Tue 2010-08-03 15:02 EDT

Economics of Contempt: Anatomy of Lehman's Failure, and the Importance of Liquidity Requirements

Remember the Lehman Examiner's Report? The 4000+ page report by the court-appointed examiner was lauded for a couple of weeks after it was released, and then largely forgotten. The media and blogosphere quickly moved on to the next outrage-du-jour...Well, I did not forget about it, and thanks to the uptick in flights -- and thus reading time -- in the last few months, I can now credibly claim to have read....well, not every single word in the Examiner's Report (some appendices are just pages of CUSIPs), but all of the substantive sections...Anton Valukas and the lawyers at Jenner & Block who wrote the Examiner's Report did a masterful job. I was, and continue to be, in awe of the quality and comprehensiveness of the report...think I have a pretty good handle on what went wrong at Lehman, and why it failed...they were misrepresenting their liquidity pool. In a huge way...the brazenness of their misrepresentation was shocking...Including the clearing-bank collateral in its liquidity pool was not only inappropriate, but also aggressively deceptive...Lehman was also including in its liquidity pool non-central bank eligible CLOs and CDOs. And they had the audacity to mark these CLOs and CDOs at 100 (par) for purposes of the liquidity pool, even though JPMorgan's third-party pricing vendor marked them at 50--60...

Anatomy; contempt; economic; important; Lehman's failure; liquidity requirements.

naked capitalism Mon 2010-07-19 17:07 EDT

Is the SEC Settlement Really a Win for Goldman?

Tom Adams and Yves Smith

...Conventional wisdom in the financial media is that the settlement announced by the SEC over its lawsuit on a Goldman 2007 Abacus CDO is a home run for Goldman. But a closer reading suggests that Goldman's victory is qualified, and the enthusiastic press response is in large measure due to the firm's skillful manipulation of perceptions...it is hard to see how anything in the settlement, if affirmed, would be negative for private parties considering lawsuits against sellers of CDOs...we imagine potential CDO investors will be mightily encouraged that Goldman ended up returning the full amount of investment to the one true third party investor in the deal -- IKB...An investor considering bringing an action against a bank that sold them a CDO that failed (meaning virtually all 2006 and 2007 ``mezzanine'' CDOs) would probably be encouraged that a bank was required to pay such a large amount for making inaccurate statements about the true nature of the CDO...Plaintiffs who sue CDO sellers have good reason to be optimistic...The settlement thus tarnishes the popular myth that the subprime shorts were insightful outsiders who executed ``the greatest trade ever''...the SEC has demonstrated that investors in such a CDO can win a recovery as a result of such inaccurate statements.

Goldman; naked capitalism; SEC Settlement Really; Wins.

zero hedge Wed 2010-05-19 11:37 EDT

Guest Post: Goldman's CDOs Had Nothing to Do With the Real Estate Bubble

David Fiderer

If Goldman Sachs wanted to reduce its exposure to subprime mortgage investments, why didn't it simply sell the assets it owned? Two reasons: First, those large sales would have sent a signal that something was terribly, terribly wrong, and thereby pushed prices down further. That's how supply and demand normally works. Second, Goldman professed to be market maker, which uses its trading book to instill confidence. It ostensibly bought, sold and inventoried mortgage securities to provide stability and liquidity to the marketplace. Of course, we now know that such market confidence was entirely misplaced. To sidestep these issues, Goldman and other major banks found a solution that subverted the laws of supply and demand, and escaped the price discovery of a transparent marketplace. They fabricated synthetic CDOs, such as Abacus 2007 AC-1. These toxic assets, invented out of thin air, made the meltdown worse than it otherwise would have been...

Goldman's CDOs; Guest Post; real estate bubble; Zero Hedge.

naked capitalism Sun 2010-01-03 10:58 EST

On Goldman's (and Now Morgan Stanley's) Deceptive Synthetic CDO Practices (aka Screwing Their Customers)

Goldman is trying to diffuse the increasingly harsh light being turned on its dubious practices in the collateralized debt obligation market, with the wattage turned up considerably last week by a story in the New York Times that described how a synthetic CDO program called Abacus was the means by which Goldman famously went ``net short'' subprime....Goldman wanted its Abacus trades to fail. That was the most profitable course of action for them (note the Times clearly states that that was the role of the Abacus trades and Goldman has not disputed that claim). They were net short, this was no mere hedge of a long position but a trading bet. And those CDOs did turn out to be big turkeys...

aka Screwing; customer; Deceptive Synthetic CDO Practices; Goldman's; Morgan Stanley's; naked capitalism.

Tue 2009-09-22 08:29 EDT

Guest Post: Satyajit Das on Dr. Jekyll and Mr. Hyde Finance

Satyajit Das

One year ago, AIG was brought to the brink of bankruptcy as a result its exposure under credit default swaps (''CDS'') (a form of credit insurance). Asset backed securities and Collateralised Debt Obligations (''CDOs''), which lived up to its cheery nickname Chernobyl Death Obligation, brought the financial system to the edge of collapse...If you assumed that these events meant that wild beast of derivatives would be tamed, then you would be wrong. History tells us that there will be cosmetic changes to the functioning of the market but business as usual will resume in the not too distant futureIf you assumed that these events meant that wild beast of derivatives would be tamed, then you would be wrong. History tells us that there will be cosmetic changes to the functioning of the market but business as usual will resume in the not too distant future.

Dr. Jekyll; Guest Post; Mr. Hyde Finance; Satyajit Das.

The IRA Analyst Thu 2009-09-17 10:22 EDT

Back to Basis for Securitization and Structured Credit: Interview With Ann Rutledge

To get some further insight into the world of securitization and cash flows, we spoke last week to Ann Rutledge of RR Consulting...The difference between a futures contract for T-bonds and a credit default swap is that the former is a real contract for a real deliverable, whereas the CDS trades against what people think is the cash basis, but there is no cash market price to discipline and validate that derivative market. Rutledge: a contract or structure without a cash basis should not be allowed at all. You cannot have a derivative that is honest and fair to all market participants without a true cash basis. ...derivatives markets such as CDS and CDOs that have no cash basis tend to magnify speculative excesses, while derivative markets where there is a visible cash basis market to discipline investor behavior seem less unstable in terms of systemic risk. Rutledge: If the cash market were visible and could be examined by all participants, then it would give away the ability of the dealer banks to tax participants in the market and extract these abnormal returns. So how do we fix the problem... Rutledge: These originators play this game over and over again and they don't get caught, in part because we do not have a common, standardized set of definitions for governing the most basic aspects of the securitization process. The buyers don't do the work and the accounting framework is a counterparty-oriented framework, not one that is focused on the underlying assets. So banks like Countrywide and WaMu originated and sold some truly hideous structures during the bubble, but the buyers only diligence was reliance upon recourse to these banks. It costs maybe 50bp for a buyer to get the data and grind the numbers to really diligence a securitization based on cash flows, even a complex CDO. But the cost to the buyer and the system of not doing the diligence is an order or magnitude bigger. If the Congress, the SEC and the FASB, and the financial regulators only do one thing this year when it comes to reforming the world of structured credit, then it should be to impose by law and regulation common standards for the definitions used in the marketplace.

Ann Rutledge; basis; interview; IRA Analyst; securitizations; structured credit.

Wed 2009-04-01 00:00 EDT

naked capitalism: More on the Simply Dreadful Performance of CDOs

CDOs; naked capitalism; Simply Dreadful Performance.

Thu 2009-02-26 00:00 EST

FT.com / Capital Markets - Half of all CDOs of ABS failed

by Paul J Davies

ABS failed; Capital Markets; CDOs; com; FT.

Tue 2007-12-04 00:00 EST

A - Could Citadel's valuation of E*Trade's CDOs wipe out capital at three big banks? - BloggingStocks

A - Could Citadel's valuation of E*Trade's CDOs wipe out capital at three big banks? by Peter Cohen; BloggingStocks

big banks; BloggingStocks; capitalism; Citadel's valuation; e; Trade's CDOs wipe.

Tue 2007-11-20 00:00 EST

naked capitalism: A Riveting Disclosure in the $1 Billion Swiss Re Writedown

asset-backed CDOs deemed worthless; subprime components written down to 62% of original value

1; naked capitalism; Riveting Disclosure; Swiss Re Writedown.

Sat 2007-11-10 00:00 EST

naked capitalism: CDOs: The Ticking Time Bomb

CDOs; naked capitalism; ticking time bomb.