Last week Barry Ritholtz had an excellent post 10 Things You Don’t Know (or were misinformed) About the GS Case in which Barry noted that 99% of the mainstream media commentary regarding the strength of the SEC’s case is, of course, completely uninformed conjecture. I sat down with Barry, who is a lawyer with experience in securities law, to get an insightful take on the SEC’s case against Goldman Sachs.
Goldman employees have incriminated the company in the quest for compensation, but I have the solution...
One day after the Goldman hearings, we were left with the warm and fuzzy impression that the whole Goldman farce was for nothing, and that everything the firm had been doing for the past 5 years was perfectly legitimate. The prop trading abuse, the discount window generosity, the endless abundance of flow and prop inventory commingling, the endless client rape...All these allegations must have been for naught. Which is why we were thoroughly disappointed when our sense of sudden enlightenment that we may have been wrong all along about Goldman, vanished promptly and without a trace once we had a chance to read the 2007 self-evaluation of Goldman Managing Director Michael Swenson. The line penned by Michael, who incidentally was the least like of the three Goldman SPG MDs testifying on Tuesday based on peer feedback, that broke our collective heart is the following: "Once the stress in the mortgage market started filtering into the cash market, I spent numerous hours on conference calls with clients discussing valuation methodologies for GS issued transactions in the subprime and second lien space [redacted] is prime example). I said "no" to clients who demanded that GS should "support the GSAMP" program as clients tried to gain leverage over us. Those were unpopular decisions but they saved the firm hundreds of millions of dollars." Alas, we find that all of Goldman's sincere hypocritical lies before the Senate committee were... precisely just that.
European central bankers and politicians have been as dumb as their American counterparts ...
Spreads were mixed today with the major US indices managing modest gains as HY outperformed IG. This spread compression is optically misleading though as, in general, curves flattened in 3s5s and more technically indices outperformed weak single-names as the theme of the day appeared to be skew compression and profit-taking. Modest short-covering and single-name (sovereign and corporate) repricing was the mood of the day and while we rallied it seemed like there was very little conviction to it (despite IG closing at the day's tights) - though well off yesterday's tights.
The propaganda machine's favorite subversive mechanism to instill confidence in the prevalent population, is by nudging none other than the Confidence Index itself. And indeed, over the past few months, the Conference Board and UMichigan indices have been on a straight upward slope. What better way to get Joe and Jane Sixpack out to the mall to spend, than to give them the impression that all their neighbors are out, doing just that (and buying 5 iPads in the process). Don't forget the US economy is based on reckless spending and credit, and the Sixpacks love that, especially if they don't have to pay their mortgage ever again (as Obama told them to do). Yet the Consumer Index is nothing but just another massive scam. To wit: observe the ABC Consumer Comfort index, a representation of consumer "confidence" which according to many is much more detailed, due to its larger sampling size, and more up to date, due to its weekly updates, yet one which, refusing to drink the Kool Aid has never once been mentioned on the biggest propaganda channel of all, CNBC. Yesterday, the latest ABC numbers came out, and they were a stunner: at -49, the index is barely a few points away from all time record lows, and well into deep recession territory. In fact, the only confidence consumers can have, is that there is absolutely nothing predictive about the CONsumer indices out there: the spread between the ABC and the administration darling's Conference Board just hit a record high, as see on the chart below. In fact, it has gotten so difficult to sway popular opinions with these simplistic methods of subliminal control, that even Goldman Sachs is concerned about the utility of such indices going forward. Goldman's Jan Hatzius, in discussing Consumer Confidence, notes: "Since the monthly spending figures are noisy estimates of the true underlying trend, it does make sense to put some weight on confidence alongside actual spending when trying to gauge the outlook for consumption. This still points to a U-shaped rather than V-shaped recovery in spending." If after reading this, you still think that consumer indices are indicative of anything at all you probably were one of those who did buy 5 iPads over the past month.
Before I get pilloried for this article, just forget everything you believe about Goldman and their ethics and role in the economy because those mean nothing in this case. There is one issue and that is, within the facts set forth in the SEC complaint: What did Goldman do wrong? Here is a way to analyze it.
The drama continues following S&P’s slice to Greece’s debt rating (to junk status of BB+, a three-notch decline, which prompted a surge in 2-year bond yields to a Zeus-like 15%) and the two-notch decline to Portugal’s rating, to A- from A+. The Euro has bounced back this morning and the flight to higher quality German and French bonds has partly reversed course as the markets are swirling with speculation that the IMF is about to announce a stepped-up aid package (yet again!) and the ECB’s Trichet (“Mr. Euro” himself) is set to make a trip to Berlin to meet with German parliamentarians today. (In the U.S., the huge rally in Treasuries has subsided too as the bond market braces for $42 billion of fresh 5-year T-notes today). JGBs have rallied all the way to four-month lows, in terms of yield, to 1.28% — talk about a switch to defense (not to mention a slap in the face to the conventional wisdom that JGBs are an accident waiting to happen)
Trichet And Dominique To Brief German Parliament On "End Of World" Should They Not Ratify Greek BailoutSubmitted by Tyler Durden on 04/28/2010 09:28 -0500
Guess what happens when banks need something? They promptly brief you how the world will end should one not do their bidding. The IMF and the ECB are apparently no exception to the rule. From prophet Goldman Sachs: "Trichet and Strauss-Kahn in Berlin today to brief parliament. ECB president Trichet and the head of the IMF Strauss-Kahn will be in Berlin today to brief parliamentary leaders about the financial help package for Greece. The idea behind the briefing is to explain to MPs the consequences of a Greek default (i.e what are the second and third round effects) and why it is in the German interest to help."
And so the Abacus fallout is about to hit precisely where the culprit for it all resides: the Federal Reserve Bank of New York. Could there be justice in this world after all? From Bloomberg: "Barofsky says the question of whether the New York Fed engaged in a coverup will result in some sort of action. “We’re either going to have criminal or civil charges against individuals or we’re going to have a report,” Barofsky says. “This is too important for us not to share our findings.” He won’t say whether the investigation is targeting Geithner personally."
- Greece official: IMF loan boost possible (WSJ)
- Greece bondholders may lose $265 billion in default (Bloomberg)
- Stocks drop as sovereign-debt crisis spreads, Greek bonds slump (Bloomberg)
- First quarter GDP is history, beware of a 2011 slowdown (Barrons)
- China is undermining the dollar by the back door (FT)
- Hedge-fund bust will bear Goldman's fingerprints (Bloomberg)
- Mexico issues travel warning for Arizona over law (Bloomberg)
- Goldman grilled: A ghastly day on Capitol Hill for Goldman Sachs’s top brass (Economist)
Improving California state finances make its municipal bonds a “buy.” With California in the heat of primary elections, this is good news no one seems to want to talk about. Inconvenient ties to the “vampire squid.” With taxes about to skyrocket everywhere, tax free municipal bonds are about to become more valuable. What’s this movie, "Fight Club", all about, anyway? (VCV), (NCP), (NVX).
The CDS market, as always, is prophetic to the dot: after main deriskers in the past two weeks were Spain, Portugal and France, so far the spread blow out in these markets has materialized like a Swiss watch. Which is why Ambrose Evans-Pritchard better be looking at this week's DTCC data, because the credit market is flashing a bright red warning light over his favorite bankrupt country - the UK (incidentally, the week's largest net derisker, just after Goldman Sachs). Second in order of sovereign implosion - Ireland. The British Isles, at least according to CDS traders who time after time prove they have far more sense than their equity equivalents, are about to become a hotbed of credit activity, and not in a good way. The other countries that fill out the top 10 deriskers in the prior week: Brazil, Germany (yeah, failed auctions do that), Argentina (yeah, persistent threat of default does that too), Mexico (yeah, living next to a money printing terrorist does that), Ukraine, Korea, Belgium and China.
I think he did.
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 14:05 -0500
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.