Deciphering Joe Cassno’s Lies Before The Financial Crisis Inquiry Commission
Joe Cassano is a very good liar, which is why it would be so hard to prosecute him for perjury. When testifying before The Financial Crisis Inquiry Commission, the former head of AIG Financial Products kept blending in half-truths with his audaciously dishonest claims, so that the overall effect was nonsensical. For instance, to justify his outrageous claim that, "the books were generally considered fully hedged," he explained that "we were using it basically in actuarial basis …[so] it’s not hedged in the conventional sense." (Translation: The book was never hedged in any sense. Nor was there any actuarial analysis, only a reliance on triple-A credit ratings.) These rhetorical tricks were designed to throw sand in everyone’s face. But his tactics seem to have worked. The staunchly unregenerate Cassano framed a media narrative that deflected away from his dishonesty and gross incompetence.
Here’s a reality check on some of his more ridiculous claims, in order of appearance:
1. Cassanos’s Claim: AIGFP never compromised its high underwriting standards.
The Truth: AIGFP had no underwriting standards pertaining to the most important risk, which affected AIG’s liquidity.
Commission Chairman Phil Angelides asked Cassano if he understood the subprime risks he insured. Cassano stonewalled with a lot of doubletalk:
Angelides: I want to talk to you about this, that these were represented as multisector CDOs. But if you look at — we did a sample of some of these in 2004, 2005, 2006, they were almost overwhelmingly residential-backed and very substantially subprime. For example, in the survey we did of some of these CDOs that you issued protection on, 84 percent were backed by RMBS residential mortgages in ’05, 89 percent in ’06. And just as an example, while you indicated you decided to stop writing on subprime instruments in January of ’06, for example, you backed an instrument called RFC III where that CDO was 93 percent subprime and seven percent HELOC home equity loans.
My question for you, Mr. Cassano, is was there — you said you did thorough due diligence. Were you aware of the quality of the mortgages? Do you do direct analysis of the loan data? Were you confident that you had a full understanding of the nature of what you were backing?
Today, during the FCIC’s second day of hearings, Goldman CFO David Viniar was forced to provide additional data about the firm’s AIG CDS trades. Luckily the firm kept a record of all entry and exit points, and thus will be able to confirm just what the P&L of the associated trades is (and if not, we are happy to teach Goldman’s risk department how to use the Bloomberg CDSD function in conjunction with RMGR run scraping to build a real time CDS portfolio tracker)… Which is ironic, because when asked by Brooksley Born why the firm has not yet provided a break down of its derivative revenue Mr. Viniar by all accounts perjured himself. As Bloomberg reported: “We don’t have a separate derivatives business,” Viniar told the panel. “It’s integrated into the rest of our business.”
Every evening, a firm’s back office (and that most certainly includes Goldman) takes the EOD CDS and cash marks from every single prop trader, be they equity, fixed income, mortgage, FX, etc. and using its own integrated pricing system or an outsourced one, compiles a daily P&L which is immediately sent to the head of the risk division, the head of trading, and other various listserv participants. And most certainly the traders, who have every interest of knowing just how they did in any given day as they prepare their bonus speech at the end of the fiscal year. Traders, who combine cash and CDS trading simply look at a consolidated P&L on the basis of DV01 exposure, which makes the form of product used completely irrelevant, and is a process whereby every change in 1 basis point in interest rates is equivalent to a profit or loss. Every single derivative is presented in Goldman’s daily risk summary on a DV01 basis to show not only maximum possible loss, but what the daily profit or loss may have been. This makes the tracing of both revenue from derivatives and cash products seamless.
Obviously even the FCIC panel was fully aware of this:
“When you tell us that you don’t know how much you make in your derivatives business, nobody here really believes it,” [Commissioner Byron] Georgiou told Viniar. “Nobody here believes that you don’t know how much money you’re
Think Blanche Lincoln’s attempts to tame derivative trading are new? Think again. During the 1990′s, its was the CFTC’s Brooksley Born who was the original crusader, attempting to warn about the dangers posed by an unregulated and out of control explosion in synthetic exposure. And just like Lincoln’s current role reprisal will likely end up being neutered by the Dodd-Frank tag team, so Born’s warnings continuously fell on deaf and conflicted ears. To see how 12 years ago one person was predicting precisely what may happen if JPM got its way to drown the world in $1.2 quadrillion of derivatives, watch this Frontline video "The Warning" from late last year: a fascinating hour-long adventure into the shadowy Over The Counter world which everyone has an opinion on, yet so few understand.
Last night PBS’s Frontline aired a new documentary called The Warning. If you missed it, you are in luck. We’ve got it right here.
Here’s how Frontline describes the documentary.
"We didn’t truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency — the Commodity Futures Trading Commission (CFTC) — who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country’s key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"
In The Warning, airing Tuesday, Oct. 20, 2009, at 9 P.M. ET on PBS (check local listings), veteran FRONTLINE producer Michael Kirk (Inside the Meltdown, Breaking the Bank) unearths the hidden history of the nation’s worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.
"I didn’t know Brooksley Born," says former SEC Chairman Arthur Levitt, a member of President Clinton’s powerful Working Group on Financial Markets. "I was told that she was irascible, difficult, stubborn, unreasonable." Levitt explains how the other principals of the Working Group — former Fed Chairman Alan Greenspan and former Treasury Secretary Robert Rubin — convinced him that Born’s attempt to regulate the risky derivatives market could lead to financial turmoil, a conclusion he now believes was "clearly a mistake."
Born’s battle behind closed doors was epic, Kirk finds. The members of the President’s Working Group vehemently opposed regulation — especially when proposed by a Washington outsider like Born.
"I walk into Brooksley’s office one day; the blood has drained from her face," says Michael Greenberger, a former top official at the CFTC who worked closely with Born. "She’s hanging up the…
Why have stock-picking fund managers had it so tough over the last few years? A lot of people would say high correlation in the stock market, but that’s only part of the story. According to Goldman Sachs strategists, the real culprit is low dispersion. We’ve talked about this topic here before, but to rehash: Dispersion is a measurement of how stocks act in relation to each other, not just to the overall market.
A high-dispersion environment is where a large number of stocks are zigging and zagging drastically. This means that returns and risk factors are all over the map, which, in theory, would allow skilled...
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Click for popup. Clear your browser cache if image is not showing. Comment: Robert Shiller who got the dot-com and housing bubbles right says bonds are next and that’s your gold price spike. www.cnbc.com/...
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Last week, the major indexes fell back below round-number thresholds that had taken a lot of effort to eclipse. There has been an ongoing ebb-and-flow of capital between risk-on and risk-off, including high sector correlations, which is far from ideal. But at the end of it all, the S&P 500 found itself right back on top of long-standing support and poised for a bounce, and Monday’s action proved yet again that bulls are determined to defend their long-standing uptrend line.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enh...
Former Federal Agents Charged With Bitcoin Money Laundering and Wire Fraud
Agents Were Part of Baltimore’s Silk Road Task Force
Two former federal agents have been charged with wire fraud, money laundering and related offenses for stealing digital currency during their investigation of the Silk Road, an underground black market that al...
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Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
Bullish trades abound in Cypress Semiconductor options today, most notably a massive bull call spread initiated in the July expiry contracts. One strategist appears to have purchased 30,000 of the Jul 16.0 strike calls at a premium of $0.89 each and sold the same number of Jul 19.0 strike calls at a premium of $0.22 apiece. Net premium paid to put on the spread amounts to $0.67 per contract, thus establishing a breakeven share price of $16.67 on the trade. Cypress shares reached a 52-week high of $16.25 back on Friday, March 13th, and would need to rally 4.6% over the current level to exceed the breakeven point of $16.25. The spread generates maximum potential profits of $2.33 per contract in the event that CY shares surge more than 20% in the next four months to reach $19.00 by July expiration. Shar...
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PSW Members - well, what a year for biotechs! The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down! The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months. What could go wrong?
Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.
Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies. A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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