding the shadow banking system which among other things was used to pad ridiculous banker bonuses over the past decade. Today, Citi's Matt King has taken a humorous approach on this topic, and has concluded that in order for investors in a CDO2 to have a complete understanding of all the nuances in their investment (based on filed information), they would need to read precisely 1,125,000,300 pages worth of information for every CDO2 purchased to be aware of everything that was being acquired. And this even ignores the fact that recent robosigning revelations may have rendered the entire reading process moot as the entire RMBS foundation may have been built upon a complete sham.

 
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