NYT Muffs Merrill/Magnetar Piece (And Why is No One Investigating the Related Bonus Fraud?)
by ilene - August 10th, 2010 2:51 pm
NYT Muffs Merrill/Magnetar Piece (And Why is No One Investigating the Related Bonus Fraud?)
By Yves Smith and Tom Adams, an attorney and former monoline executive, at Naked Capitalism
Louise Story has penned what presents itself as an important story at the New York Times, one that charges Merrill Lynch with misrepresenting the size of its subprime, specifically, collateralized debt obligation exposures, in the runup to the global financial crisis. The ruse the article depicts is a CDO called Pyxis., which purportedly served as a dumping ground for exposures Merrill could not unload. Initially, Merrill was able to escape reporting these positions because it claimed to have hedged the risk. In fact, the hedges failed, the bank was ultimately on the hook and was later forced to ‘fess up to the magnitude of its holdings. This revelation sounds juicy in that Citigroup and some of its recent senior executives paid fines to the SEC for similar, albeit less convoluted-sounding, misconduct.
But in fact, the story is astonishingly incomplete, to the point of being misleading. While Merrill’s probable accounting improprieties are noteworthy and merit investigation by the authorities, they are not the most important element of this episode. CDO abuses amounted to accounting fraud to enable employees and executives to loot their companies. Moreover, they were not perpetrated by isolated actors, but were part of what Bill Black calls a criminogenic environment.
To put it more simply, if you think Merrill’s misrepresentations to investors are a big deal, they are only a small aspect of the bigger, and frustratingly largely untold, tale of the role of CDOs in the crisis. CDOs were the epicenter of the upheaval, the device that magnified a what otherwise would have been contained subprime bubble into an economy-wrecking meltdown. When the music stopped, it was the dealers themselves that wound up holding much of the toxic paper they’d created. AAA rated CDOs went from haircuts of 2-4% in early 2006 to 95% in later 2007. The collapse in CDO valuations and the resulting inability to use CDOs as collateral for repo was a major, if not the major, cause of dealer illiquidity and insolvency which resulted in massive bailouts and backdoor subsidies.
Accounts like Ms. Story’s are blind man and the elephant affairs: at best, they do a good enough job of depicting, say, the trunk, but leave the beast…
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Much Ado About TED, LIBOR, and Currency Swaps
by Chart School - May 22nd, 2010 1:41 pm
Much Ado About TED, LIBOR, and Currency Swaps
Courtesy of JESSE’S CAFÉ AMÉRICAIN
There is some alarm being expressed about the recent increase in the TED spread from some quarters this week.
Here is a short term chart of the TED. It is definitely elevated expressing the accelerated demand for dollars in Europe. Although the BIS reports will not catch up with this action for quite a while, I suspect we are seeing a replay of a flight away from dodgy assets such as dollar denominated CDO’s that European customers had deposited with their banks that are now being liquidated again. Also, and undeniably, there is a flight to gold, Swiss francs, and US dollars from the Euro as the ECB and the EMU sort out their serious issues brought about by a single currency and monetary policy working across a wide diversity of localized fiscal conditions.
However, here is the longer term picture of the TED spread. As you can see, it is a bit too early to hit the warning sirens. But it does bear watching.
The long view is not very dramatic, and also not as useful for promoting short euro hedge fund trades, or for generating viewer clicks.
For some additional perspective, here is a chart of the one year LIBOR rate.
Here is a short term view of LIBOR in US Dollars. It is definitely elevated.
But here is a similar short term view of LIBOR expressed in ECU’s. By comparing the two LIBOR charts one might think that there is an elevated demand for dollars, probably attributable to a flight to safety. The DX chart indicates that it seems to be peaking. But it can always take a turn for the worse.
And while we are at it, here is a reprise of a prior discussion of the Fed’s swap lines with Europe, designed to relieve imbalanced demand for dollars.
The US is indeed contributing to the bailout of Greece, via its membership in the IMF. But not through the currency swap lines, unless there is something else going on there behind the scenes. Since the US owns the biggest printing press in the world, at least for now, that would not be a shock.
There may be a time to worry about European insolvency. But quite a bit of what we are hearing about Europe these…
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Market Manipulation, Systemic Risk and Fraud, Pure and Simple, And It Continues Today
by ilene - April 28th, 2010 2:28 am
Market Manipulation, Systemic Risk and Fraud, Pure and Simple, And It Continues Today
Courtesy of JESSE’S CAFÉ AMÉRICAIN
This article by the Financial Times should remove any doubt in anyone’s mind that Goldman Sachs was willfully selling fraudulent financial instruments. It appears that they were working in conjunction with Ratings Agencies, Mortgage Origination Firms, and Hedge Funds to cheat investors.
"Cheat" means to circumvent or distort the normal price discovery process through misrepresentation, price manipulation, and omissions and distortion of key data.
Carl Levin summarized the situation in his opening statement this morning in tying together various Congressional hearings and investigations into aspects of the recent financial crisis and the underlying frauds. It sounds remarkably like the frauds that Enron had so recently inflicted on the American public.
In particular, Congressman Levin gave a good description of the key role that derivatives played in this control fraud.
"Of special concern was Goldman’s marketing of what are known as “synthetic” financial instruments. Ordinarily, the financial risk in a market, and hence the risk to the economy at large, is limited because the assets traded are finite. There are only so many houses, mortgages, shares of stock, bushels of corn or barrels of oil in which to invest.
But a synthetic instrument has no real assets. It is simply a bet on the performance of the assets it references. That means the number of synthetic instruments is limitless, and so is the risk they present to the economy. Synthetic structures referencing high-risk mortgages garnered hefty fees for Goldman Sachs and other investment banks. They assumed an ever-larger share of the financial markets, and contributed greatly to the severity of the crisis by magnifying the amount of risk in the system.
Increasingly, synthetics became bets made by people who had no interest in the referenced assets. Synthetics became the chips in a giant casino, one that created no economic growth even when it thrived, and then helped throttle the economy when the casino collapsed."
This is also a good description of the basis of the emerging scandal in the silver market, and other commodity markets such as those that Enron manipulated, in which synthetic bets are being used to manipulate price, and improbable sales are being misrepresented under the cover of secrecy and opaque markets as…
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The Must Have Dictionary For Those Who Don’t Speak Goldmanese Good
by ilene - April 27th, 2010 12:25 am
The Must Have Dictionary For Those Who Don’t Speak Goldmanese Good
Courtesy of Tyler Durden
With less than 12 hours left to the once-in-a-generation cruentus calamari roasting, here is a primer for all those who will be listening in and hoping to understand any of the guttural noises coming out of the beaks of the those doing god’s work on the Senate witness stand. Below is a must-have dictionary for all who seek to speak the divine (or is that brine?) dialect of the Goldmanites, courtesy of Bloomberg’s Jonathan Weil.
1. Sophisticated: Susceptible to predators, blindly trusting of Moody’s and Standard & Poor’s credit ratings, all in all an easy mark.
How to use in a sentence: The companies that lost $1.1 billion on Abacus 2007-AC1 “were among the most sophisticated mortgage investors in the world,” Goldman said in an April 16 press release.
2. Transaction: An investment position whose scope can be defined rigidly or elastically, as a single business deal or a group of many, resulting in either a loss or a profit, depending on the desired outcome. Such flexibility can be useful for tax purposes, or for confusing an angry yet gullible public.
Example: “Goldman Sachs lost money on the transaction,” the bank said. (Notice how the word, when used by Goldman, conveniently excludes the seriously large offsetting profits Goldman made by shorting subprime-mortgage bonds in 2007.)
3. Hedged: A public-relations term that refers to the act of pairing a free-standing loss with a separate profitable transaction, thus creating the outward impression that a Wall Street bank never bore any risk. Effective only when the actual facts are unverifiable. Not effective where showing a profit would cause further harm to the bank’s reputation.
Usage: Goldman said it wouldn’t have lost money if AIG had filed for bankruptcy in 2008, because the bank was hedged. Goldman said it was not hedged on Abacus.
4. Select: To agree to be called a “portfolio selection agent,” at a Wall Street bank’s request, even though one of the bank’s bearish clients is doing much of the picking. See statement from Goldman’s April 16 press release: “ACA, the largest investor, selected the portfolio.”
Related word: Independent. As in, ACA was “an independent and experienced
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Goldman’s Claim Tourre Acted Alone is Horse$&*t
by ilene - April 22nd, 2010 2:19 pm
Goldman’s Claim Tourre Acted Alone is Horse$&*t
Courtesy of Larry Doyle at Sense on Cents
(If you missed my enlightening interview with Larry, click on "The FINRA Fiasco.")
Goldman Sachs is playing this SEC charge of fraud by the book. How so? Wall off senior management, pin the blame on one low level junior employee, and sell that individual down the river. This approach by Goldman is not a surprise but, in my opinion, it is total horse$&*t. How so? Let’s navigate the world of structured finance transactions on Wall Street.
Bloomberg reports the Goldman defense in writing, Goldman Sachs Says SEC Case Hinges on Actions of One Employee:
Goldman Sachs Group Inc. said the U.S. fraud case against the firm hinges on the actions of the employee it placed on paid leave this week.
Fabrice Tourre, the 31-year-old Goldman Sachs executive director who was accused of misleading investors about a mortgage-linked investment in 2007, will also be de-registered from the Financial Services Authority, a spokeswoman at the firm in London said yesterday.
“It’s all going to be a factual dispute about what he remembers and what the other folks remember on the other side,” Greg Palm, Goldman Sachs’s co-general counsel, said in a call with reporters yesterday, without naming Tourre. “If we had evidence that someone here was trying to mislead someone, that’s not something we’d condone at all and we’d be the first one to take action.”
By characterizing the case as a dispute involving a single employee, Goldman Sachs may be taking its first steps to publically distance itself from Tourre in the case, some lawyers said. That could reduce bad publicity and ultimately make it easier for the company to settle the case.
Goldman Sachs may also want to separate itself from Tourre if it’s concerned he will cooperate with the SEC or implicate more senior employees, said Onnig Dombalagian, a professor at Tulane University Law School in New Orleans and former attorney fellow at the SEC.
Goldman’s defense is no surprise, but it is pathetic and ridiculous. In pinning all the blame on Tourre, Goldman would like America to believe that a 27-year old junior level employee structuring a synthetic CDO has the ability to sign off on the capital commitment and other legal liabilities associated with this type of transaction. Wow!! Goldman Sachs must truly believe America is incredibly naive.
Within Wall Street…
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The Litany
by ilene - April 19th, 2010 12:51 pm
The Litany
Courtesy of Joshua M Brown, The Reformed Broker
Looks like it’s gonna be a tough one for stocks today. Here’s a list of what you can expect to put pressure on the markets this morning…
1. Germany and the UK are very much interested in the details of how a New York investment bank may or may not have ripped off their local banks.
2. China (Shanghai Composite Index) sold off almost 5% on news that the government has told the banks to curb all loans for third home purchases. In and of itself, not a big deal, but a reminder of the tightness to which that country’s rulers aspire.
3. The Euro weakening against the dollar is a fairly obvious headwind for risk assets – especially commodities and stocks.
4. Dr Copper, possibly the best leading indicator we’ve got these days, dropping 2.3% in London. May crude contract down 2.4% this morning (81-ish).
5. Goldman’s ($GS) earnings conference call is coming up this week (April 20th), there is a hesitancy for any kind of dip buying until The Street gets a better sense of how big the debt derivatives business is for them.
6. The speed and degree to which all stocks and sectors sold off on Friday on news that was rather company-specific is indicative of a blustery Bull without strong underpinnings.
7. While we were celebrating the Intel ($INTC) quarterly earnings, we had gotten a handful of initial jobless claims and foreclosure stats that were overlooked. These stats will now be circled back to – and they looked like Paula Abdul getting off an airplane with no makeup.
8. Many savvy market participants are anticipating the next phase of the CDO fraud pile-on – who else did this, who’s next to be called out. In addition, will state attorneys general be joining the fray? And what will the impact on the financial industry be now that Finance Reform has become more a slam dunk to pass, politically speaking?
Good luck and be careful out there.
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Did Goldman And Tourre Break FINRA Regulations By Not Reporting “Fab Fabrice’s” Wells Notice Receipt?
by ilene - April 17th, 2010 12:09 pm
Did Goldman And Tourre Break FINRA Regulations By Not Reporting "Fab Fabrice’s" Wells Notice Receipt?
Courtesy of Tyler Durden at Zero Hedge
Yesterday we praised two NYT reporters for having uncovered the mess of the Goldman CDO scandal first, and we concluded, erroneously now it seems, that the SEC merely piggybacked on their disclosure to file charges against Goldman. However, as Reuters’ Matt Goldstein reports, Goldman had received a Wells Notice from the SEC as far back as "six months ago", which predates the Morgenson and Story December 24 story. And as the SEC case would likely have taken at least one year to build up, we are confident that the SEC began their investigation into Goldman and Paulson well prior, likely in 2008 if not earlier. For those unfamiliar, a Wells is basically an advance warning that the recipient will be a target of an SEC investigation. We do not anticipate that anyone aside from Tourre (who, being just 27 at the time of the alleged transactions, in no imaginable way acted alone) and Goldman’s legal counsel was aware of this development, although with allegations that Goldman was dumping various security holdings in advance of the announcement one can never be certain. One key line of questioning has emerged as a result of this disclosure: why was there no official notice anywhere in the public record of this Wells Notice receipt? The precedent is murky when it comes to corporations responsibility to report Wells Notice receipts: certainly, Goldman had no mention of this even in its March 1 10-K.
What is however without question, is that Fabrice Tourre, who as we reported yesterday, is a registered broker dealer, has a responsibilty to modify his/her U-4 within 30 days of the Wells Notice receipt, yet as of yesterday there was still "no disclosure of any event about this broker." Assuming Goldman received the Wells 31 days ago or more, it begs the question did the firm, by allowing Tourre not to report the Wells Notice, break Finra regulations, and just why it believes it has the facility to do this?
Below is Tourre’s still unupdated CRD form with Finra, which still show neither a pending civil case, nor any report of a Wells Notice receipt.
More relevantly, we are keeping a close eye on…
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Spare Me The Sudden Outrage
by ilene - April 16th, 2010 5:23 pm
Feeling good about the SEC filing charges against Goldman Sachs? Maybe there is such a thing as justice after all? Smarten up, says Joshua M Brown, here’s how it goes. – Ilene
Spare Me The Sudden Outrage
Do me a favor…spare me the faux-populism and the sudden bouts of outrage, this garbage CDO factory stuff has been very widely known for a long time. When was Zuckerman’s Greatest Trade Ever book published? Last year. When did the New York Times start telling this story? January.
Now you’re angry? Now you’re outraged?
Here’s how it will all end for those unfamiliar with the process:
- Goldman will hire the best lawyers in the history of the universe, making OJ’s Dream Team look like Ally McBeal.
- They will make public statements about their "vigorous defense" while negotiating a settlement that will involve a large check and quite possibly the sacrifice of "Fabulous" Fabrice Tourre.
- Upon the writing of this check, Goldman will admit no wrongdoing and the White House will claim victory.
- Not one of you will be safer, more employed or in better shape as a result of any of this.
- The lawyers and PR reps involved in the case will buy Maseratis and vacation homes. Lots of them.
- Fabrice Tourre will be running his own hedge fund within 3 years.
- Everyone connected to this case will still have more money in the bank, in real estate and in investments than you could ever dream of.
- The sun will come up the next day, you will go to work, then pick up your kid at Karate, then pay the utility bill.
That’s it, folks. Let’s not pretend otherwise.
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SEC Charges Goldman Sachs With Fraud On Subprime Mortgages, Paulson & Co. Implicated
by ilene - April 16th, 2010 12:33 pm
SEC Charges Goldman Sachs With Fraud On Subprime Mortgages, Paulson & Co. Implicated
Courtesy of Zero Hedge
Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."
Kenneth Lench, Chief of the SEC’s Structured and New Products Unit, added, "The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress."
The SEC alleges that one of the world’s largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.
According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.
The SEC’s complaint alleges that after participating in the…
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Sham Transactions That Led To AIG’s Downfall: The Ugly Truth Was Hiding In Plain Sight
by ilene - January 30th, 2010 12:58 pm
Guest Post: Sham Transactions That Led To AIG’s Downfall: The Ugly Truth Was Hiding In Plain Sight
Courtesy of Tyler Durden
Submitted by David Fiderer, posted originally at Huffington Post
Sham Transactions That Led To AIG’s Downfall: The Ugly Truth Was Hiding In Plain Sight
If you want to understand the deals that wiped out AIG, the best place to start is the website of the New York Fed. In the financial statement of Maiden Lane III, published last April, we see the gory details of the three largest CDO investments – Max 2008-1, Max 2007-1, and TRIAXX 2006-2A – acquired from AIG’s banks at par. Those deals, which totaled $10.7 billion, offer a template for evaluating the other sham transactions in the portfolio.
Initially, the business deal between AIG and the banks was that AIG sold credit default swap protection. Banks buy credit default swaps for two reasons: They want to slice and their dice credit risk, and/or they want to hide something. Here’s a simple, fairly innocuous, illustration: Suppose you’re a banker who tells his client, Procter & Gamble, "We want to expand the relationship and do more business with you." P&G then says, "Fine, lend us $100 million." Back at the office, your senior credit management says, "The maximum risk exposure we approve for P&G is $80 million." How do you keep in P&G’s good graces? You lend the company $100 million, and simultaneously offload $20 million in risk exposure by purchasing a credit default swap from another bank. P&G’s understanding is that you’ve lent them $100 million.
When Deutsche Bank bought a credit default swap from AIG in 2008, its primary motivation was not to slice up the credit risk, but to hide virtually all of it. Max 2008-1, a CDO that Deutsche arranged and closed on June 25, 2008, was huge. The total debt issue was $5.8 billion, of which 94%, or the entire $5.4 billion Class A-1 tranche, was covered by one credit default swap issued by AIG Financial Products. The Class A-1 tranche was considered "supersenior" because it was ahead of two other tranches, both originally rated Aaa, which totaled $200 million. (The remaining debt $200 million worth of debt was rated Aa, a and Baa at closing.)
Put another way, Deutsche Bank did not bring Max 2008-1 to "the marketplace," where investors might consider…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site