"In the depths of the 2008 crisis it was the governments that stepped in to provide a guarantee on financial assets. It was the governments that backed our savings accounts, money market funds, day-to-day business banking accounts, as well as debt issued by US banks. But what happens when confidence in the government guarantee begins to erode? We’ve seen what happened to Greece. Leverage inherent in the banking system elevated a bank run, equivalent to a mere 3.6 percent of deposits, into another full blown banking crisis. In our view it’s time for investors to acknowledge sovereign risk. The ratings agencies can opine all they want, but it seems clear to us that the only true AAA asset to protect your wealth is gold. " Eric Sprott
John Paulson, the hedge fund investor behind the toxic CDO
referenced in the S.E.C. complaint, ratcheted up his
nobody-saw-it-coming rhetoric, with a letter nominally addressed to his own investors but clearly intended for a broader audience of ignoramuses and amnesia victims:
"It is easy to forget that before the collapse, the
overwhelming view of investors, ratings agencies and economists was
that the housing market was strong and would continue to get stronger."
The opposite is true. Nobody was saying that the housing
market was strong and would continue to get stronger during the weeks
prior to April 26, 2007, the closing date of Goldman's notorious Abacus 2007-AC1.
There are countless ways to discredit Paulson's statement, just as
there are countless ways to discredit his claim that he operated in "good faith." (As Vanity Fair was kind enough to point out, Paulson's bad faith manipulations were first highlighted here on HuffPo seven months ago.)
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.
It appears the Democrats at the SEC were hell bent on going after Goldman, even as the Republicans votes against action, in a close 3-2 vote. Some say this is the reason for the most recent surge in the market. As this event has already passed and at this point it will either be settlement (which Goldman has made clear it does not care about) or an actual jury trial, how this disclosure is in any way relevant to move the market is once again beyond us.
Even as Bank of America is preparing to restart securitization and thus provide the single greatest gift to creditors the world over, as this is merely the first step in wiping out/transferring yet more trillions in private sector debt, it has done the public a bigger favor by compiling the following list of key terms for all those lost in the current labyrinth of definitions,acronyms and euphemisms. Since following the Goldman legal plight will require a facility with some heretofore quite complex constructs, the following catalog is a must read for all financial novices.
Although it would seem that the Goldman-linked SEC case single-handedly killed the price of gold, it was only a catalyst to a technical correction that was overdue. Furthermore, gold’s long term outlook is further solidified by a couple of new “China factors.”
GS&Co marketing materials for ABACUS 2007-AC1 – including the term sheet, flip book and offering memorandum for the CDO – all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC (“ACA”), a third-party
with experience analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson’s adverse economic interests or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors...The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% were on negative watch. By January 29, 2008, 99% of the portfolio had been downgraded. As a result, investors in the ABACUS 2007-AC1 CDO lost over $1 billion. Paulson’s opposite CDS positions yielded a profit of approximately $1 billion for Paulson.By engaging in the misconduct described herein, GS&Co and Tourre directly or indirectly engaged in transactions, acts, practices and a course of business that violated Section 17(a) of the Securities Act of 1933, 15 U.S.C. §77q(a) ("the Securities Act"), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b) ("the Exchange Act") and Exchange Act Rule 10b-5, 17 C.F.R. §240.10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, civil penalties and other appropriate and necessary equitable relief from both defendants.
If only they had known ... Oh, wait ...
In order to manipulate bond fund NAVs, two employees "actively screened and manipulated dealer quotes", "fraudulently published NAVs", made "price adjustments" that "were arbitrary and did not reflect fair value." The list keeps going. "This scheme had two architects - a portfolio manager responsible for lies to investors about the true value of the assets in his funds, and a head of fund accounting who turned a blind eye to the fund's bogus valuation process," - Robert Khuzami, Director of the SEC's Division of Enforcement. Sharp Mary barked today. FINRA & the SEC bit.
A recent Bloomberg story about one of the CDOs insured by AIG, Davis Square Funding III, is a stark reminder of one of the bedrock principles of real estate lending: Timing is everything. Davis Square III, originally underwritten by Goldman Sachs, was comprised of pieces of mortgage bonds issued in 2004, two years before the home prices peaked. As the chart from Moody's demonstrates, when home prices stopped rising in 2006, loan losses soared. So when Davis Square III's investment manager, Trust Company of the West, substituted 2004-vintage bonds with subprime deals issued in 2006 and 2007, AIG got stuck insuring an obligation far more toxic than one it had bargained for. The basic tenet of structured finance--what you see is what you get--seems to have been short-circuited. And the ultimate cost was borne by the taxpayers, who now own a slice of Davis Square III in an AIG bailout vehicle called Maiden Lane III.
There are many factors which affect rental prices, including: (1) the general health of the economy; (2) demographics; (3) housing strength; (4) population growth; (5) migration patterns; and (6) wealth distribution.
Today will be day 12 of 13 (or something just as silly) that the market has been melting up on no volume: yet another truly ridiculous statistic in the anals of momoism. As David Rosenberg points out: "the market has been able to digest California, Dubai, and Greece" - and this has all been offset by what? Merely promises of ever increasing liquidity and bailouts by the Fed, first domestically, and soon internationally. Have people really forgotten yet again that this is precisely what got us on the verge of a historic collapse in the first place? Yes, the Fed bailed capitalism out last time around (with about 3 hours to spare), but this time it has gone dodecatuple all in, and unless intelligent, and very rich life, on Mars is discovered pretty quickly, this will all end in ruins (certainly those of the Marriner Eccles building).
Guest Post: The CDOs That Destroyed AIG: The Big Short Doesn't Quite Reveal What They Knew And When They Knew ItSubmitted by Tyler Durden on 03/15/2010 22:35 -0500
It's been eighteen months since AIG collapsed, and Congress has yet to seriously focus on the most important questions: What did they know and when did they know it? "What" refers to the fatal flaws in the collateralized debt obligations, or CDOs, that AIG insured. "They" are the bankers that structured and sold the CDOs, plus the AIG executives who took on the credit risk, plus the rating agencies that handed out AAA ratings. "When" harkens back to 2005 and 2006, when those toxic CDOs were first issued.
A detailed overview of the current state of charge-offs, delinquencies and (yes) improvements in the mortgage industry - and most importantly what can be discerned from these trends...
Must Read: Seth Klarman On The True And False Lessons From The Financial Crisis, Blasts Government Market InterventionSubmitted by Tyler Durden on 03/04/2010 22:17 -0500
The government can always rescue the markets or interfere with contract law whenever it deems convenient with little or no apparent cost. (Investors believe this now and, worse still, the government believes it as well. We are probably doomed to a lasting legacy of government tampering with financial markets and the economy, which is likely to create the mother of all moral hazards. The government is blissfully unaware of the wisdom of Friedrich Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”) - Seth Klarman