Did John Perry Take The "Perceived" Paulson CDO Cap Structure Arbitrage To A Whole New Level In 2007?Submitted by Tyler Durden on 04/27/2010 15:05 -0400
One of the critical observations that have emerged as a result of the
SEC action into Goldman is the realization that
various investors would take full advantage of perceived capital
structure arbitrage, not directly, but by implication: if fund X was
seen as an equity investor in a given product, be it structured in the
form of a CDO, or a boring corporation, with publicly traded
equity,that would imply to everyone else curious, that fund X was implicitly comfortable with every tranche in the balance sheet above the equity:
whether the mezz tranche, the deeply subordinated debt, and obviously
the very top or the supersenior debt tranche (secured or otherwise).
The ruse, the SEC claims, is that said Fund X would invest a token equity amount, and make it plain for all to see, all the while shorting the bejeezus out of securities above the equity tranche, knowing full well that the equity would be wiped out, yet with partial or full losses on the debt above, the shorts would end up making a profit multiples of times larger than the equity tranche loss. This is among the key points in the SEC complaint - we will not discuss it much, suffice
to say that it is more than obvious that when dealing with other (not
all that sophisticated) investors, this ruse would certainly work, as
the rest of the world would be logically satisfied that investor X
would not assume there would be impairments above the equity tranche, absent further disclosure. Yet what is interesting, and what we would like to touch upon, is a curious tangent of this "ruse" - as blog LittleSis points out, one
entity that could have taken the "Fund X" scheme to a whole new level
may be the hedge fund run by former Goldman Robert Rubin arb desk
protege Richard Perry. Perry, who made billions in 2007 by shorting
subprime, and most likely was involved in shorting CDOs (Goldman
underwritten or otherwise) in the same vein that Paulson and others
were doing,did not buy equity stakes in CDOs (that we know of).
Instead what he did was amass an equity stake directly in the CDO
wraparound company du jour: ACA Capital. Should Perry have wanted to convey an impression
to everyone else that ACA (and its holdings) were safe (and his
anonymous and Goldman conveyed bids on ACA CDO protection were
sufficiently low) what better way than to telegraph to the world in his
most recent 13F that he was building up a stake in ACA? Which as we
disclose below, between December 31 2006 and September 2007, is precisely what he was doing.
Circle Jerk 101: The SEC's Robert Khuzami Oversaw Deutsche Bank's CDO, Has Recused Himself Of DB-Related MattersSubmitted by Tyler Durden on 04/24/2010 13:08 -0400
The incest continues: the WSJ has informed that the SEC's chief investigator, Robert Khuzami, used to be general counsel for Deutsche Bank, and presumably reviewed numerous CDO-related transaction, while on the "other side" of the wall. "As part of that job, he worked with lawyers who advised on the CDOs
issued by the German bank and how details about them should be
disclosed to investors. The group included more than 100 lawyers who
also defended the bank against lawsuits and vetted other financial
products, these people said." The good: he probably knows more about CDOs than any other person in government administration history, and thus would not have brought on the Goldman case without being aware of all the potential tripwire nuances (and yes, if the Goldman case gets to the discovery stage, which it will, it is game over for Goldman's defense strategy, which means settlement and/or much worse). The bad: who knows how many Deustche Bank CDO's of comparable or worse nature he allowed to see the light of day. The most interesting: "Because of Mr. Khuzami's old job and his financial interest in the
company, he has recused himself from any matters related to Deutsche
Bank, according to an SEC spokesman." With Greg Lippmann's (legendary head of CDO trading at the German firm whose assets are greater than all of Germany's GDP) recent sudden departure, and the SEC being prevented from bringing CDO-related charges against the bank (for the time being), is DB currently actively cleaning up its tracks? After all the firm was one of the top 3 CDO issuers in the period under consideration.
The (in)famous Greg Lippmann is gone. The question is why? Is Deustche Bank about to report the next Wells receipt? Of course not: Goldman did not do so even though it held it for 9 months.
Now that the attention of the investment community once again turns to regulatory risk, analysts will instead focus on who may be most at risk for comparable CDO-related overtures by the SEC. The table below presents CDO league tables for top CDO underwriters in the 2006 and 2007 period. By and far Merrill Lynch and Citi appear to be most at risk (from Credit Suisse). In a separate report Credit Suisse confirmed that based on deals with "salient" characteristics to Abacus, the firm once again sees Merrill/BofA as the most likely to suffer the wrath of the SEC. The other two firms that fill out the top three list for the 2005-2008 period with "comparable deals" are UBS AG which ranked second with $15.8 billion, and JPMorgan Chase & Co. was third with $9.9 billion, primarily due to its purchase of Bear which despite being one of the biggest underwriters of CDO, passed on the Paulson proposed deal structure citing "ethical concerns", as we reported yesterday.
- ABACUS 2007-AC1 is a $2 billion notional synthetic CDO (the “Transaction”) referencing a portfolio (the “Reference Portfolio”) consisting of RMBS obligations.
- ACA Management, LLC (“ACA”) will be acting as Portfolio Selection Agent in this Transaction.
- ACA currently manages 22 outstanding CDOs with underlying portfolios consisting of $15.7 billion of assets
- The 360 WARF target Reference Portfolio selected by ACA consists of 90 Baa2-rated mid-prime and subprime RMBS bonds issued over the past 18 months.
- The CDO tranches amortize principal using a full sequential amortization sequence, avoiding any reduction in the relative subordination of the CDO tranches.
- The CDO tranches will have a projected average life(2) of 3.9 to 4.9 years, which is shorter than the average life of most traditional ABS CDOs executed in the current market environment.
- The CDO tranches do not bear any available funds cap risk and other related interest shortfall risks.
- Goldman Sachs’ market-leading ABACUS program currently has $5.1 billion in outstanding CLNs with strong secondary trading desk support.
In a surprising move, the FRBNY has just released the holdings of Maiden Lane I, II and III. Some preliminary observations: ML 1, in addition to holding a boatload of CDOs, has quite a few Residential whole loans, a variety of single names CDS, of which the bulk is CMBX, AMBAC, MBIA, PMI, CDS on Commercial Real Estate, CDS on Munis, CDS on non-agency RMBS, CDS on Non-residential ABS, some treasuries, and just under $3 billion in Interest Rate Swaps. ML 2, as noted, contains $35 billion of Non-Agency MBS. It also contains $280 million in cash, held with a Goldman Sachs account. (GOLDMAN SACHS FIN SQ GOVT FS). ML 3 consists of a variety of CDOs whose notional value is given as $56 billion. Once again, the Fed parks its cash of $383 million in this account with Goldman Sachs.
Lloyd Blankfein Says He Never Got Request To Take Less Than 100 Cents On Dollar For AIG CDO ExposureSubmitted by Tyler Durden on 01/13/2010 11:18 -0400
So... Timmy... Who's lying here?
"I have been a big critic of the systemic risk posed by excessive leverage, problematic CDOs and the credit derivatives written against them. But I did not specifically criticize Goldman’s deals until it became an issue of public interest when AIG blew up. Goldman may not have to answer to sophisticated investors, but it should answer for its role in the systemic risk posed by AIG’s near collapse, its role in the way in which AIG was bailed out, and the fact that the U.S. taxpayer had to bail out the global financial system along with a number of Goldman’s trading partners." - Janet Tavakoli
Who wants to bet how many of these are marked to market?
Bloomberg highlights an interesting development out of CDO land, where TPG Credit is in the process of attempting to raid quality assets in a TRuPs CDO at the rip off price of 5 cents on the dollar, while bribing the first loss tranche: the CDO equity holders, with a moderate take out fee. If this is a broad loophole in which the equity tranche, which in most cases is out of the money since even the highest-rated slices are trading at 40-50 cents on the dollar in most CDOs, can determine the fate of CDO dispositions, expect many other funds to join TPG in raiding any and all good assets making up comparable CDOs. As there is roughly $650 billion in CDOs outstanding, they have quite an extensive selection to pick and choose from.
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Recently uncovered critical documents disclosing details about AIG's CDO portfolio and collateral calls, indicate that during a December 5th conference call with Investors, Joe Cassano, famous for singlehandedly destroying capitalism and forcing most financial companies to be subsidized by US taxpayers in perpetuity, as well as then CEO Martin Sullivan, effectively commited 10(b) 5 fraud by misrepresenting material company conditions.