Cramer Needs To Shut The Hell Up
Courtesy of The Market Ticker, Karl Denninger
Seriously.
Cramer came on CNBS this afternoon saying that he "heard on good authority" that Goldman was actually long Abacus.
(Note – this is not my capture, and there’s good odds that CNBC will have this video removed – so if you want to watch, do so soon!)
Well, duh! They structured the deal!
Again, back to The Audacity of Synthetics:
A synthetic CDO is, as the name implies, not made up of actual bonds. Instead, the issuer writes a naked credit-default swap on the underlying reference(s) they use.
So Goldman had to be long the credit, since they wrote the initial credit-default swaps which formed the CDO!
When you write a credit-default swap you are long the underlying credit.
Paulson’s hedge fund bought the CDS that made up the CDO (becoming short the credit) and the tranches were then sold to investors (relieving Goldman of their "long" position.)
Goldman was probably residually long post-origination and distribution, and it is also almost-certain that they then bought a CDS as an offset to hedge whatever they couldn’t sell (likely from AIG), thereby becoming delta neutral.
But Paulson purchased the credit protection that created the CDO – without his purchase of the CDS there was no CDO at all!
There is nothing wrong with them doing so.
There is also nothing wrong with Goldman writing the CDS that created the CDO.
The issue is whether Goldman fairly disclosed how the mortgages that went into the CDO were selected, and whether or not the fact that the CDO came into existence because Paulson believed that the underlying securities were going to blow up was disclosed to investors.
That’s the entire case and the entire issue with these things (synthetic CDOs) as I stated back in February!
Let’s face the facts – a synthetic instrument like this exists only because someone believes that the underlying securities referenced will become worthless.
If the person buying the CDS that forms the cash flow basis of the CDO is incorrect in this belief, then he will be forced to make coupon payments on that CDS to the buyers of the tranches – that is, he is going to lose, over time, an enormous amount of money.
There is exactly one way for the person buying the CDS (that is, the person who wants the synthetic CDO to exist in the first place) to make money – the reference securities have to lose value.
These things should have never existed. It is nearly impossible for fair and full disclosure to exist with securities of this sort, as nobody in their right mind is going to buy an instrument which comes into existence only because the person on the other side of the transaction believes the reference securities are going to zero!
