Note that the deal was a synthetic CDO, so the cash flows that are sliced and distributed come from CDS premiums on sub-prime MBS (not directly as cash flows from mortgages). Either way it is the same bet-being long the mortgages or selling insurance on them (which is a bet that they won’t default). Who is paying these premiums? Any buyer of CDS who thinks the underlying mortgages are going south. Could that have been Paulson? Must be in the complaint somewhere.
a) GS was aware of these investigations because of a Wells Notice, sent them in December 2009. Still it looks like they made some reactive comments that may make them look bad. Its not as much the fraud that catches you as the attempt made to cover it up.
b) Bear Stearns apparently declined this deal on ethical grounds.
c) If this is all that the SEC comes up with, it is not a smoking gun, but a water pistol!
d) And a nice moralistic short story version HERE.
e) Notice how the VIX popped huge on Friday!!
A quick look at the weekend financial media suggests a lot of short-term frenzy at least. Bears want to short everything including the banks and Goldman (still)…. A few links with more to come.
First, the SEC complaint against Goldman. Second, some documents from the ABACUS deal in that complaint. Third, a story about how similar deals were not uncommon. Fourth, a Pecora moment for the financial crisis. (Don’t you want to know who or what a Pecora is?)
See my post of Feb 10, titled “Just another CDS game.” It points you to the story that made todays headline. I suppose it takes the SEC some time to build a legal case. I don’t think it will succeed.
More Goldman bashing. Watch the video here.
Synthetic CDO’s and John Paulson..
….Paulson asked the banks to create those CDOs “so that they could be sold to some suckers at close to par. That way, Paulson’s hedge fund could approach some other sucker who would sell an insurance policy, or credit default swap, on the newly minted CDOs. Bear, Deutsche and Goldman knew perfectly well what Paulson’s motivation was. He made no secret of his belief that the CDOs subordinate claims on the mortgage collateral were close to worthless. By the time others have figured out the fatal flaws in these securities which had been ignored by the rating agencies, Paulson could collect up to $5 billion. The full story here.