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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.

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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


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, 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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Biggest German State-Owned Lender Just Sued Goldman Sachs Over Davis Square CDO


So... now what?

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Bank CDO Self-Dealing (And Modern Stock Trading) For Dummies

Miss out on ProPublica's must read piece on self dealing in CDOs (which is currently translating to comparable practices in stocks, and virtually all risky assets, now that retail investors want out)? Here is your chance to catch up, courtesy of a few simple to understand cartoons. While not news to anyone who lived through the crazy days of 2006-2007, this simple visual should be archived and recreated in when alien historians try to explain why the world ended and the Dow was at 36,000,000 and going up, as it explains precisely what is happening in the stock market today.

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Hinde Capital On Whether GLD Is A New CDO In Disguise

Hinde Capital has expanded on an idea we have been toying around with and wish to follow up on soon (that ETFs are de facto the new CDOs, as the most actively traded products (SPY, GLD, etc) are now merely synthetic representations of underlying securities, as the actual securities are increasingly more thinly traded, thus creating a huge "tail wags the dog" paradox), by penning a presentation calling GLD "the new CDO in disguise." We don't think it is disguised - after all the two products share far too many characteristics, although having CDO-like features does not make something evil per se. The reason why implied correlation hit 0.8 yesterday as we first pointed out, is precisely due to the aggregation of products into such synthetic aggregators as ETFs, of which GLD is merely one of many. Yet Hinde's opinion focuses precisely on the disconnect between the "idea" of owning a hard asset, and the reality of merely having claims to a Cede & Co stock certificate which in turn has no liquid and direct physical collateral, in essence condemning GLD and all non-physical ETFs, by saying "we believe ETFs are a risky way to express a gold view." All this and much more on why GLD has more risks than are acceptable for any sophisticated investor in the attached Hinde Capital presentation.

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Goldman's Hudson Mezz CDO Is Now Focus Of Brand New SEC Probe

Abacus, Timberwolf, and now Hudson, pretty soon there won't be a CDO underwritten by Goldman that is not the object of some civil or criminal legal battle. The FT is reports that the SEC has launched a brand new investigation into Goldman Sachs, this time into its $2 billion Hudson Mezzanine Funding CDO. According to the FT: "People familiar with the matter said that in recent weeks the SEC had been gathering information on Hudson Mezzanine, which featured prominently in an 11-hour grilling of Goldman’s executives in the US Senate in April. The SEC and Goldman declined to comment." It is unclear if Goldman has received a separate Wells Notice for this second probing iteration, but since as Goldman notified its shareholders, these things are immaterial, we won't hold our breath to find out. As was repeatedly hammered during the Congressional grilling of Blankfein and his henchmen two months ago, Hudson is precisely the "junk" deal that AIB was “too smart to buy"which in turn forced Tourre and the other salespeople to keep pushing Eastward to Taiwan and Korea (Marc Faber beware).

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Australia's Basis Yield Alpha Fund Says It Is Suing Goldman Sachs Over Timberwolf CDO Deal

From the lawsuit: "Goldman intentionally failed to provide correct information regarding the state of the market in Timberwolf and/or intentionally failed to provide correct information concerning Goldman's actual opinion concerning the state of the market for the Timberwolf security and its quality and value. At the time Goldman made these statements to BYAFM, Goldman was actively shorting both Timberwolf and comparable securities because Goldman's internal assessment of the market for such securities was that their value would drop. In order to reduce Goldman's exposure to CDOs, Goldman personnel made false and misleading statements of material fact, knowing such statements were false and misleading... and with knowledge that BYAFM would rely on them in making the decision to purchase an interest in Timberwolf. Moreover, Goldman personnel failed to disclose material information knowing that, by this omission, information that they did disclose was rendered misleading, or they acted with reckless disregard as to whether the omission of the information rendered other disclosures misleading."

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Citi And Deutsche Subpoenaed Over CDO Sales

Gasparino has broken news which everyone knew was pending, namely that Deutsche Bank's Greg "I am short your house" Lippmann, who abruptly left the firm a few days after the SEC complaing against Goldman was made public, is about to get the probe. In other words, the toxic CDO sale probe is escalating, and the latest lucky contestants are Citi and Deutsche Bank, which according to Fox Biz' Charlie Gasparino have been subpoenaed for further documentation after a preliminary investigation left far too many questions open.

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Morgan Stanley Is Next Target Of CDO Fraud Probe

The WSJ reports that "Federal prosecutors are investigating whether Morgan Stanley misled investors about mortgage-derivatives deals it helped design and sometimes bet against, people familiar with the matter say, in a step that intensifies Washington's scrutiny of Wall Street in the wake of the financial crisis." In essence, Abacus comes to Times Square. And the latest soundbite for today's media feeding frenzy: the "Dead Presidents." So going down the list: Goldman - check, Morgan Stanley -check, Merrill, Deutsche and UBS - to come, especially once Khuzami finds a replacement to fill his recused status when investigating the German bank.

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Did John Perry Take The "Perceived" Paulson CDO Cap Structure Arbitrage To A Whole New Level In 2007?

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.

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