CREDIT DEFAULT SWAPS ___CDS

[QaB2i]

As the US banks begin to admit to the level of defaults in the
Equity lines and secondary loans that these incompetent pen pushing bankers (LMFAO) made during the heyday of asset stripping your house to the max (LOL), I wonder who owns CDS's on the Bonds that securitized this defaulting crapola :)

Oh yes.....$$$$$$$$$$$$$$
BANGORANG!!!!

http://www.nytimes.com/2010/08/12/business/12debt.html?_r=1&ref=todayspaper

Debts Rise, and Go Unpaid, as Bust Erodes Home Equity
By DAVID STREITFELD
Published: August 11, 2010

PHOENIX — During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.


The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.

Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.

The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.

“When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” said Christopher A. Combs, a real estate lawyer here, where the problem is especially pronounced. “Their chances are pretty good of walking away and not having the bank collect.”

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

[Tina]

Trading in emerging-markets CDS surges 85%
Eurozone's debt woes fueled interest in CDS

SAN FRANCISCO (MarketWatch) -- Trading in emerging-markets credit default swaps jumped 85% in the second quarter on the back of greater demand for insurance against sovereign-debt defaults, according to a survey released Tuesday by the trade group EMTA.

Inflation up, but the BoE doesn't careThe Bank of England's inflation update this week is likely to show inflation will remain well above its target. But the U.K.'s cental bank doesn't care. That's because it has an asymmetric policy: Too much inflation is better than deflation.

Emerging-markets CDS contracts surged to $658 billion in the second quarter from $355 billion in the second quarter of 2009 and up 35% from the first quarter of 2010, the trade association said.

CDS are a type of derivative that pays out in the event of default. A price of 100 basis points means it costs $100,000 a year to insure $10 million in debt for five years.

"We believe the standardization efforts made by the financial community in 2009 have contributed to better liquidity in the CDS markets," Hongtao Jiang, director of emerging-markets strategy at Deutsche Bank, said in a statement.

"Finally, we believe the hedging need caused by [euro zone] sovereign risk in April and May, and the subsequent squeeze, have also contributed to the increase in CDS trading volumes in the second quarter of 2010," Jiang added.

The most frequently traded sovereign CDS contract was on Turkish sovereign CDS, at $118 billion, followed by $92 billion in Russian sovereign CDS contracts and $69 billion in Brazilian sovereign CDS.

In the corporate sector, the most heavily traded contracts were those on Gazprom (PINK:OGZPY) at $54 billion and $10 billion in Pemex CDS.

[QaB2i]

OT : My Hero +++++
F Jet BLUE

[QaB2i]

Please Do.

[Tina]

Love the accent!

should put that in the ibox

[QaB2i]

Bad dreams?

[Tina]

I must have been dreaming-

Could have sworn I saw some HUGE teeth getting ready to take a BITE

Woogs, I was looking for a really great post you made some time ago with an awesome analogy in reference to the NSS to show someone.

It really should be a sticky as it's just pure genius.

[Tina]

Nighty night Woogs

You always do tell a good bedtime story.


BITE

[QaB2i]

Naked CDS trades, in which investors can insure sovereign debt against default without having to own the underlying bond, have been blamed by Greece and others for amplifying government debt woes

Moral Hazard: What Does Moral Hazard Mean?
The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.

In a credit default swap (CDS), the buyer contracts to pay the seller a regular premium in return for a commitment that the seller will pay out in the event of a default on a specified financial instrument, typically a bond. The market began in the late 1990s as a pure insurance market that permitted bondholders to hedge their credit exposure – an excellent innovation.


But then market participants realised that they could buy and sell ‘protection’ even if the buyer did not hold the underlying bond. This is a ‘naked’ CDS, which offers a way to speculate on the financial health of an issuing corporate or sovereign without risking capital, as short-selling would do. That was so attractive that soon the market was dominated by naked CDS, with a volume an order of magnitude greater than the stock of underlying bonds.


Ya got to admit, now the cats out of the bag it was all a bit effing hoho obvious wasn't it?

Have a hard bite of something that screams over the weekend :)

[Tina]

ECB Backs Temporary Bans on Naked Short Selling

August 6, 2010

FRANKFURT

The European Central Bank supports temporary bans on naked short selling of European credit default swaps and shares in extreme market conditions, but has warned against permanent action to stop shorting.

"Limitations or bans should be limited in time and in scope in case of exceptional circumstances," the ECB said in a submission on proposed new European Union rules.

The European Commission is preparing legislation to allow bans on naked short-selling of shares and some trading of credit default swaps (CDS) although it has stopped short of proposing a permanent ban.

Naked CDS trades, in which investors can insure sovereign debt against default without having to own the underlying bond, have been blamed by Greece and others for amplifying government debt woes. Germany announced a unilateral ban on naked CDS contracts in May.

The ECB said it had similar reservations about completely banning naked CDS trades as it did about short-selling in general, which also had benefits for market participants, but called for more transparency in bond market trades.

"While a complete ban on naked short selling might potentially reduce the possible risks for the markets, the potential adverse effects of such a very restrictive measure should be carefully considered," the ECB said in the submission, published overnight on its Website.

"Regulators should be attributed adequate powers to impose a temporary ban in order to react to extreme circumstances whereby the broad market positioning negatively impacts on the issuer.

"If significant market speculation led by short sellers can be evidenced in future situations, a temporary short selling ban on both sovereign cash bonds and CDS markets could in such cases be agreed upon."

Short selling is the sale of a security the seller does not own and is typically a bet the price will fall by the time the seller must buy the stock to settle his trade. The difference in price is pocketed as a profit.

"Naked" short-selling is where the seller does not own or has not borrowed the security at the time of the short sale.

The ECB backed proposals by the Committee of European Securities Regulators to improve transparency and said regulators should have more powers of enforcement to ensure that trades are settled.

Higher penalties could be envisaged if trades failed, it said.

For a copy of the ECB submission, please see http://www.ecb.int/pub/pdf/other/eurosystems_reply_to_a_commission_public_consultation_on_short_sellingen.pdf

(Reporting by Krista Hughes; editing by Patrick Graham)

Copyright 2010 Reuters News Service. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Copyright © 2010 ABC News Internet Ventures

[QaB2i]

perfect !!! eom

[ListenToMe]

it's this simple...!

[ListenToMe]

I must admit i got scammed on that one! ... can't win em all. lol

[QaB2i]

@@

[QaB2i]

yup me too

[ListenToMe]

Ahhhhh. Yes. The ol bban scam. .... remember it well.

[QaB2i]

Moral Hazard at the SEC
Posted on 28 July 2010 by Judd Bagley


Moments after first mention of the word “bailout” came the first of many references to the inevitable outcome: moral hazard, which is the term used to describe the direct correlation between the irresponsibility of one’s behavior and the degree to which one is insulated from responsibility for said behavior.

Moral hazard is observed in any decision-making entity – including individuals, corporations and even government regulatory agencies – and in extreme cases helps to explain many of their otherwise inexplicable actions. Indeed, when attempting to understand much of what happens at the Securities and Exchange Commission (SEC), I believe moral hazard is nearly as important a factor as the much more frequently-discussed matter of regulatory capture.

The following case illustrates this quite aptly.

In his most recent report to Congress, David Kotz, Inspector General of the SEC, summarized an internal report prepared by his office in which two unnamed enforcement attorneys were found to have provided information on non-public SEC investigations to an unnamed short-seller and an FBI agent. It’s apparent that the short-seller and FBI agent are the infamous Anthony Elgindy and Jeffrey Royer, respectively. The identities of the two SEC investigators who enabled them, on the other hand, are not clear.

Hoping to learn more, longtime SEC critic Dave Patch requested and received the IG’s full report on the matter (get your copy here antisocialmedia.net/OIG-512.pdf

Months later, the report arrived, though redacted by SEC censors (not affiliated with the IG’s office) to the point of near incomprehensibility. None the less, thanks to a single missed redaction and extensive cross-referencing of facts mentioned in the report, we’ve established the identities of both SEC employees.

They are: Douglas Gordimer and Robert Long, both senior investigators at the SEC’s Fort Worth regional office. Knowing this, it’s possible to fill in almost all of the holes left by SEC censors, and better understand the enabling role that organization played in the Elgindy/Royer scams.

It all began in March of 2000, when Royer, then a special agent with the FBI’s White Collar Crime Unit, contacted Gordimer about Broadband Wireless (BBAN), a public company Royer was investigating. We know from other sources that Royer would later inform Elgindy associate Derrick Cleveland of the subsequent SEC investigation into BBAN, and that both Cleveland and Elgindy illegally (and profitably) used that information to short the company’s stock ahead of the investigation’s disclosure.

The BBAN situation apparently gave Elgindy a really bad idea: to use Royer as a conduit for acquiring negative, confidential information about potential shorting targets, and as a catalyst for launching SEC investigations into companies Elgindy was already shorting.
According to the IG report:

During the course of the BBAN investigation, Royer began to contact Gordimer to “try to get the Commission to investigate” various other companies and individuals based on information that Royer provided to Gordimer. Royer would tell Gordimer that “he had some information about [alleged securities laws violations by public companies] that he wanted to pass along” and would ask “who at the SEC might have an open investigation about the company.” (OIG-512 report p.4)

In response to Royer’s requests, Gordimer acknowledged that he would perform a search in the NRSI database, which he described as “an internal SEC database that shows all the open investigations and closed investigations and filings of different entities,” to determine if the SEC currently had an open investigation for the company or individual. (OIG-512 report p.5)

In addition to providing this information, according to Gordimer if there was an existing investigation of the company or individual about which Royer had inquired, Gordimer would refer Royer to the SEC staff attorney conducting the investigation. If the SEC did not currently have an open investigation of the company or individual about which Royer inquired, Gordimer would take the information from Royer and look into it himself. (OIG-512 report p.5)
Gordimer testified that he knew Royer lacked the proper authorization to request such confidential information, but that he freely provided it anyway.

In September 2000, Royer’s involvement in the FBI’s White Collar Fraud unit ceased as he was transferred to Gallup, NM, tasked with investigating crimes on an area Indian reservation. And yet, Royer’s calls to the SEC continued, and in January 2001, Royer also began calling Robert Long, probing for information on confidential investigations and lobbying to get others started.

During this period, Gordimer and Long also began to deal directly with Elgindy, and both became frequent readers of his website, insidetruth.com.

Later in 2001, Gordimer acknowledged that he became aware of a correlation between the stocks that Royer asked him to investigate and the stocks that Elgindy discussed on insidetruth.com. Despite knowing about this correlation and Elgindy’s background, Gordimer insisted that Royer “wasn’t just fishing” for information by continuing to bring information to him, particularly as some of this information had resulted in the opening of a few “legitimate investigations.” (OIG-512 report p.7)

Royer informed Gordimer in January 2002 that “he was leaving the Bureau to go work for some investigative agency which…was associated [with] Elgindy. Gordimer later learned that Royer had received a job offer from Elgindy directly and that Royer would be working with…the company running Elgindy’s insidetruth.com. (OIG-512 report p.7)
Meanwhile, Royer’s requests for information about investigations into public companies slowed but did not stop, though Gordimer felt it prudent to no longer tell Royer exactly who was handling any active investigations, opting instead to provide the relevant SEC staffer with Royer’s number and instructions to get in touch with him. Either way, the outcome is the same: disclosure of confidential, highly material information to a business partner of known short seller Elgindy, despite past evidence of a correlation between such disclosures and shorting activity by Elgindy.

But wait, there’s more.

Despite the fact that Royer left the FBI altogether, Gordimer contacted Royer about an alleged false press release issued in March 2002. Gordimer said he needed information about the company “quickly” in order to determine whether the SEC should suspend trading of its stock.

The IG’s report summarizes the situation nicely as follows:

Therefore, by disclosing information to Royer about whether certain companies and individuals were under investigation, Gordimer released non-public information to Royer. Royer would then provide this information to Elgindy and his associates, and they would sell short the companies’ stock in order to earn illegal profits…By discussing non-public information with Royer without appropriate agency authorization on numerous occasions, the OIG finds that Gordimer repeatedly violated SEC policy. (OIG-512 report p.9)
Normally, such an overt pronouncement of culpability would equate to an explicit demand for one’s resignation, if not one’s termination. But lacking such authority, Kotz was forced to pass the baton to just about every one of Gordimer’s and Long’s superiors.

In light of the foregoing, these matters are being referred to the Director of Enforcement…the Associate Executive Director for Human Resources, the Associate General Counsel for Litigation and Administrative Practice, and the Ethics Counsel for consideration of disciplinary action against Gordimer and Long. (OIG-512 report p.13)
The outcome?

According to Kotz, “[Gordimer and Long] were issued written counseling memoranda and were required to attend training.” (OIG Semi-annual report, April 2010 p.67)

In other words, neither was held responsible for their deeply irresponsible behavior. And, in such a setting, the principle of moral hazard dictates that behavior will become increasingly irresponsible.

And it’s about to get much worse.

The only reason we know what little we do about the SEC’s culture of irresponsibility is the Freedom of Information Act (FOIA), which imposes much transparency on government by empowering citizens seeking access to official records. It was through FOIA that we were finally able to grasp of the true depth of the illegal naked shorting problem. FOIA also helped to identify the motives behind the illegal firing of SEC investigator Gary Aguirre and the extent of the Commission’s failures in stopping the Madoff and Stanford Ponzi schemes. And not least, FOIA made it possible for Dave Patch to acquire the above-cited internal report detailing the SEC’s role in supporting Anthony Elgindy’s illegal trading racket.

In each of these cases, the SEC was held responsible for its screw-ups only after documentary evidence was revealed – and that was only possible through FOIA requests submitted by the public and news organizations.

Today, Fox Business reports that the SEC is claiming Section 929I of the recently-signed financial reform bill exempts it from complying with FOIA. In other words, the SEC currently finds itself in a regulator’s wonderland: all of the authority and none of the accountability. If ever there was a reason to urgently contact your representative in Congress, this is it. That body must be made aware of the disaster of unintended consequences buried in the legislation they just passed. Please contact yours immediately (you can find their contact information here).

Postscript: to learn more about the Elgindy/Royer case, check out his excellent report from the series American Greed.
http://www.cnbc.com/id/35038015/The_Mad_Max_of_Wall_Street

[QaB2i]

SEC Charges N.Y.-Based Investment Adviser With Fraudulent Management of CDOs Tied to Mortgage-Backed Securities
FOR IMMEDIATE RELEASE
2010-105
Washington, D.C., June 21, 2010 — The Securities and Exchange Commission today charged a New York-based investment adviser and three of his affiliated firms with fraudulently managing investment products tied to the mortgage markets as they came under pressure in 2007.

The SEC alleges that, at the direction of its owner and president Thomas Priore, ICP Asset Management LLC defrauded four multi-billion-dollar collateralized debt obligations (CDOs) by engaging in fraudulent practices and misrepresentations that caused the CDOs to lose tens of millions of dollars. Priore and his companies also improperly obtained tens of millions of dollars in advisory fees and undisclosed profits at the expense of their clients and investors.

"ICP and Priore repeatedly put themselves ahead of their clients," said Robert Khuzami, Director of the SEC's Enforcement Division. "Instead of acting as fiduciaries, they took advantage of a distressed market to line their own pockets."

According to the SEC's complaint, filed in the U.S. District Court for the Southern District of New York, ICP began serving in 2006 as the collateral manager for what were known as the Triaxx CDOs, which invested primarily in mortgage-backed securities. ICP's affiliated broker-dealer ICP Securities LLC and its parent company Institutional Credit Partners LLC also are charged in the SEC's complaint.

The SEC alleges that ICP and Priore directed more than a billion dollars of trades for the Triaxx CDOs at what they knew were inflated prices. ICP and Priore repeatedly caused the Triaxx CDOs to overpay for securities in order to make money for ICP and protect other ICP clients from realizing losses. The prices for such trades often exceeded market prices by substantial margins. In some trades, ICP caused the CDOs to pay a price that was substantially higher than the price another ICP client paid for the security earlier the same day.

George S. Canellos, Director of the SEC's New York Regional Office, said, "The CDOs were complex but the lesson is simple: collateral managers bear the same responsibilities to their clients as every other investment adviser. When they violate their clients' trust, we will hold them accountable."

According to the SEC's complaint, ICP and Priore caused the CDOs to make numerous prohibited investments without obtaining necessary approvals, and they later misrepresented those investments to the trustee of the CDOs and to investors. The prices of many of these investments were intentionally inflated to allow ICP to collect millions of dollars in advisory fees from the CDOs. The SEC further alleges that ICP and Priore executed undisclosed cash transfers from a hedge fund they managed in order to allow another ICP client to meet the margin calls of one of its creditors. Priore subsequently misrepresented the transfers to the hedge fund's investors.

The SEC's complaint charges the defendants with violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(c)(1)(a) of the Securities Exchange Act of 1934 and Rules 10b-3 and 10b-5 thereunder, and Sections 204, 206(1), 206(2), 206(3), and 206(4) of the Investment Advisers Act of 1940 and Rules 204-2, 206(4)-7, and 206(4)-8 thereunder. The SEC's complaint seeks permanent injunctions barring future violations of the federal securities laws, disgorgement of the defendants' ill-gotten gains with pre-judgment interest, and monetary penalties.

Celeste A. Chase, Joseph O. Boryshansky, Susannah M. Dunn, Joshua R. Pater, and Kenneth Gottlieb of the New York Regional Office conducted the SEC's investigation, which is continuing.

# # #

[QaB2i]

ill bite: what is a brazilian LTN?
HAS IT GOT A CUSIP NUMBER?

[QaB2i]

How the Exxon Valdez Spill Created the Credit Default Swap

By Justin Rohrlich May 27, 2010 8:00 am

When Exxon Mobil borrowed billions from JPMorgan to pay damages in the case, the risk needed be managed somehow.

It was reported yesterday that the Associated Press obtained a witness statement from one Truitt Crawford, an employee of Transocean (RIG) -- the company that leased the now-infamous Deepwater Horizon drilling platform to BP (BP).

"I overheard upper management talking saying that BP was taking shortcuts by displacing the well with saltwater instead of mud without sealing the well with cement plugs, this is why it blew out," Crawford told Coast Guard investigators.

Eleven people died on April 20. The various methods BP has tried in its increasingly desperate attempt to stanch the gusher of oil currently turning the Gulf of Mexico toxic -- the “Top Hat,” the “Top Kill,” and so forth -- haven’t worked. What we don’t yet know is the extent of the contamination caused.

Trial attorney W. Mark Lanier, founder and lead litigation counsel at The Lanier Law Firm, who has extensive expertise in maritime law and has filed a class action suit on behalf of Louisiana residents affected by the spill, wrote that “some estimates of the flow of oil exploding from the sea floor put the volume equal to the Exxon Valdez spill -- every four days.”

Lanier noted that “It is sobering to realize that oil still remains from the Exxon Valdez spill, a spill that occurred over 20 years ago.”

While the Exxon Valdez spill created environmental havoc, it also ended up inadvertently creating something else that, years later, created a bit of havoc in the financial markets:

The credit default swap.

After a jury ruled that Exxon Mobil (XOM) was responsible for paying $5 billion in punitive damages -- equivalent to one year’s worth of Exxon profits at the time -- the US Court of Appeals for the 9th Circuit later reduced the amount to $2.5 billion. That ruling was overturned in 2008 by the United States Supreme Court, which ruled 5-to-3 to limit Exxon Mobil's liability to $507.5 million, the amount of actual economic losses suffered by fishermen, landowners, and others affected by the spill.

Years earlier, in 1994, to protect the company in case the $5 billion award was affirmed, Exxon Mobil obtained a $4.8 billion credit line from JPMorgan (JPM).

JPMorgan, knowing that the Basel rules required banks to hold 8% of their capital in reserve against outstanding loans, wasn’t thrilled about tying up $384 million in the event the loan went bad. All sorts of swaps already existed at that time -- currency swaps, interest rate swaps -- but according to Gillian Tett’s 2008 book Fool’s Gold, Blythe Masters, a member of JPMorgan’s swaps team, hit upon the idea of the credit default swap as a way to allow the bank to sell the credit risk associated with the Exxon loan to the European Bank of Reconstruction and Development. The EBRD stood to gain a substantial return for taking on the risk of Exxon defaulting, while JPMorgan was able to keep more cash available for other things and greatly reduce its own risk by laying it off on someone else -- in essence, insurance to cover its loan to Exxon.

“Interesting -- I didn’t know that,” was the first thing Cato Institute senior fellow Jerry Taylor said when told of the Exxon Valdez/CDS connection in an interview with Minyanville.

Taylor, who has testified frequently on Capitol Hill regarding assorted energy and environmental policy matters and is an adjunct scholar at the Institute for Energy Research, asserts, as do most financial professionals, that there's nothing inherently “evil” about credit default swaps, a claim that has lately become rather fashionable to bounce around at dinner parties when discussing the economic meltdown.

“Credit default swaps are simply a creative means of managing risk,” he explained. “That’s all they are. There are lots of ways to do it; a CDS is just one method.”

The problems begin when banks stray from the tight risk models JPMorgan had in place at the time of the Exxon Valdez deal.

“I don’t mean to steal a line from the NRA, but it’s not the gun that kills someone else, it’s the person pulling the trigger,” Taylor said.

[ListenToMe]

A blank msg??? ... hmmmmmmm

[QaB2i]

$5 Billion Securitized Commercial Property Loan Seen Defaulting



By Prabha Natarajan, Of DOW JONES NEWSWIRES

NEW YORK -(Dow Jones)- A nearly $5 billion portfolio of commercial real estate properties securitized at the peak of the boom is set to default, according to a Fitch report released Monday.

The portfolio was moved into special servicing, where it will be considered for a workout or resolution, according to Fitch.

The buildings that back these loans were originally owned by Equity Office Properties, which was first sold to The Blackstone Group (BX) in 2007, are part of a deal called GS Mortgage Securities Corporation II, Series 2007-EOP. The collateral on the deal consists of mortgages, equity pledges in joint ventures and cash flow pledges. In addition, there is approximately $2.3 billion of mezzanine debt held outside the trust.

Blackstone's $39.2 billion purchase of Equity Office was seen as the peak of the commercial real estate boom. What made it even more noteworthy was when Blackstone managed to turn around for a profit.

Today, many of the loans to buy these properties are in trouble.

The GS transaction that was transferred to special servicer, Bank of America ( BAC), has nearly $5 billion left to be paid. The collateral of the original deal was a $7.41 billion floating-rate loan secured by 145 office properties. The interest-only loan, with an interest rate of LIBOR plus 0.9966%,matures Feb. 1, 2011, and has one remaining extension option.

At the time of issuance, the average occupancy rate in the portfolio was 91%. That dropped to 82.7% earlier this year. Further, more than 40.4% of the leases are set to end by May 2012. These were the main reasons for Fitch's downgrade of certain classes of this deal in April.

The largest property in the pool by value--11%--is the Verizon Building, located across from Bryant Park in mid-town Manhattan. The property was in the middle of a renovation in 2007, and now is 82% occupied.

-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; prabha.natarajan@ dowjones.com

(END) Dow Jones Newswires
05-24-101814ET
Copyright (c) 2010 Dow Jones & Company, Inc.



Read more: http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201005241814dowjonesdjonline000291&title=fitch5-billion-securitized-commercial-property-loan-seen-defaulting#ixzz0p4rxLpby

[QaB2i]

Confessions Of A Wall St. Nihilist: Forget About Goldman Sachs, Our Entire Economy Is Built On Fraud
by Mark Ames

April 30, 2010

There was a strange moment last week during President Obama's speech at Cooper Union. There he was, groveling before a cast of Wall Street villains including Goldman Sachs chief Lloyd Blankfein, begging them to "Look into your heart!" like John Turturro's character in Miller's Crossing...when out of the blue, the POTUS dropped this bombshell: "The only people who ought to fear the kind of oversight and transparency that we're proposing are those whose conduct will fail this scrutiny."

The Big Secret, of course, is that every living creature within a 100-mile radius of Cooper Union would fail "this scrutiny"--or that scrutiny, or any scrutiny, period. Not just in a 100-mile radius, but wherever there are still signs of economic life beating in these 50 United States, the mere whiff of scrutiny would work like nerve gas on what's left of the economy. Because in the 21st century, fraud is as American as baseball, apple pie and Chevrolet Volts--fraud's all we got left, Doc. Scare off the fraud with Obama's "scrutiny," and the entire pyramid scheme collapses in a heap of smoldering savings accounts.

That's how an acquaintance of mine, a partner in a private equity firm, put it: "Whoever pops this fraud bubble is going to have to escape on the next flight out, faster than the Bin Laden Bunch fled Kentucky in their chartered jets after 9/11."

And that's why this SEC suit accusing Goldman Sachs of fraud is really just a negotiating bluff to give Obama's people some leverage--or it's supposed to be, anyway--according to the PE guy. He dismissed all the speculation that the fraud investigations would turn on other obvious villains like Deutsche, Merrill, Paulson & Co., the Rahm Emmanuel-linked Magnetar and so on.

"You don't get it, Ames. Even Khuzami, the SEC guy in charge of the Goldman case, is a fraud; the fucker was Deutsche's general counsel when they pulled the same CDO scam as Goldman. You have no idea how deep this goes."

And it's clear that a lot more people here are aware of how fundamentally rotten things are but they're not willing to face the big fraudonomics bummer yet, preferring instead to stick with specific accusations.

My position on this was, "Good, throw the book at those crooks too, I don't see what the problem is here."

This was exactly what I argued a week ago, during a verbal slapfight with that acquaintance of mine. We were making a scene in a Midtown yuppie restaurant, arguing over just how much damage Wall Street had caused, and what to do about it.

His position was indefensible, and he knew it, so he switched tactics:

"OK Ames, which bankers would you throw the book at? Because you're arguing that they're all guilty. So which ones do you go after? Two of them? Three? Half of them?"

"Every last one of them. Lock 'em up in one of their private prisons."

"Not gonna happen, Che."

"Che? Me? Listen, Scarface, I'm about law and order. Don't any of you PE degenerates believe in that anymore?"

"OK, here's the deal, Che. I'm going to walk you through this nice and slow so that even an agave-sweetened hippie like you can understand this. Stick with me, this is gonna be a little complicated. Ready?" And so he began.

"Let's say the government decides one day, 'You know, we oughta listen to Che here, let's throw the book at every firm and every executive that our people can make a case against. Because you know, gosh, it's all about rule of law and blind justice, just like Che says.' OK, so now this means indicting just about every serious player in finance, so they take down Goldman Sachs, they take down Citigroup, JP Morgan, BofA... and they also serve all the big funds who are at least as guilty, if not more. So they shut down Pimco, Blackrock, Citadel... maybe they indict Geithner and Summers, haul in some of Bush's crooks... right?"

"Too bad they don’t serve popcorn here, this is getting good."

"OK, now guess what you've just done? You've just caused the markets to completely tank. Remember what happened after the Lehman collapse? Remember how popular that made every politician in Washington? Still wondering why they coughed up a trillion bucks? They were scared for their lives; that's why they voted for that bailout. You'd have done the same goddamn thing. But if we go after everyone guilty of fraud and theft, the market crash this country would see would make 2008 look like Sesame Street. Open that can of worms labeled 'Fraud' and the whole fucking economy collapses. You may as well prosecute people for masturbating. No one will know where the fraud investigation stops and who will be charged next--everyone will try to cash out, and the markets will tank to zero. And guess what happens when the markets tank to zero? Every fucking American with a retirement plan, or an investment portfolio, or a 401k--every state pension plan in the country, every teacher's pension fund, every fireman's pension--every last one of them will be wiped out. That's what the Lehman collapse taught us."

"Us? It didn't teach anything but that this country is run by maniacs."



"Jesus H. Christ, Ames– you're even more clueless than the idiots who managed the Lehman collapse. I mean, didn't everyone get it how badly those idiots screwed up with Lehman? It was the biggest screw-up this hemisphere has ever seen. You had Secretary Paulson and Fed Chief Bernanke scratching their asses not knowing what to do, so then they go, 'OK, we're supposed to be a free market economy, and we're supposed to be the Republicans--let's try something different for a change since nothing else is working. Let's go out on a limb and actually give this "free market" thing a whirl. Who knows? Maybe the "free market" really works the way we always say it does. Nothing else seems to work, let's let the free market decide Lehman's fate. Maybe corporate-socialism isn't the answer.' So they hung Lehman out in the free-market, and BAM! The. Shit. Hit. The. Fan. No shit, dudes--the free market is for suckers, didn't your daddy teach you idiots that? Not only did Lehman collapse--everything collapsed; confidence in the entire system collapsed. And here's what I'm trying to explain to simpletons like you: Our economy is just a confidence game. Don't ask me how it got this way, don't care."

I tried saying something insulting to him, but he just talked right over me, lurching forward baring his laser-whitened teeth.

"I'm sure you have the answer, you and Ron Paul and all the other pot-smoking libertarian do-gooders have it all figured out. But what I'm saying is, no confidence means end of the confidence game. That's what Lehman showed. Every single player in finance suddenly had to face the fundamental problem--this whole fucking economy is built on fraud and lies and garbage. So when Lehman collapsed, every single player panicked, going, 'If Lehman was nothing but a Ponzi scheme--and I know what I'm running is a Ponzi scheme--holy shit, that means everyone else is running a Ponzi scheme too! Run for the exits!' No one trusted anyone else, everyone pulled out, and the entire global economy collapsed just like that. And that meant your parents, my parents, every teacher, every fireman, every person in the country going into retirement, every price on every asset--wiped out.

"And here's what I'm trying to get you to understand: In the grown-up world, when an entire country's savings accounts are wiped out because of some do-gooder and his law books and his Thomas Jefferson 'What about free and fair markets?' crap, that is a big problem--people don't give a fuck about Jefferson and 'free and fair markets,' they just want their savings to be worth something. And people are right: Jefferson was an imbecile. He should have been a folk singer, not a Founding fucking Father. But that's another issue that's over your head--the point is, the guy who destroys this economy because it's 'the right thing to do' will have to flee for his life, and whatever president or political party was in power when that decision was made will be out of power for the next 200 years. That's why Washington panicked and passed 'the bailout,' they didn't want to be the fools whom all the Ponzi victims blame for tanking the Ponzi scheme, so they broke the glass and pumped up a newer, bigger Ponzi scheme. It was an expensive 14 trillion dollar lesson in, 'Stay the fuck away from free-market experiments, assholes!' How naive are you people to actually believe that 'free market' crap? The problem is when people in power are stupid enough to listen to guys like you: all the do-gooder libertarians and the do-gooder free-market Republicans who forgot that they're supposed to lie. Hello!"

"Libertarian, me? Since when was I ever a libertarian?"

"That's my point: Fools like you don't even know who you are anymore. They forgot that they're supposed to lie about all that libertarian free-market shit, keep it far the fuck out of policy. But instead of just lying about free-markets while secretly propping up Lehman, the idiots actually tried pulling off a 'free-market' miracle, and we had to pay $14 trillion just to find out what I could have told them for no fee at all, which is: 'Hey, assholes, you're supposed to be hypocrites, OK? You're supposed to be two-faced free-market liars, not libertarian Quakers! You're not supposed to believe in anything--your job is to get up in front of the public and lie about free markets and the rest. Period.'

"That's it, how fucking hard is it? Look, watch my face: Say one thing out of one side… and do the other out of the other side. Got that? Let everyone else whine and cry about, 'Ooh, that's not fair, ooh, that's a bailout, that's socialism, that's corruption.' That's what losers do--they whine. You, for example, Che--you whine all the time, and look at you… Can you pay the bill for this meal? Is there a libertarian on earth who can afford to buy a decent meal in Manhattan? And now, look at me: I'm a hypocrite. Hell yes I am! I lie every day of my life, I lie to myself in my sleep. Hell, I'm lying to you right now, in fact I don't even know what the fuck I'm saying anymore because I'm so used to lying. And yet--who's the guy with the black card? Who's the one who's going to pick up the check tonight? Guys with power, guys like me, we lie. You got that? 'Lie' as in 'My Lai' the massacre--as in, 'My Lai you long time, me so free-markety.' You distract the dumbshits with free-market B.S. because hey, for whatever reason, that's what the public likes to hear, it doesn't really matter what lie you feed them so long as it's the lie that puts them in a trance. And then behind the scenes, you do the very opposite: You fix the game, you cover up this problem here with those funds there, you move shit around, you skim budgets and you subsidize the system, you cover up the bad shit and once in a while throw a has-been to the wolves to keep the public entertained--that's the way the system works, and anyone who's an adult understands that. And everyone who doesn't understand that can go form an online libertarian chat group and complain with all their little libertarian friends about free markets and Jekyll Island and 'Wahhh! It's not not fair, waahhhh!'"

"What's with the libertarian accusation?"

"It's just that you all sound the same to me. Libertarians, hippies--is there really a difference? You all whine alike: 'It's not fair, man! Ooh! You can't do that, it's fraud, it's corruption, ooh no!' Or: 'It's the income inequality, man; Goldman Sachs controls us all man; it's socialism for the rich; it's all too scary for my retarded 5-year-old libertarian brain!' Seriously, anytime I meet libertarians like you--"

"Listen--I'm not a fucking libertarian, OK? I want free handouts. How clear do I have to make this? Me--handouts. Me--Big Government. I want to collectivize your productive cash, because I am a resentful parasite. Are you capable of processing a single word of what I'm saying to you, Spaz?"

"Uh-huh, sure, whatever. Here's the thing: I think it's great that you and your friends memorized Road to Serfdom in between Star Trek episodes--no really, I'm happy for you. Yeah, we're all so proud. But here's the thing: We grown-ups are really, really busy now trying to sort out the free-market mess you made with that Lehman move of yours. Yeah, so why don't you run along to your libertarian chat rooms and have your little debates about Jekyll Island and the gold standard, because it really means a lot to us. And report back to me as soon as you have it all figured out, m'kay? Just get the fuck out of my face and leave the adults alone."

It got a lot more vicious and personal than this, but when our verbal slap-fight ended--and he paid the bill--I thought about what he said, and it made a lot more sense. Fraud has become so endemic in this country that it's woven its way into America's DNA, forming a symbiotic relationship that can't be undone without killing off the host. If they push it just a little too hard, the entire American economy could crash, asset values could tank, and that means tens of millions of extremely pissed off retirees and Baby Boomers. As the Wall Streeter put it: "Whoever is responsible for bursting this latest bubble by exposing all the fraud--and tanking all the markets--will not only be out of power for at least a generation, but they'll all have to get radical reconstructive surgery on their faces and seek political asylum somewhere remote. No one wants to be that guy, and that's why it's not going to happen."

That may be true, but all bubbles to eventually burst, all Ponzi schemes do collapse. The only question is when. For those of us not on the verge of retiring, the sooner we have this day of reckoning and get it over with, the better.

Fraudonomics: 10 Fun Fraud Facts



Ever since I got kicked out of Russia and forced back home, I've been collecting all kinds of news articles about fraud, in a document file titled "America Is Russia." Here's a little taste of the wonderful world of American Fraud:

1). Accounting Fraud: Last year, America's leading banks were insolvent. They had tens or hundreds of billions in losses on their books, and the only way to wipe those losses out would be to either a) own up to the mess, raise enormous amounts of money on top of all the bailout money; or b) get out a big fat eraser, and wipe those losses off the books as if they never existed. The first option was nice and all, but a real hassle. So Geithner and Larry Summers chose Door Number Two: Accounting Fraud. They forced the FASB to accept a rule-change in the accounting methodology called "mark-to-model" which let banks decide how much their assets were worth, rather than letting the markets decide. So if for example a BofA owned a complex security called "Orion Butt Fungus" that was worth 5 pesos on the open market, but BofA was too broke to go out and raise 5 pesos to cover that loss, under the new accounting rules, the government told BofA that rather than pricing "Orion Butt Fungus" at what the market will actually pay for it, why not first ask, "How much would BofA like 'Orion Butt Fungus' to be worth, in a perfect world?'" If BofA answers, "Doyee, gee I dunno, how about $500 million?" then under the "mark-to-model" accounting rules, BofA could now value "Orion Butt Fungus" at $500 million, and voila! Their problems are over. That wasn't so hard, was it? Suddenly, BofA looks like it knows how to pick winners! And no one's going to second-guess them, because everyone else is mark-to-modeling their "Orion Butt Fungi" too! The end result: under the old rules, BofA would have had to raise money just to cover its debts, sort of like you and me have to do, and that's just a lot of money going to waste. But now that its portfolio is so profitable, BofA has a much easier time raising money, which it uses to pay ginormous bonuses to its executives.

2). Big Pharma Fraud. Remember that scene early in Fight Club, when Edward Norton explained his job, when it was more profitable to let a car defect go and pay whatever lawsuit settlements come from the deaths, and when it's better to recall the cars because the number of deaths will result in too many lawsuits? This is humanitarian do-gooder stuff compared to the savage real-world fraud-for-profit model that drives America's drug companies. It's really simple and it goes like this: the more fraud a drug company commits, so long as it's off-the-scale fraud with the most horrible consequences for the victims, the drug company's profits always outdo the criminal fines and lawsuits by factors of 20, 30, 100... It's as simple as that. Because the billion in penalties here or the two billion in class action lawsuit settlements there are always far less than the tens of billions you earn from pushing harmful drugs on unsuspecting idiots. To wit: Between May 2004 and March 2010, a handful of top drug companies like Pfizer, Eli Lilly and Bristol-Myers paid over $7 billion in criminal penalties for bribing doctors to prescribe drugs for unapproved uses, with sometimes deadly consequences. However, as a Bloomberg report noted, the fines are always a fraction of the profits--Pfizer alone paid almost $3 billion in criminal fines since 2004, yet that was just one percent of their total revenues; Eli Lilly got busted bribing doctors to prescribe a schizophrenia drug, Zyprexa, to elderly patients suffering from dementia, even though company-run clinical trials showed an alarming death rate of 31 people out of 1,184 participants (double the placebo rate). Whatever--the market for elderly dementia patients meant billions in extra revenues. So Eli Lilly continued pushing Zyprexa on the elderly for another four years until it the Feds busted them. Eli Lilly got hit with $1.42 billion fine, but that was peanuts compared to the $36 billion it earned on Zyprexa sales from 2000-2008. To make it happen, the drug companies buy off all the checks and balances: lawsuits revealed the enormous bribes they pay to doctors, and even America's medical journals are so corrupted by drug company influence that they're no longer reliable as much more than hidden advertisements, according to a recent UCSF study. Medical journals are 5 times more likely to publish "positive" drug reviews than negative reviews, and one-quarter of all clinical trials are never published at all, leading doctors to prescribe drugs assuming they have all the information. The result: prescription drugs kill one American every five minutes ...while Americans pay more for drugs than anyone in the world, spending a total of $12 billion on drugs in 1980 to spending $291 billion in 2008--a 1,700% increase. America is ranked only 17th in the world in life expectancy.

3). Alan Greenspan: Fraudonomics Maestro. America's central banker from 1987-2006 once told a do-gooder regulator not to fuck with the bankers' fraud schemes, because in Greenspan's mind, fraud was not a crime and didn't need to be regulated. Then Greenspan forced the regulator, Brooksley Born, to resign. Just in time for his next and final act as Central Bank chief: from 2001-2004, Greenspan pumped up the biggest housing bubble in human history by holding rates down to nothing, while touring the country promoting the glories of subprime and Alt-A mortgages. Then in late 2005, when the bubble was ready to burst, Greenspan tendered his resignation and switched over to the other side, signing lucrative contracts with three investment firms all of which bet big against gullible American homeowners, and reaped billions. First, Greenspan signed up to work for Deutsche Bank, which is being sued for securities fraud for selling an Abacus-like CDO to a Warren Buffett-owned bank, M&T; Greenspan also worked for Pimco, which earned $2 billion in a single day in September 2008, when Fannie Mae and Freddie Mac were nationalized with Greenspan's lobbying help; and lastly, Greenspan went to work for Paulson & Co., the hedge fund that raked in $1 billion off the same Abacus CDO deal that brought the SEC fraud suit against Goldman Sachs. It's an unusually perfect record for Greenspan, given his atrocious forecasting record at the Fed. It recalls the old Greenspan circa 1984-5, when he worked as a lobbyist for Charles Keating trying to push regulators off his back and vouching on the record for Keating's character...Keating was eventually jailed for fraud in the worst savings and loan collapse of all.

4). Municipal Debt Fraud. America's $2.8 trillion municipal bond market is rife with fraud of the sort you'd expect in an emerging tinpot economy: opacity rather than transparency, plenty of corruption and kickbacks, resulting in decimated budgets and services cutbacks in communities across the country. The problem all stems from way the bonds are issued these days: instead of holding open tenders, nearly all are the result of backroom deals. Back in 1970, only 15 percent of municipal bond contracts were awarded through no-bid contracts; last year, 85% of muni bond deals were assigned in no-bid, non-transparent agreements. Studies show that no-bid bonds invariably cost municipalities more than bonds resulting from open tenders. So far, fraud and corruption charges have been leveled against state employees and city councilors in Florida, New York, New Mexico, Alabama and California, to name a few. Muni bond defaults soared from just $348 million in 2007 to $7.4 billion in 2008--that's an increase of 20 times– with growing numbers of cities, counties and states on the verge of bankruptcy.

5). Journalism fraud. The Washington Post got caught whoring out their venerable editorial staff to corporate lobbyists for anywhere from $25,000 to $250,000 a date, depending on the access. The Atlantic Monthly admitted to TalkingPointsMemo that it routinely sold access to its editorial staff for cash. As for business journalism, all sorts of articles and studies have asked the obvious question: "How did every mainstream business outlet miss the financial collapse of 2008?" Among all the self-flagellating mea-kinda-culpas, you won't find the word "fraud" in their answer. Speaking of business journalism and fraud, The Business Insider, one of the top business news blogs, published a pair of articles defending Goldman Sachs against the SEC fraud charges. The author of the articles defending Goldman Sachs is Business Insider's co-founder and editor, Henry Blodget. In 2003, Blodget himself was charged with securities fraud by the SEC for repeatedly misleading clients into buying stocks of companies that in private emails Blodget referred to as "piece of shit." Under the terms of Blodget's settlement with the SEC, he agreed to a lifetime ban from the securities industry, and he paid $4 million in fines and disgorgements. Since he is not barred from the world of business journalism, Blodget was able to post an article last Friday headlined: "HOLD EVERYTHING: The SEC’s Fraud Case Against Goldman Seems VERY Weak."

6). Fraudonomics K-12. If you want your kid to grow up to succeed in a fraud-based economy, you need to teach him the ABC's of cheating starting at a young age. This is one area where America's schools aren't failing their students. Cheating is so rampant in schools that nowadays if the student doesn't cheat on his exam, chances are his teacher or administrator will cheat on his test for him. One in five elementary schools in Georgia are currently being investigated for tampering with the students' standardized test scores--although suspicious patterns of erasing and remarking answers showed up in half of the state's elementary schools. In California, as many as two-thirds of its public schools admitted to fudging its students' standardized test scores. A survey of graduate school students found that 53 percent of business school grad students admitted to cheating, more than any other grad school discipline. Overall, up to 98 percent of college students today admit to cheating, compared to just 20 percent who cheated in 1940.

7). Boardroom Fraud. Corporate America's boardrooms are stacked up these days in tight, intertwined relationships that turn public companies into crime scenes, plundering money from unsuspecting shareholders and divvying up the loot among the directors and top executives. In 2008, Chesapeake Energy's stock price collapsed from $74 per share to $9.84, wiping out $33 billion in shareholder value. The CEO, Aubrey McClendon, gambled and lost 94% of his stock in the company on a margin call, personally losing about $2 billion. So what did the board of directors do? They voted to award McClendon $112 million for 2008, the highest of any CEO in America. Shareholders were outraged, calling it a "bailout," and several pension funds tried suing Chesapeake, but the courts in Oklahoma blocked the lawsuits. That's because Aubrey McClendon is sort of the George Bush of Oklahoma--a spoiled fuck-up with a rich and powerful granddaddy--Robert Kerr, former governor and senator, and founder of Kerr-McGee--meaning plenty of VIP connections for the loser grandkid. So on Chesapeake's board, you had Aubrey's cousin, Breene Kerr; Frank Keating, Republican ex-governor of Oklahoma whose son Chip (and Chip's wife) works for Chesapeake; Don Nickles, Republican ex-Senator of Oklahoma who co-funded with Aubrey the Republican anti-gay marriage campaign in 2004; Richard Davidson, the former head of Union Pacific, whose corrupt board of directors lavished Davidson with tens of millions in bonuses and a $2.7 million per year pension when he retired... Now multiply a board of directors like this by the sum total of "Corporate America" and you get…a corrupt, tin-pot corporate culture masquerading as a civilized First World corporate culture. That's us. (You can read about this problem in an excellent new book Money For Nothing: How The Failure of Corporate Boards is Ruining American Business and Costing Us Trillions.)

8). Corrupt credit rating agencies. The only way big institutional investors like pension funds could justify buying a piece of the Orion Butt Fungus CDO pie was if ratings agencies like S&P or Moody's gave it a top-notch seal of approval: AAA rated, with a little star on the forehead for good behavior. And in the world of fraudonomics, good behavior looks like this email from a Standard & Poor ratings analyst in December 2006:

"Rating agencies continue to create an even bigger monster _ the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters."

The happy ending to this story is that a huge percentage of thieving scum like this emailer saw their hopes become reality: they got wealthy and retired before the CDO market crashed in a trillion-plus dollar heap of shit. And if they didn't retire, even better--because bonuses in 2009 were soaring, thanks to the always-gullible American taxpayer.

9). Regulatory Fraud: In the OTS, OCC, Fed, pension benefit guaranty agency and of course the SEC, where whistleblowers were routinely ignored because the regulators were too busy painting their monitors while surfing sites like www.fuck-my-wife.com.

10). Judicial Fraud: Juvenile court judges in Pennsylvania took millions of dollars in kickbacks from privately run prisons in exchange for sentencing thousands of innocent kids to juvenile prison terms. Chronic on-the-bench masturbation is running rampant: an Oklahoma judge was accused of using a penis pump on the bench, while nearby in Texas, a Harris County judge masturbated and ejaculated on a defendant's hand. Speaking of Texas, the entire juvenile prison system there was turned into a sex abuse racket involving Texas state officials–over 750 official complaints about prison administrators molesting or raping underaged inmates in all 13 juvenile facilities had been officially logged between 2000 and 2007.

The list goes on and on. Hell, even our literature was corrupted with fraud: James Frey's addiction "memoir" A Million Little Pieces turned out to be A Million Pieces of Bullshit, the biggest literary fraud of our time. Fooled readers sued, Oprah chewed him out and Frey is now a bestelling "fiction" author.

This is just scratching the surface, but you get the point. We’re way past the point of redemption. No wonder everyone’s dreaming of a violent apocalypse to wipe the slate clean, and take us away to another plane where everything would be better. Anything but this.
_______

[QaB2i]

Why SEC Has Strong Case Against Goldman,
by: Suna Reyent April 30, 2010 |

I have stated in an earlier article my belief that SEC has a very strong case. I also believe that the Goldman Sachs (GS) defense I’ve read thus far is inadequate.

So what is wrong with the Goldman defense? In my opinion, Goldman is putting its own spin on the subject matter, rather than addressing the SEC complaint directly. In fact, they seem to be regurgitating the same boilerplate arguments I outlined in the earlier article without really addressing the specifics.

Let’s break down the defense Goldman camp has used to get a better view of what we’re talking about:

The “But This Wasn’t Material Information” Defense
This has been an important focus of discussion in legal blogs and opinions. I seem to be one of the rare souls who believe with certainty that this information is absolutely “material.” Misleading investors in a structured security underwriting on top of excluding pertinent information in an offering memorandum in my opinion should pass the test of “materiality.”
A collateralized debt obligation is a structure that repackages loans into a new instrument. These portfolios could be made up of pools of corporate debt, auto loans, credit card debt, or subprime mortgages.

The synthetic Abacus CDO was composed of credit default swaps written on subprime debt. These credit default swaps (CDS) were insurance bought by Paulson on the housing market from Goldman.

For this short position, Paulson paid premiums just like regular insurance.

Paulson bought insurance on what he thought was most likely to fail. In other words, these CDS instruments suffered from what is known as adverse selection problem in the insurance industry. People tend to buy insurance in bad products or what is more likely to fail, but they don’t tend to buy protection on good products or successful investments. It is allowed and perfectly legal.

So it was this insurance guaranteed by Goldman, which was repackaged into the Abacus CDO. This is where the Abacus CDO deal-making process entered into the picture. Goldman found long investors for the deal to transfer its short CDS liability to Paulson, without telling them that Paulson had the majority of say in what products would go into the CDO structure.
Instead, the CDO was represented and marketed to investors (IKB, and ABN Amro who assumed Goldman’s credit risk with ACA) as having been designed and selected by ACA Management, an independent firm with a long interest in the underlying securities.

SEC alleges that Goldman not only hid Paulson’s role from all long parties via making it appear like a third long party (ACA) picked the portfolio, which is a material misrepresentation on its own, but it also made one investor (ACA) believe that Paulson was interested in the long side of the deal.
Some legal experts say the case may very well come down to the definition of “material information.”

First of all, a specific information does not have to act as a threshold to make or break a deal for it to be considered material.

Such information could also make a difference in the pricing of a deal, or the market price of a proposed deal or transaction, if we were talking about a publicly traded firm acquiring another firm.

This information could have caused investors to require higher yields and better negotiating terms from the other side, i.e., Paulson, to be compensated for the extra risk they were carrying, if they had known that someone with a short interest was influential in choosing the securities. But no. Instead, they believed an independent collateral manager with a long interest had performed that job.

This information would also influence the grading of the bundled product besides yields and structure. A Moody’s (MCO) official has testified in a US Senate panel that “he would have liked to have known that billionaire hedge fund manager John Paulson was shorting the Abacus product when Moody's was rating it”.
What has been done in this deal is not equivalent to failing to inform that Paulson the hedge fund is on the other side of an investment. If this had been a simple trade in the capital markets, confidentiality of Paulson’s position would have been rightfully protected.

However, this is not a simple trade or market transaction, it’s an underwriting with an offering memorandum that also gets graded depending on collateral and structure. The material information at hand is that this portfolio has been misrepresented as having been designed and selected by an independent third party with a long interest, ACA Management. The email trail presented by SEC shows that Goldman staff has gone through some pains to conceal this information, and this action is not limited to Fabrice Tourre.

Gregory Palm, the general council of Goldman Sachs, insisted in the quarterly conference call that ACA Management was the sole party responsible for selecting the securities, despite the SEC claim that ACA chose securities from the pool of mortgage securities recommended by Paulson, whereby ACA accepted 55 of the 123 initial securities proposed by Paulson (Complaint No: 30).
The rest of the securities (35 in total) were decided back and forth between ACA and Paulson. On top of that, Paulson exercised the freedom to delete “safer” securities suggested by ACA from the portfolio. (Complaint No: 34) Thus Paulson had a very significant say, if not full control, in picking a total of 90 names for the Abacus portfolio.

According to the transcripts of the conference call available at Seeking Alpha, when asked about exactly what Paulson’s involvement in the portfolio selection process was, Palm says this:

In this market there has to be a long and a short. That is perfectly clear. Other point I would really emphasize is in order to have a transaction in this market you have to have some reference portfolio of securities which is satisfactory to both the longs who are looking at the portfolio; they are not really looking at really anything else and the short who are looking at the same portfolio and deciding that. As you know, whether the shorts are us or anyone else.

If I understand correctly, he is saying (or rather going through great pains to avoid saying) that it is natural for the long and the short side to come together and pick a portfolio that is mutually acceptable to both the long and the short sides of the deal.

That’s great. Sounds quite acceptable to me so far. But why was the deal represented to the outside investors as if ACA Management, a company who had long interest in the deal, had sole responsibility in picking all of the names in the portfolio? SEC alleges that it was because German bank IKB specifically required an independent collateral manager as an investor. All official marketing materials represented ACA as the only party (with long interest) who selected securities for the CDO structure.
Goldman Sachs bought insurance from ABN Amro to cover for ACA’s credit risk, thereby exposing this firm to a long position in the CDO in case ACA failed to make through on its payments. Would ABN Amro have been equally willing to insure this transaction at the spread it agreed to if it had known that Paulson with a short interest had a significant say in picking the securities in this deal? It was ABN Amro (via RBS) who eventually recouped the losses of ACA Management in this deal. (Complaint No: 66)
Remember, Paulson picked 55 out of the 90 names, and it vetoed the “sound” RMBS securities suggested by ACA from the rest of the 35 that eventually made it into the portfolio.
Later on in the same conference call Palm offers the following:
In very simple terms the portfolio here was not selected by John Paulson. The portfolio here was selected by ACA. ACA had the responsibility to do that. They were paid to do it.

Wait, didn’t he just say minutes before something about “the longs who are looking at the portfolio and the short who are looking at the same portfolio and deciding that”?
Must be difficult to stick to your initial story about ACA’s portfolio selection responsibilities AND try to sound consistent when asked about Paulson’s involvement at the same time.
If anything, it appears as if the general council is failing a simple cross-examination regarding this matter.
The charges have to do with failure to disclose relevant information, and “recklessly, negligently and knowingly misrepresenting” the offering, which fall within the scope of the Section 17(a) of the Securities Act of 1933 and Section 10(b) of Securities Exchange Act of 1934 and Rule 10b-5. Private placements are not exempt from these laws.

Also, the fact that these investors were “sophisticated” does not relieve Goldman of its duty to comply with the laws stated above. Finally, the fact that IKB, ABN, and Moody’s failed to do proper due diligence on the selected securities, while noteworthy, does not give Goldman the license to misrepresent the deal making process.

The “But We Lost Money On The Deal” Defense

Goldman Sachs has affirmed that because it has lost money on this deal, the “intent” to defraud is proven to be false. My first reaction to this defense was the irrelevance of this fact (or claim).

However, Goldman is treading a dangerous territory by taking this route. If the firm maintains innocence partly because of its long position in this specific deal, then it will have to explain profits made via any offsetting short positions in other proprietary deals or trades besides this one, as well as insurance “hedges” bought in the form of CDS contracts. On top of that, despite claiming to have “skin in the game” via this position, Goldman has tried to unload its remaining stake in the Abacus investment “almost from the start”.

In fact, there are very good accounts (here and here) by William Cohen of the Daily Beast and Steven Davidoff and Peter Henning of The New York Times about how Goldman’s relationship with its short-betting client Paulson may have helped shape the firm’s own opinions regarding the mortgage market. The former also explains in detail the linkage of that outlook to Bear Stearns’ eventual collapse.

Goldman Sachs’ infamous decision to reduce its exposure to the mortgage market after a ten-day losing streak at the end of 2006 was regarded as evidence by some (including yours truly) as an astute use of risk management by the firm.

Taking a better look at the inside of the firm gives a better view of the fact that Goldman was a significant originator, intermediator, arbiter, marketer, buyer, seller, and cheerleader of this opaque market of mortgage securities, where barriers to entry made it impossible for most people to participate in. Goldman not only had a far better knowledge of the junk it was selling, but it also knew which players were betting for and against which instruments, and thus the timing and size of important bets.

A report released by Permanent Subcommittee on Investigations
notes that a transaction by the name of Timberwolf Ltd. (along with Abacus deal) was completed after one department shifted its proprietary position in the mortgage market from $6 billion long to $10 billion short by the end of the fateful quarter that ended February 2007.

The subcommittee has released new information that enables us to take a closer look into the workings of the investment house. In an internal email, a supervisor refers to the Timberwolf CDO as a “sh**y deal”. The same supervisor sends an email congratulating sales staff for getting rid of a specific position in this CDO created by Goldman itself.

This is purely conjecture, but Abacus CDO could also be seen in the bigger picture as an effort for Goldman to unload a CDS liability it acquired in earlier dealings with Paulson.
Interestingly, Andrew Butter has provided a short and important timeline at Seeking Alpha that puts the Abacus deal into a new perspective, into a deal that was designed to unload an earlier CDS exposure Goldman acquired in trading with Paulson in 2005 and 2006.

I don’t know whether Goldman had any naked CDS exposure to Paulson before the Abacus CDO transaction was completed. This is speculative at best, but if Goldman had full exposure, then this transaction would save them $900 million as opposed to costing them around $90 million.

But for that to happen, Paulson would have to allow Goldman to buy back the naked CDS, thus allowing Goldman to get out of its original position. After the CDO deal gets done, Paulson would buy a similar CDS from Goldman, and this CDS would now be appropriately hedged in Goldman’s books via the special purpose vehicle created for the Abacus CDO. Simple, no?
Interestingly, Blankfein himself sends an email dated Feb 11, 2007, wondering whether “could/should we (they) have cleaned up these books before and are we (they) doing enough right now to sell off cats and dogs in other books throughout the division?”
The head of the correlation desk sends an email on the same day to Fabrice Tourre stating, "the cdo biz is dead we don't have a lot of time left" (SEC Complaint No: 18). If anything, these emails are indicative that Mr. Tourre was not acting alone in his over-extended enthusiasm to get the CDO deal done at all costs. They are also indicative of the firm trying to reap commissions and/or trying to get rid of “cats and dogs”, rather than trying to serve clients’ best interests during this timeframe.
Goldman has certainly profited at the expense of its clients via unloading mortgage securities they helped create. Even if these actions themselves are not against the law, attempting to unload such positions in the inventory (including the remaining Abacus position that eventually cost Goldman $90 million), and email trail released by the SEC and the Senate subcommittee, assist in establishing the intent to misrepresent the Abacus deal to investors.

The “But They Were Big Boys” Defense

This is the defense that Goldman, while acting as a broker-dealer, did not act in a fiduciary capacity in this deal, a fact that sophisticated investors are well aware of. Touché. But fraud is still fraud regardless of who the victim is. In other words, the laws that Goldman is charged with violating apply to qualified institutional buyers under Rule 144A as well.
The senate grilled Goldman executives on having made money at the expense of clients. This is bound to provoke outrage in the constituency, although betting against clients in and of itself does not a legal case make. But it does assist in establishing the bigger picture that shows purposeful actions on the part of the firm to push the aforementioned CDO deal onto the customers in an inappropriate and misleading fashion.

Besides, it does not hurt to spice up the case with insider details on how Goldman made money via selling “cats and dogs” to sophisticated clients. Not to mention that the deceived “big boys” may have been taking care of individual savings and retirement accounts of ordinary folk.

The “But The CDO Would Have Performed Poorly Even Without Paulson’s Involvement” Defense

So, that’s why the firm was so anxious to dump the “cats and dogs” remaining in its inventory, right? And that’s why the firm was trying so hard to find a counterparty to sell its remaining investment in the Abacus CDO as soon as the deal was completed.
Whether a certain misrepresentation or fraud changes the final outcome of a deal or situation does not excuse the fact that a material misrepresentation as well as fraud has been committed.
This is intellectually equivalent to saying that a person you poisoned died because of an earthquake so what you did to them prior to their death is not punishable by law.

The “But Others Were Doing What We Were Doing” Defense
Normally I would contain my sarcasm, but really, how solid is it to try to explain away material misrepresentation and fraud by saying that there were others out there who did what Goldman did as well? Since when did pointing fingers to others become a legitimate defense?

But did others do exactly what Goldman did?
There were plenty of other CDO deals done on the street. In fact, SEC and Goldman seem to have engaged in at least one conversation regarding which deal on the street included what kind of disclosure throughout the 18 months of this investigation.
Deutsche Bank (DB) sold similar CDOs without notifying customers who was on the other side of the trade, and Paulson was taking short bets on these deals as well. Here is how Deutsche Bank’s head of communications argued that its deals were different from

Goldman’s Abacus deal:
What distinguishes Deutsche Bank's CDO transactions is that both long and short investors were given the opportunity to select the specific collateral to which they were seeking exposure and mutually agreed on the CDO portfolio. No third-party collateral manager was utilized for these deals, which eliminated the potential for deception with respect to the role of such a manager.

So there was no (mis)representation to the long investors that an independent collateral manager had exclusively designed and approved the portfolio.

In fact, Deutsch Bank’s CDO transactions were overseen by the very Robert Khuzami who is the current head of SEC enforcement today.

The “But We Didn’t Know Fabrice Was Devious” Defense
Goldman has not been able to distance itself from Mr. Tourre by saying it was not aware of his actions and does not approve of what he has done, since doing so now would indicate serious failures of supervision on the part of the firm for at least 18 months that SEC was known to be investigating this issue.
An internal investigation must have been conducted during this period. Indeed, Goldman Sachs’ defense letters now made public reveal that the firm knew about all of the charges SEC alleges that Mr. Tourre as well as the firm have committed. The firm was also notified of the email that Mr. Tourre sent to Ms. Schwartz (ACA representative), which misrepresented Paulson’s involvement in the CDO deal as a long investor.

In the first response letter to SEC’s Wells notice, Goldman’s defense team has categorically denied that this employee had engaged in any “negligent, reckless, or intentional” misrepresentation (Page 33). A sudden reversal from that position when slapped with a lawsuit would look disingenuous at best, if not devious.

Also, distancing itself from Mr. Tourre would not extricate the firm from its own material omission of Paulson’s involvement in the offering memorandum, sales pitches as well as marketing materials, even if these documents were prepared by Mr. Tourre himself. These documents belong to Goldman Sachs and are considered firm’s property, hence they go through supervisors as well as legal department before being sent out to the clientele.
Yet, the aforementioned email of Mr. Tourre to ACA clearly states that Paulson planned to invest in the equity tranche of the Abacus CDO (SEC Complaint No: 47), which indicates a very serious intention to mislead. Goldman defense flat out rejects that this email constitutes any claim for Paulson to invest in the equity tranche.

I was actually offended that Goldman lawyers rejected the significance of Mr. Tourre’s email as well its misleading nature in their 49-page response to the SEC.

Perhaps there is not a direct sentence in English that spells it out for a four year-old, but Paulson’s “sponsorship” described in the “contemplated capital structure” with a “[0]% - [9]%: pre-committed first loss” is reasonably clear for a financial analyst to conclude that Paulson was investing in the equity tranche. If I were reading that email, I would have had the same impression that the ACA representative (a senior managing director who had 22 years of experience in the asset-backed securities business in firms like Merrill Lynch and New York Life) had.

Goldman defense instead tries to explain away the word “sponsor” by saying that in a deal, “sponsor” could refer to either long or short, depending on who initiated the CDO inquiry in the first place. But the way the email is written, any reasonable financial analyst would put the phrases “Paulson’s Sponsorship” and “contemplated capital structure” with a “[0]% - [9]%: pre-committed first loss” together to mean that Paulson was investing in the equity tranche.

Paulson could have indicated an interest in acquiring a spread position in the CDO by going long a smaller equity and short a much larger portion of the debt “space”. In fact, Goldman defense seems to refer to such a possibility via mentioning hedge fund Magnetar’s trades and Ms. Schwartz’s participation in those deals. If it were true, revealing Paulson’s long interest in the equity while hiding a much bigger short interest in the debt would indicate an even more devious method of conning ACA.
But in the end, no equity tranche was created.

In addition, Mr. Tourre is not the only person who has failed to correct the impression that ACA got of Paulson’s participation in the deal. One salesperson has failed to correct ACA Management’s email indicating the impression that Paulson was investing (long) in the structure (SEC Complaint No: 48). Goldman Sachs defense has alleged that the Wharton grad with experience in firms like Lehman Brothers and Merrill Lynch might not have understood the significance of statements like “equity investor”.

I’m of the opinion that even if one of Paulson’s employees later went out of his way to disabuse ACA of the notion that Paulson & Co. intended to go long, that still does not relieve Goldman employees and the firm itself from having given the wrong impression to ACA Management regarding Paulson’s intentions. Regardless, written Goldman material officially misrepresented the deal to IKB and ABN Amro.

The flip book of Abacus CDO indicates that the first loss tranche (equity trance) is empty, with N/A written over it. ACA must have seen this information. But nothing has been produced by Goldman defense thus far to show any solid effort (or a later email that clearly corrects Mr. Tourre’s earlier “mistake” and gives an explanation of Paulson’s participation in the “space”) on the part of the broker-dealer to disabuse ACA Management of the impression that Paulson was a long investor. I find this very troubling. This will be a very contentious point in court, especially when witnesses are called to the stand.
When trying to argue that this email and what took place thereafter did not constitute any “inference of scienter”, Goldman Sachs states the following: (Page 33)

If Ms. Schwartz inferred that Paulson was an equity investor from Mr. Tourre’s email, that at most indicates that a misunderstanding occurred. It does not indicate that Goldman Sachs negligently (let alone recklessly or intentionally) led ACA to believe this was the case, particularly in light of the amorphous language from which Ms. Schwartz apparently drew her inference.

This is equivalent to holding a glass of jar in front of your shop counter and a sign close-by that states “church donation”, and then claiming that the sign was actually meant for the boxes nearby that the church had for the clothing drive. And if good Samaritans put the jar and the sign together to come up with the idea that the jar also belonged to the church, well, too bad …They should have done their due diligence by asking the minister nearby…

But wait…The defense continues:

Indeed, there is no indication that a reasonable professional under the circumstances presented here would have expected Ms. Schwartz to construe the term “sponsor” to mean that Paulson necessarily was an equity investor.

So, there is no indication that a reasonable shop owner would have believed that the good Samaritans mistook the jar as belonging to the church, as opposed figuring out that the jar in fact belonged to the shop owner himself.

I am of the opinion that while trying to argue itself out of the charges of scienter, Goldman Sachs may have crossed the line of scienter itself. Which is most likely why the SEC did not make any mention of it in their September 15, 2009 meeting thereafter.
In a follow-up 20-page defense letter sent to the SEC after the September 15 meeting, the defense writes the following: (Page 15)
While the September 15 meeting included a robust discussion of materiality, the issue of scienter was never raised. Although we are therefore hopeful that our Wells submission was sufficient to dispel any continuing consideration of charges requiring scienter, out of an abundance of caution we comment briefly as to this issue as well.

I am guessing that the issue of scienter was never raised in this meeting not because the SEC did not think it was important. It was not raised so as not to tip Goldman defense of the entire and complete – how shall I put it – idiocracy (or shall I say arrogance) that made it possible to come up with such an inexcusable and unbelievable justification while defending such a material misrepresentation.

I cannot think of a worst way of trying to argue one’s way out of such a big issue, even if it is truly a big misunderstanding. I think the appropriate thing for the firm would have been to look for any tangible records of a later email or phone conversation that clearly and unequivocally attempted to correct this “error” that Mr. Tourre made.

If such a record cannot be found and ACA representatives won’t talk to you about this “misunderstanding” because they are possibly cooperating with the SEC in the ongoing investigation, then the best course would have been to admit that a mistake had been made and look for ways to make amends.
Goldman has carefully stated that it would never “condone one of its employees misleading anyone, certainly not investors, counterparties or clients”. I am getting the hint that the firm appears to be prepping itself towards a one-employee-did-it sort of defense:

The core of the SEC’s case is based on the view that one of our employees misled these two professional investors by failing to disclose the role of another market participant in the transaction, namely Paulson & Co., and that the employee thereby orchestrated the creation of materially defective offering materials for which the firm bears responsibility.

SEC’s case is not based upon this view. In fact, it is based upon using a much broader set of evidence to establish intent, and utilizing Goldman’s lack of compliance to the aforementioned laws in this specific deal to argue material misrepresentation and fraud charges both for the employee and the firm.

Were there ever to emerge credible evidence that such behavior indeed occurred here, we would be the first to condemn it and to take all appropriate actions.

So even in the light of the SEC complaint that very clearly manifests various efforts to mislead ACA as well as other investors, the firm still does not see “credible evidence” that any such behavior occurred.
Of course, via this statement the firm concurrently tries to hedge its bets by saying that if things start looking worse, it reserves the right to go on the offensive against Mr. Tourre to exonerate itself.

Conclusion
The most important thing to me is that the general counsel cannot keep it together when asked about Paulson’s involvement in the portfolio selection process in a routine conference call. And that is the crux of the matter.

My opinion is that it is quite straightforward to argue that both Goldman Sachs and Fabrice Tourre violated Section 17(a) of the Securities Act of 1933. Goldman defense letter to the SEC stresses that threshold for proving a violation of the Section 10(b) of Securities Exchange Act of 1934 and Rule 10b-5 is higher and requires more proof in terms of “intent.” The SEC complaint, as far as I can tell, has not made this distinction.
Proving “intent” appears to be easier as far as Mr. Tourre is concerned, if only because it was he who structured and marketed the CDO and engaged in conversations with investors.
In my opinion, arguing for intentionally deceptive practices on the part of the firm, given other evidence and emails during the time period the firm was working on the Abacus deal as well as others, should not be difficult at all.


About the author: Suna Reyent

[TEX]

Lobbying in unexpected quarters:

http://www.nytimes.com/2010/04/20/business/20derivatives.html?th&emc=th

[QaB2i]

Rahm Emanuel and Magnetar Capital:

The Definition of Compromised

Magnetar

1) A neutron star with an intense magnetic field, capable of emitting toxic radiation across galaxies
2) A hedge fund, the single market player most responsible for the severity of the 2008 financial crisis, through the toxic instruments it created

Rahm Emanuel
1) White House Chief of Staff
2) Politician selected by Magnetar’s CEO to be sole recipient of his political donations, 2006-2008

Strange as it may seem, nearly three years after the onset of the global financial crisis, its greatest, most destructive, and most profitable “it ought to have been a crime” has gone almost entirely unnoticed.

Most people believe that they understand the broad outlines of the financial crisis, and that a central element was an explosion in mortgages made to people who could not afford them.

But how did such destructive behavior occur on such a large scale? The conventional view is that the subprime mortgage blowup resulted from bank
executives being short-sighted, greedy, or both.

But that simple story deters inquiry into how and why this disaster came to pass. Some recognize that the appetite for subprime mortgages seemed to come from investors. In fact, it resulted in a large degree from the way traders at certain large banks used subprime mortgages in a strategy to make their profits seem much larger than they actually were. The effect of this “negative basis trade” strategy was to overpay employees of those banks and consequently eviscerate the banks’ abilities to withstand future economic uncertainty.

The appetite for subprime mortgages was also inflated by people who were betting that the housing market would fail.

Moreover, the devastation wrought by this strategy remains virtually a secret. The fact that it has been almost invisible and appears to have been entirely legal, demonstrates a set of vexing problems. First, that investigations of the crisis have not delved deeply enough, and second, that the deregulation so keenly sought by the financial services industry has made activities legal that by any common-sense standard should be criminal.

But the sponsors of this toxic trade did bother to make sure they had a powerful friend. The head of the firm in question gave substantial amounts of money by political contribution standards to Rahm Emanuel’s PACs, and only his PACs, over the period when these transactions were in play.

The moving force behind a brilliant and devastating subprime short strategy was a heretofore unknown Chicago hedge fund, Magnetar, headed by Alec Litowitz, formerly of the hedge fund behemoth Citadel. Our studies indicate that Magnetar alone accounted for between 35% and 60% of demand for subprime mortgages in the year 2006.

This is how their strategy worked in detail.

The ruse at the heart of their transactions was creating subprime (so called “mezz” or mezzanine) collateralized debt obligations by investing in the riskiest layer, the so-called equity tranche. This kind of CDO consisted almost entirely of not just any subprime risk, but that of the dodgiest layer that could be sold short, the BBB tranches, via a combination of actual bonds and credit default swaps.

But Magnetar’s true objective was not to invest in this toxic waste, which its role as funder of the CDO would lead most to believe. While Magnetar paid roughly 5% of the total deal value for its equity stake, it took a much bigger short position by acting as a protection buyer on some of the credit default swaps created by these same CDOs. This insurance in turn was artificially cheap because over 80% of the deal was rated AAA. Most investors did not understand what Magnetar recognized: this concentrated exposure to the very riskiest type of bond associated with risky mortgage borrowers, each of these CDOs was a binary bet. It would either work out (in which case Magnetar would still show a thin profit) or it would fail completely, giving Magnetar an enormous profit and wiping out even the AAA investors who mistakenly believed they were protected by having other investors sit below them and take losses first. Thus the AAA investors were only earning AAA returns for BBB risk.

As the equity investor, Magnetar could further stack the deck in its favor through the influence it gained over the deals’ parameters. It was able to ensure that the CDOs held particularly dubious BBB exposures, and pushed for, and often got, “triggerless” structures, which stripped away another protection most deals had. When CDOs start to show significant losses, the payments to the lower-tier investors, including the equity tranche, are cut or halted to defend the AAA layer, much the way the human body, when exposed to severe cold, will restrict blood flow from the extremities to save the brain and organs. But triggerless deals, even as they started to fail, kept paying the lower tranche holders, including, in this case, Magnetar itself.

While these transactions may sound similar to the widely decried Goldman synthetic CDO program, Abacus, by which the firm went short various real estate exposures, effectively dumping the risk on customers, the Magnetar program was not only much larger, but also produced far more devastating systemic consequences, thanks to the distinctive structure of its CDOs.

As I explain at greater length in my book ECONNED: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, the use of cash bonds turned mezz CDOs from a dumping ground for otherwise unsellable mortgage bond risk to a breeding ground for demand. Ex Magnetar-inspired appetite, it is hard to find an explanation for the widely-discussed phenomenon of 2006 and 2007, of the mortgage securitization pipeline screaming for more subprime product, precisely when Federal Reserve interest rate increases should have stanched demand for risky loans above all others.

Market participants have estimated that Magnetar’s CDOs drove over 50% of demand for subprime bonds during the market’s toxic phase, 2006 and 2007. With the input of a team including professionals who have worked on some of these trades, ECONNED, we’ve performed repeated, conservative analyses that indicate the true figure is probably at least 35% of demand, and perhaps as high as 60%. And that’s before allowing for the fact that Magnetar’s strategy was imitated by the proprietary trading desks of major dealers. And for good reason. Magnetar made billions, some observers contend as much as subprime kingpin John Paulson, whose fund earned over $20 billion on its short strategy.

And the hedge fund’s cagey bet on Rahm? Litowitz and his wife had never before made significant political donations. In 2005, they started giving to Rahm and his PACs, and only PACs connected to Rahm, just before the Magnetar CDO program began, and continued through the first quarter of 2008, when the trade would have started to pay out handsomely. The Litowitzs gave a total of $8,000 to Emanuel and $10,000 to his Our Common Values PAC in May 2005. In 2006 and 2007, they contributed $51,700 to the Democratic Congressional Campaign Committee, while Emanuel was chairman. We have been advised by individuals involved in political fundraising that the amounts given would be considered significant, and the way the payments were distributed across the PACs is sophisticated. Put it another way: this money was not given impersonally.

But this troubling connection should be no surprise. Rahm has long been a favorite of the hedge funds, having raised more money from them than any Senator not running for President. Not surprisingly, he has been a staunch supporter of the financial services industry, and is widely credited with playing a key role in securing passage of the TARP after its initial defeat.

As the Magnetar-Rahm connection highlights, Obama raised more money from financial services players than any previous presidential candidate, so it can hardly be a surprise that he and his minions are happy to give the industry a free pass. Key policy figures maintain that no one was at fault, that there was a pervasive lack of regulation, and there are therefore no bad actors. That party line also means that destructive behavior is and will remain unquestioned, unexamined, uncorrected, and unpunished. We are still paying for the costs of the financial train wreck of 2007 and 2008. We can no longer afford the costs of willful blindness.

Addendum: Hat tip to Corrente who posted on this relationship on April 11, and finally prodded us to post our writeup of this story. We worked closely with Moe Tkacik on the story she put up on DailyFinance and took down, and had held off publishing our version pending her releasing her final version.

[QaB2i]

How one hedge fund helped keep the housing bubble going

ProPublica .

Story written by ProPublica (www.propublica.org)

In late 2005, the booming U.S. housing market seemed to be slowing. The Federal Reserve had begun raising interest rates. Subprime mortgage company shares were falling. Investors began to balk at buying complex mortgage securities. The housing bubble, which had propelled a historic growth in home prices, seemed poised to deflate. And if it had, the great financial crisis of 2008, which produced the Great Recession of 2008-09, might have come sooner and been less severe.


At just that moment, a few savvy financial engineers at a suburban Chicago hedge fund helped revive the Wall Street money machine, spawning billions of dollars of securities ultimately backed by home mortgages.

When the crash came, nearly all of these securities became worthless, a loss of an estimated $40 billion paid by investors, the investment banks who helped bring them into the world, and, eventually, American taxpayers.

Yet the hedge fund, named Magnetar for the super-magnetic field created by the last moments of a dying star, earned outsized returns in the year the financial crisis began.

How Magnetar pulled this off is one of the untold stories of the meltdown. Only a small group of Wall Street insiders was privy to what became known as the Magnetar Trade. Nearly all of those approached by ProPublica declined to talk on the record, fearing their careers would be hurt if they spoke publicly. But interviews with participants, e-mails, thousands of pages of documents and details about the securities that until now have not been publicly disclosed shed light on an arcane, secretive corner of Wall Street.

According to bankers and others involved, the Magnetar Trade worked this way:

The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations -- CDOs. If housing prices kept rising, this would provide a solid return for many years. But that's not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.

Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.

Magnetar says it was "market neutral," meaning it would make money whether housing rose or fell.

Dozens of Wall Street professionals, including many who had direct dealings with Magnetar, are skeptical of that assertion.

They understood the Magnetar Trade as a bet against the subprime mortgage securities market. Why else, they ask, would a hedge fund sponsor tens of billions of dollars of new CDOs at a time of rising uncertainty about housing?

Key details of the Magnetar Trade remain shrouded in secrecy and the fund declined to respond to most of our questions. Magnetar invested in 30 CDOs from the spring of 2006 to the summer of 2007, though it declined to name them. ProPublica has identified 26.

An independent analysis commissioned by ProPublica shows that these deals defaulted faster and at a higher rate compared to other similar CDOs. According to the analysis, 96 percent of the Magnetar deals were in default by the end of 2008, compared with 68 percent for comparable CDOs. The study was conducted by PF2 Securities Evaluations, a CDO valuation firm. (Magnetar says defaults don't necessarily indicate the quality of the underlying CDO assets.)

From what we've learned, there was nothing illegal in what Magnetar did; it was playing by the rules in place at the time. And the hedge fund didn't cause the housing bubble or the financial crisis. But the Magnetar Trade does illustrate the perverse incentives and reckless behavior that characterized the last days of the boom.

Magnetar says it invested in 28 CDOs from the spring of 2006 to the summer of 2007. At least nine banks helped the hedge fund hatch these deals, and Merrill Lynch, UBS and Citi all did multiple deals.

Many of the bankers who worked on these deals personally benefited, earning millions in annual bonuses. The banks booked profits at the outset. But those gains were fleeting. As it turned out, the banks that assembled and marketed the Magnetar CDOs had trouble selling them. And when the crash came, they were among the biggest losers.

Some bankers involved in the Magnetar Trade now regret what they did. We showed one of the many people fired as a result of the CDO collapse a list of unusually risky mortgage bonds included in a Magnetar deal he had worked on. The deal was a disaster. He shook his head at being reminded of the details and said: "After looking at this, I deserved to lose my job."

Magnetar wasn't the only market player to come up with clever ways to bet against housing. Many articles and books, including a bestseller by Michael Lewis, have recounted how a few investors saw trouble coming and bet big. Such short bets can be helpful; they can serve as a counterweight to manias and keep bubbles from expanding.

Magnetar's approach had the opposite effect -- by helping create investments it also bet against, the hedge fund was actually fueling the market. Magnetar wasn't alone in that: A few other hedge funds also created CDOs they bet against. And, as the New York Times has reported, Goldman Sachs did too. But Magnetar industrialized the process, creating more and bigger CDOs.

Several journalists have alluded to the Magnetar Trade in recent years, but until now none has assembled a full narrative. Yves Smith, a prominent financial blogger who has reported on aspects of the Magnetar Trade, writes in her new book, "Econned," that "Magnetar went into the business of creating subprime CDOs on an unheard of scale. If the world had been spared their cunning, the insanity of 2006-2007 would have been less extreme and the unwinding milder."


Magnetar gets started
http://www.magnetar.com/senior-partners.html

The guiding force behind Magnetar was Alec Litowitz, a triathlete, astronomy buff and rising star in the investing world. In 2003, Litowitz retired from a Chicago-based hedge fund, Citadel, one of the most successful in the world, where he had spent most of his career and became a top executive. He promised to stay out of the business for two years.

As he waited for his non-compete agreement to expire, Litowitz and his wife traveled through Europe collecting antiques to stock a big house they were building on the shores of Lake Michigan.

By spring 2005, Litowitz's wait was over. Then 38 years old, Litowitz quickly raised money to start his own hedge fund. The fund, Magnetar, attracted $1.7 billion from investors and opened in April.

Litowitz, who declined to be interviewed, had an approach to investing that emphasized scale and simplicity. He told those he hired: "Figure out a way to make money and figure out how to repeat it and do it over and over again," according to a former employee. The firm handed out T-shirts emblazoned with a confident slogan: "Very Bright, Very Magnetic." Employees privately joked about working for a fund named after something like a black hole.

Litowitz brought on board David Snyderman. A New Yorker with a serious mien, Snyderman, in his mid-30s, began hunting for investment opportunities in Wall Street's burgeoning market in mortgage-backed securities.

It didn't take them long to find something promising.

Snyderman and Magnetar focused on Wall Street's mortgage assembly line, which had been super-charged during Litowitz's time away from the business. Banks bundled pools of mortgages into large bonds, which they combined to create even larger investments. These were the now-infamous collateralized debt obligations. Each month, homeowners paid their mortgages. Each month, payments flowed to investors.

Large investors across the globe snapped up the CDOs, which took the hottest investment around -- the U.S. housing market -- and transformed it into something that supposedly had little or no risk. Wall Street preached that the risk had been diluted because it was spread out over such large collections of mortgage bonds. (CDOs can also be based on side bets that rise and fall with the value of other mortgage bonds. These are known as "synthetic" CDOs. Magnetar's deals were largely synthetic.)

Just as they did with mortgage-backed securities, investment banks divided CDOs into different layers, called tranches. As the mortgages were paid, money flowed to investors holding the top tranche. Since they were the first to get paid, and thus took the least amount of risk, they earned low interest rates. Next came the middle levels -- the so-called mezzanine tranches.

Last in line for money were investors in what's known as the equity. In return for being at the bottom, equity investors got the highest returns, sometimes 20 percent interest -- money they would receive only as long as the vast majority of mortgage holders made their payments.

Even back then, Wall Street insiders called the equity "toxic waste," and as anxiety built in late 2005 that the housing boom was over, investment banks struggled to find takers.

To Magnetar, the toxic waste was an opportunity.

At a time when fewer investors were stepping up to buy equity, the little-known hedge fund put out the word that it wanted lots and lots of it. Magnetar concentrated in a particularly risky corner of the CDO world: deals that were made up of the middle, or mezzanine, slice of subprime mortgage-backed bonds. Magnetar CDOs were big, averaging $1.5 billion, about three times the size of earlier deals built on subprime mortgages.

Magnetar's purchases solved a crucial problem for the banks. Since the equity was so risky and thus difficult to sell, banks didn't like to create new CDOs unless someone committed to buy them. Indeed, such buyers were so crucial that Wall Street referred to them as the CDOs' "sponsors."

Without sponsors, Wall Street's mortgage bond assembly line could grind to a halt, and with it bank profits and banker bonuses. A top CDO banker could earn $3 million to $4 million annually on the CDOs he created and sold.

Usually, investment banks had to go out and find buyers of the equity. With Magnetar, the buyer came right to the bank's doorstep. Wall Street was overjoyed.

"It seemed like a miracle," says one mortgage market investment banker, because "no one" had been buying equity.

"By the end of 2005, the general sense was that the CDO market would slow down. These trades continued to fuel the fire," says Bill Tomljanovic, who worked for a firm that helped build a Magnetar CDO. Magnetar was "a driving force in the market."

According to JPMorgan data, Magnetar's deals amounted to somewhere between a third and half the total volume in the particularly risky corner of the subprime market on which the fund focused.

Outsiders thought Magnetar was piling in at exactly the wrong time. A March 2007 Business Week article titled "Who Will Get Shredded?" would later put Magnetar near the top of its list. The hedge fund, said the magazine, "showed bad timing."

How could Magnetar hope to make money on such risky stuff? It had a second bet that was known only to insiders.

At the same time it was investing in the equity, the fund placed bets that many of the same CDOs it had helped create would actually blow up. It did that using one of the most opaque corners of the investment world: credit default swaps, which function as a kind of insurance on CDOs and other types of bonds.

Credit default swaps work roughly like an insurance policy: You pay a small premium regularly, on any bond you want -- whether you own it or not -- and if it goes bust, you get paid off in full.

Nobody but Magnetar knows the full extent of its bets. Hedge funds are private and they don't disclose the details of their trades. Also, credit default swaps are mostly unregulated and not publicly disclosed. Magnetar says it didn't bet only against its own CDOs. The majority of its credit default swaps, says Magnetar, were on other CDOs.

Since it was the sponsor, Magnetar had privileges. Placing the risky equity was so important to banks that they typically gave those who bought it a say in how the deal was structured. Like all investors, equity buyers had to weigh risk and reward, the goal being to maximize returns while minimizing the chances that your investment will blow up.

But people involved in Magnetar's deals say the hedge fund took a different tack, pushing for riskier bonds to go inside its CDOs. Doing that would make it more likely that Magnetar's bets against the CDO would pay off.

The equity bought by Magnetar represented just a tiny fraction of the overall CDO. If it costs, say, $50 million, an entire CDO could be 20 times that, $1 billion. And if the CDO begins to go south and you're smart enough to have taken out enough insurance, you can make hundreds of millions of dollars. That, of course, would take a bit of the sting out of losing your original $50 million investment in the equity.


Magnetar does its first deal

As Magnetar set up its CDO shop, the hedge fund hired Jim Prusko, a smart and affable investor who had worked previously at the Boston money-manager Putnam Investments. He would shoulder much of the work of courting Wall Street bankers and managers who worked with the hedge fund. He operated out of Magnetar's office in midtown Manhattan around the corner from Saks Fifth Avenue. In an office of 20-somethings, Prusko, then 40 years old, stood out as the "old man."

Prusko and his boss at Magnetar, Snyderman, began approaching investment banks, offering to buy the riskiest, highest-yielding portion of CDOs. They always wanted a middleman, known as a CDO manager, on their deals. Many CDOs are operated day to day by such independent firms, who are often brought in by investment banks.

The managers also played a vital role in creating deals. When an investment bank created a CDO, it would often give what amounted to blueprints to the managers, who would then go out and find the exact bundles of bonds to fill the CDO. The managers had a fiduciary duty to represent the CDO fairly to all investors, ensuring investors got accurate and equal information.

Magnetar's deals were numerous and big, and just like for investment banks, the bigger the deal, the larger the fee for managers.

"Prusko's job was to butter up the CDO managers and the bankers," said one banker who dealt with him.

By relying on a manager rather than managing the deal itself, Magnetar had no legal obligations to the CDO or others who bought it.

Deutsche and Magnetar didn't reach for a Wall Street powerhouse to put the deal together. Instead the investors worked with Alex Rekeda, a young Ukrainian immigrant who was then working for Calyon, the investment banking arm of the French bank Crédit Agricole.

Magnetar and Deutsche were deeply involved in creating Orion. "We want to make sure we control the deal," a banker who worked on it recalls them emphasizing.

One person involved in Orion recalls Deutsche's point person, Michael Henriques, and Magnetar's Prusko pressuring the CDO manager, a division of the Dutch bank NIBC, to include specific lists of bonds in the deal.

Prusko and Henriques told this person that the investors "needed more spread in the portfolio." More "spread" means more return and more risk.

This person recalled Magnetar asking, "Would you consider these bonds?" Their suggestions were invariably for riskier bonds. "Let's just say we didn't think their suggestions made a lot of sense," the person said.

He said the CDO manager refused Magnetar's requests to put riskier bonds in the deal. Still, it was an eye-opening experience. "I began to realize there were things you had to defend yourself against," he said.

Magnetar and Deutsche declined to comment on Orion specifically. Magnetar says it made suggestions about the general outlines of the CDOs. But, the hedge fund says, it "did not select the underlying assets of the CDO at any time prior to or subsequent to transaction issuance."

Other buyers of the CDO could have figured out they were getting relatively risky bonds, but they would have had to look hard at the minutiae of the deal. By this point in market history, the ratings had less and less meaning. Two sets of bonds rated AA could have very different levels of risk. Most investors chose not to dig too deeply.

One investor in Orion was a fund affiliated with IKB, a small German bank. Eventually, it invested in at least four more Magnetar deals. In mid-2007, because of the disastrous investments in subprime securities, the German government was forced to bail out IKB. The failure of the bank was an early warning sign of the global financial crisis.

Deutsche's Henriques would later quit the bank and join Magnetar.

Orion lost value but never defaulted. That was better than every subsequent CDO that Magnetar helped create, according to ProPublica's research.


Magnetar's (nearly) perpetual money machine

By buying the risky bottom slices of CDOs, Magnetar didn't just help create more CDOs it could bet against. Since it owned a small slice of the CDO, Magnetar also received regular payments as its investments threw off income.

With this, Magnetar solved a conundrum of those who bet against the market. An investor might be confident that things are heading south, but not know when. While the investor waits, it costs money to keep the bet going. Many a short seller has run out of cash at the gates of a big payday.

Magnetar could keep money flowing -- via its small investments in CDOs -- and could use that money to pay for its bets against CDOs.

Similar, commonly traded, assets appeared in multiple Magnetar CDOs. Experts say the benefit of that overlap to Magnetar was that when the hedge fund bet against non-Magnetar CDOs, the CDOs still had similar characteristics to the ones Magnetar had invested in.

Soon enough, bankers and CDO managers had a sense of how it worked. "Everyone knew," said one person who managed Magnetar CDOs. "They used the equity to fund the shorts."

Magnetar further increased its odds by insisting that the CDOs it helped create had an unusual construction. Typically, cash flowing to the last-in-line equity buyers is cut off at the first signs of trouble -- such as a rise in mortgage delinquencies. Those at the top of the CDO -- who accepted lower returns for less risk -- received that cash, leaving none for the high-risk holders.

Magnetar wanted its deals to be "triggerless," meaning lacking these cash-flow dams. When the market turned shaky and homeowners began to default, money kept flowing down to the risky slices that Magnetar owned.

Even today, bankers and managers speak with awe at the elegance of the Magnetar Trade. Others have become famous for betting big against the housing market. But they had taken enormous risks. Meanwhile, Magnetar had created a largely self-funding bet against the market.


E-mails give glimpse of how Magnetar worked

Between the end of September and the middle of December 2006, Magnetar had a hand in spawning at least 15 CDOs, worth an estimated $23 billion. Among the banks involved with those deals were Citigroup, Lehman Brothers and Merrill Lynch.

E-mails obtained by ProPublica from that time suggest Magnetar's clout. The firm was involved at the start of deals and pushed for riskier bonds to be included.

After Magnetar expressed interest in buying the equity, the French bank Société Générale began to build the CDO, and selected a New York-based manager, Ischus Capital Management, which would choose the exact bonds to go into the CDO.

Magnetar wanted to name the CDO after a small constellation in the southern sky called Hydrus, which means "male water snake." But by late September, Magnetar and Ischus began sparring over the composition of the deal.

Magnetar pressed Ischus to buy lower-quality assets for the deal, according to three people familiar with Hydrus. In an e-mail to bankers at Société Générale and Ischus executives, Magnetar's CDO specialist, Jim Prusko, wrote on Sept. 29, 2006, "The original portfolio target spreadsheet that I have... had a strangely low spread target. That of course would not at all be beneficial to us. I have attached the target portfolio that I would like for this deal with target spreads."

The portfolio Magnetar outlined didn't list specific bonds, but executives at the CDO manager Ischus felt that they understood what Prusko wanted. A request for higher-spreading assets means more risk in the deal.

Andrew Shook, an Ischus executive, answered forcefully on Oct. 3, "We will not assemble a portfolio we are not proud of and feel strongly about in the name of a spread target."

Prusko dialed down the pressure, responding within an hour. "Of course, the actual security selection is totally your purview," he wrote. "I just wanted to make sure the overall portfolio characteristics worked for our strategy."

Shook declined to comment on the e-mail exchange. Magnetar says that the deal as originally conceived wouldn't have been profitable and that it was merely trying to get a higher return -- a higher "spread" -- to balance out the risk it was taking in owning the bottom-rated slice of the CDO.

The two sides subsequently drifted apart, partly over Ischus's unease with Magnetar's pressure, and the deal was never completed.


Concerns about 'reputational risks'

As part of the big business Magnetar was doing in the fall of 2006, the hedge fund put together a CDO with Lehman Brothers named for the constellation Libra. John Mawe, a banker who worked on Libra, remembers that "there was a back-and-forth fight" about the assets between the bank's CDO manager and Magnetar, with the hedge fund pushing for riskier assets.

Mawe says Lehman's CDO in-house-management arm, which handled the deal, never put assets into Libra that it thought were bad investments.

Among the other banks that Magnetar approached during that time was Deutsche Bank, with whom it had teamed up to do its first deal months earlier. Deutsche Bank was anxious for business in order to maintain its standing as one of the top CDO banks, according to one of its bankers. Deutsche recommended CDO manager State Street Global Advisors.

The State Street managers were "highly skeptical" of doing a deal with Magnetar, according to one participant. "State Street wanted their deals to do well," said the participant, and with Magnetar, there was "a lot of reputational risk to be concerned about."

Hoping to close the deal, Magnetar's master salesman Jim Prusko drove up from his home in the New York suburbs to State Street's headquarters in Boston, to mollify executives in the management team. After the meeting, the deal went forward. As one banker explained, "there were other managers who were dying to do this deal" and get the millions in fees.

After subprime losses, State Street closed the business that managed its CDOs in late 2007. Frank Gianatasio, who worked in State Street's CDO business says, "We were comfortable with every transaction we put into our CDOs."

Deutsche, Magnetar and State Street called the $1.6 billion CDO they created Carina, a constellation whose name in Latin means a ship's keel. In November 2007, Carina had the distinction of being the first subprime CDO of its kind to be forced into liquidation.

State Street and Magnetar declined to comment on their negotiations over Carina.


A lawsuit suggests Merrill Lynch's role

By early 2007, the mortgage market was falling apart. Lenders were reporting big losses [18], delinquencies were mounting [19] -- and Magnetar's business was booming.

Between late February and April, banks rolled out five Magnetar-sponsored deals, with a value of about $7.2 billion. Among them was a $1.5 billion CDO named Norma. Following Magnetar's branding convention, Norma is a constellation in the Southern Hemisphere named for the Latin word for "normal." This CDO was anything but.

Details about Norma, which was created by Merrill Lynch, have emerged through an ongoing lawsuit between Merrill and Dutch bank Cooperatieve Centrale Raiffeisen-Boerenleenbank, known commonly on Wall Street as Rabobank. (The Wall Street Journal had the first detailed report of Norma, in late 2007.) The dispute involves a side transaction that Rabobank made with Merrill involving Norma. Magnetar is not a party to the litigation. Yet the allegations are scathing in their depiction of how the CDO was developed.

"Merrill Lynch teamed up with one of its most prized hedge fund clients -- an infamous short seller that had helped Merrill Lynch create four other CDOs -- to create Norma as a tailor-made way to bet against the mortgage-backed securities market," the complaint reads.

"[T]o facilitate the selection of assets that would allow Norma to operate as a hedging instrument rather than an investment vehicle, Merrill Lynch hand-picked a beholden collateral manager that was willing to ignore its fiduciary duties to Norma's investors."

The manager for Norma was a small shop out of Long Island, N.Y., called NIR Capital Management. Run by Corey Ribotsky, the firm's primary line of business before entering CDOs was speculating in penny stocks.

NIR brought in a team of experienced bankers to run its CDO business. The firm also had a variety of other ventures. At one point, they put money into a documentary called "American Cannibal," that profiled the aborted launch of a reality television show in which contestant were stranded on an island and goaded into cannibalism. (The New York Times found it "absorbing.") Ribotsky is now under investigation by federal authorities for misleading clients about its investment returns. NIR and Merrill Lynch declined to comment on dealings with Magnetar; Merrill Lynch denies liability in the litigation. Magnetar declined to comment.

Norma began to suffer setbacks even before the deal closed in March 2007. According to the lawsuit, by the time Norma was completed, its value had already declined by more than 20 percent.


JPMorgan gets into the game -- and loses

Despite the bad news in the mortgage market, Magnetar continued to find a few willing bankers to do CDOs, including a new one: JPMorgan Chase.

JPMorgan had avoided many of the complex financial transactions that decimated the banking industry. As the market grew frothier, JPMorgan pulled back from the CDO business. In 2005, the men who ran JPMorgan's CDO unit told their bosses that they couldn't see how to complete a CDO without sticking the bank with the large top tier, which would not appeal to investors because of its low returns. Other banks dealt with this problem by retaining these CDO layers on their books.

But by mid-2006, JPMorgan joined the herd. It hired bankers to expand its CDO team and got to work.

A few months later -- in early 2007 -- Magnetar and JPMorgan banged out a deal. Unlike the earlier CDOs it helped create, Magnetar didn't name this one after a constellation. Opting for a more literal name, they called the deal "Squared," after the term for a CDO that was made up of other CDOs. Squared was filled in part with other CDOs Magnetar had helped create.

According to a person familiar with how the deal came together, Magnetar committed to purchase $10 million worth of Squared's equity. Magnetar's purchase allowed JPMorgan to create and sell a $1.1 billion CDO. As it had on previous deals, Magnetar pushed the bankers to select riskier bonds. "They really cared about it," said the person involved in the deal. "They wouldn't pull punches. It was always going to be crappier."

The hedge fund requested that Squared have slices from many Magnetar CDOs, including Auriga, Carina, Libra, Pyxis and Virgo. They all went into the deal. Magnetar also successfully pushed for Squared to include slices from one of the Abacus deals, a group of CDOs that, as the New York Times later reported [23], Goldman Sachs had created and bet against.

JPMorgan earned $20 million in creating Squared, according to the person involved in the deal.

JPMorgan's sales force fanned out across the globe. It sold parts of the CDO to 17 institutional investors, according to a person familiar with the transaction. The deal closed in May 2007, nearly a year after housing prices had peaked. Within eight months, Squared dropped to a fraction of its initial value.

Just about everybody lost out, including Thrivent Financial for Lutherans, a Minnesota-based not-for-profit fraternal organization, whose $10 million investment was wiped out. Thrivent declined to comment.

Small pieces of Squared, as well as Magnetar's CDO Norma, also ended up in mutual funds run by Morgan Keegan, a regional investment bank based in Memphis, Tenn.

The funds, advertised as conservative investments, cratered after betting on various exotic assets. Morgan Keegan was sued by individual investors who claimed that they were misled about the risks. Among the investors was former Chicago Bulls player Horace Grant, who was awarded $1.4 million in arbitration. This week, the SEC accused two Morgan Keegan employees of misleading fund investors about the value of its holdings in CDOs. Morgan Keegan called the charges "factually inaccurate" and promised to defend itself "vigorously." Morgan Keegan did not respond to a request for comment on the specifics of the two Magnetar CDOs.

The biggest loser was JPMorgan Chase itself, which had kept the large, supposedly safe top slices of Squared on its books, without hedging itself. The bank lost about $880 million on the CDO. JPMorgan declined to comment on the details of the transaction.

Magnetar came out a winner. The fund earned about $290 million on its bet against Squared, according to a person familiar with the deal. Magnetar declined to comment.


Magnetar's exit: A deal so bad even a credit-rating agency balked

Prusko was buoyant as Magnetar's trades began to make money as its short bets rose in value. One friend recalls Prusko ribbing him: "What are you going to do after this blows up?" (Magnetar declined to comment on the exchange.)

In the spring of 2007, Magnetar began to have a problem: The hedge fund was sitting on hundreds of millions of dollars' worth of CDO equity and other low-rated portions of its deals. With the decline of housing prices accelerating, off-loading these pieces would be very hard.

Magnetar needed a buyer and some deft financial engineering. It found the answer through its former partner, Alex Rekeda, who had been the banker on Magnetar's first CDO. Rekeda now worked at Mizuho, one of Japan's biggest banks. Mizuho was eager to get into the CDO world. It hired Rekeda in part because he could bring Magnetar's business, according to one CDO manager who worked with him.

Rekeda and Magnetar came up with a remarkable CDO. They took their risky portions of 18 CDOs they had helped created -- and repackaged them to sell them to others. Bundling up the dregs of a CDO was rare, if not unprecedented.

This deal, Tigris, which closed in March 2007, tied together $902 million of Magnetar's risky assets. Rekeda convinced two rating agencies, Standard & Poor's and Fitch, to rate it. Fitch designated $259 million of it as triple A, the highest rating. S&P rated nearly $501 million as triple A. (When contacted for this article, S&P said it was comfortable rating Tigris; Fitch didn't respond to questions about the deal.)

In a highly unusual move, the third major rating agency, Moody's, refused to rate Tigris. Rekeda lobbied Moody's for a rating, according to a person familiar with the deal. But Moody's then-head of CDOs, Eric Kolchinsky, wouldn't budge.

Magnetar got $450 million from Mizuho, which in return received income from assets in Tigris, according to several people familiar with the transaction. It was what's known as a non-recourse loan: If things went wrong, Mizuho could only lay claim to what was in Tigris.

In response to ProPublica's questions about this deal, Magnetar said the fund "as a matter of general practice, and as do most hedge funds, enters into non-recourse financing on specific assets in its portfolio."

By September, just six months after Tigris had been created, Fitch downgraded most of the CDO's slices. By the end of January 2008, the CDO had gone into default. The Japanese ended up with the paper, which was worthless. Mizuho eventually wrote Tigris off, as part of about $7 billion in total losses from its subprime missteps. Mizuho declined to comment, as did Magnetar.

Just as with a refi gone bad, when Tigris was wiped out, the hedge fund walked away from the house -- in this case its collateral. A person who worked on Tigris boasted about how innovative the deal was. If it hadn't blown up, he says, it would have been "deal of the year." For Magnetar, it may have been.

Records it shared with investors show Magnetar had a spectacular 2007. Founder Alec Litowitz pulled down $280 million, according to Alpha Magazine. That spring, a trade journal awarded Prusko and Snyderman "Investor of the Year" honors. The Magnetar Constellation Fund, the firm's fund that had the most exposure to the CDO trades, was up 76 percent in 2007, according to a presentation Magnetar gave to investors in early 2009. The main fund, the Magnetar Capital Fund, was up 26 percent that year. By the end of 2007, Magnetar had $7.6 billion under management, up from the $1.7 billion it began with two years earlier. Magnetar declined to comment on its performance.

ProPublica has learned that the SEC has been looking into how the Magnetar deals were created, but it's not clear how much progress the investigation has been made or who might be the target. In a statement yesterday, Magnetar said:

Our understanding is that for some time, the SEC staff has been looking broadly at the sales, marketing, and structuring of CDOs. In connection with that inquiry, the SEC staff has from time to time requested information from Magnetar and other market participants, and Magnetar has been cooperating and responding to the requests. We are not aware that this inquiry is focused on any particular person or firm.

[ListenToMe]

Seems to be a lot of brazen acts that took place over the last decade. One day I may have to read the big short ...

[QaB2i]

Fabrice Tourre : Today's (oh) Dear in the headlights.

http://www.scribd.com/doc/30036962/Abacus-2007-Ac1-Flipbook-20070226

[QaB2i]

Who is the 'fabulous' Fabrice Tourre?

By Aaron Smith, CNNMoney.com staff writerApril 16, 2010: 6:32 PM ET

NEW YORK (CNNMoney.com) -- The SEC's fraud charges against Goldman Sachs focus on a Frenchman known as the "fabulous Fab."

At least, that's how Fabrice Tourre described himself, according to a 22-page complaint filed by the Securities and Exchange Commission on Friday. As a result, he's gone from obscurity to one of the day's hottest Google trends.

The Securities and Exchange Commission accused Tourre, a vice president at the investment firm Goldman Sachs (GS, Fortune 500), of defrauding investors in a securities sale tied to subprime mortgages. The SEC's court document, which was filed in U.S. District Court in the Southern District of New York, includes various comments allegedly made by Tourre in which he misled representatives from ACA Management about collateralized debt obligations, or CDOs.

But the SEC's most damning allegations refer to one of Tourre's e-mails, written in French and English, to an unnamed friend, where he confidently presented himself as the lone, "fabulous" survivor amid the apocalyptic fallout of his finance firm.


0:00 /4:55SEC shows teeth in Goldman suit
"More and more leverage in the system, The whole building is about to collapse anytime now ... Only potential survivor, the fabulous Fab[rice Tourre] ... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those moustruosities[sic]!!!" wrote Tourre on Jan. 23, 2007, according to SEC documents.

At the time, Tourre was working at a trading desk for structured products in New York City, according to the SEC. The 31-year-old is currently in London as executive director of Goldman Sachs International.

He did not immediately respond to an e-mail sent via his LinkedIn account, where he identifies himself as a 2000 graduate of Ecole Centrale Paris with a bachelor's degree in mathematics, followed by a 2001 master's degree in operations research from Stanford University. According to the bio, he has worked at Goldman since 2001.

Goldman did not immediately return a call seeking comment and information concerning Tourre's lawyer.

[QaB2i]

I'm at a loss how this brazen fool actually wrote a book
on the trades he performed!

It makes excellent reading. Especially when read with "the big short"

[ListenToMe]

Goldman charged with fraud over Paulson CDO trade
Shares of investment bank drop 13% on news of SEC lawsuit

http://www.marketwatch.com/story/goldman-charged-with-fraud-over-paulson-cdo-trade-2010-04-16?dist=bigcharts

[TEX]

"Shadow world" on Wall Street:

http://www.nytimes.com/2010/04/13/business/13lehman.html?th&emc=th

[QaB2i]

Merrill Units Win Dismissal of Some MBIA Claims in Lawsuit
April 10, 2010, 12:03 AM EDT

April 10 (Bloomberg) -- Merrill Lynch & Co. units now owned by Bank of America Corp. won dismissal of claims in a lawsuit filed by MBIA Inc. last year over protection sold against mortgage-debt defaults.

New York State Supreme Court Justice Bernard Fried, in Manhattan yesterday dismissed five of six claims against Merrill Lynch, Pierce, Fenner & Smith Inc. and Merrill Lynch International, both now owned by Bank of America. The claims dismissed yesterday included claims of fraud and negligent misrepresentation.

The judge allowed a claim brought by MBIA, the largest bond insurer, for breach of contract, to proceed.

“We are pleased that the judge’s decision will allow us to pursue significant breach-of-contract claims,” MBIA spokesman Kevin Brown said in an e-mailed statement. “However, we respectfully disagree with the dismissal of the remaining claims and intend to appeal.”

The suit, filed in New York State Supreme Court, seeks to unwind or recover payouts for $5.7 billion of credit-default swaps and related insurance sold against collateralized debt obligations.

“We are pleased with the ruling and we will vigorously defend against the breach-of-contract claim,” Shirley Norton, a Bank of America spokeswoman, said.

‘Fraudulent Misrepresentations’

Armonk, New York-based MBIA claimed in the lawsuit, filed in April 2009, that the Merrill units made “substantial fraudulent misrepresentations” about the nature of the debt being protected. MBIA and its LaCrosse Financial Products LLC unit claimed this was part of a “deliberate strategy to offload” billions of dollars of “deteriorating” subprime mortgages between July 2006 and March 2007, as homeowner defaults began to soar, the insurer said in the complaint.

“Plaintiffs’ cause of action for breach of the implied covenant of good faith and fair dealing is properly dismissed as duplicative of the breach of contract claim,” Justice Fried said in a ruling issued yesterday.

“Further, the nebulous claim for an ‘action to enforce contractual rights’ is dismissed. Such claim is not a recognizable cause of action,” Fried said.

The guarantees and the credit-default swaps were the product of “intensive negotiations among the parties, whose sophistication and business acumen and experience cannot be overstated,” Fried said.

‘Specifically Warned’

“MBIA and LaCrosse specifically stated that they were able to evaluate the validity of the CDOs, and were specifically warned that the transaction was appropriate only for sophisticated investors capable of analyzing the risks, including the risk related to the type of collateral involved in the transaction,” the judge said.

In the guarantees, both MBIA and LaCrosse said they were also able to assess the integrity of the CDOs and would also evaluate the underlying collateral from which the CDOs originated, Fried noted.

“It is this very ground-level assessment that plaintiffs now say they were not responsible for, and could not be expected to do,” he said. “As such, plaintiffs cannot now bring a claim for fraud in the inducement, fraud by omission, or negligent misrepresentations plaintiffs expressly stated they were not relying on.”

‘Available Remedies’

Merrill, the largest CDO underwriter before the market collapsed, agreed to sell itself to Bank of America in September 2008 as competitor Lehman Brothers Holdings Inc. neared bankruptcy.

MBIA Chief Executive Officer Jay Brown said in a statement when the suit was filed that the insurer intended to “pursue all available remedies against those whose improper actions had directly resulted in substantial losses for MBIA and its shareholders.”

Bond insurers, including MBIA and Ambac Financial Group Inc., have sued banks including JPMorgan Chase & Co. and GMAC LLC over the quality of the home-loan securities they agreed to back. Those suits have generally involved mortgage-backed bonds, not the CDOs created from those mortgage-backed securities or other CDOs tied to them.

CDOs repackage debt such as mortgage bonds and leveraged loans into new securities with varying risks. Credit-default swaps on them offer payments if the securities aren’t paid down as expected, in return for regular insurance-like premiums.

The case is MBIA Insurance Corp. and LaCrosse Financial Products LLC v. Merrill Lynch, Pierce, Fenner & Smith Inc. and Merrill Lynch International, 09601324, Supreme Court of New York (Manhattan).

--Editors: Glenn Holdcraft, David E. Rovella.

To contact the reporters on this story: Patricia Hurtado in Brooklyn, New York, at [e-mail]; Carlyn Kolker in New York at [e-mail].

To contact the editor responsible for this story: David E. Rovella at [e-mail].

[ListenToMe]

Revealing What's Really Inside a 'Toxic Asset'

http://www.cnbc.com/id/36222344
Published: Wednesday, 7 Apr 2010 | 4:50 PM ET Text Size By: CNBC.com
Residential mortgage-backed securities are regaining popularity on Wall Street. And, once again, they're attracting the attention of the media.

National Public Radio's "Planet Money" recently bought one, so the program could report in detail about the investment.



In a similar experiment, "Fast Money" trader Jon Najarian (of OptionMonster) just bought an MBS for $2,100—a tiny sliver of a bond valued at $4.4 million. (Watch Jon's explanation in the video).

Najarian made the purchase through SecondMarket, a firm that specializes in matching buyers with sellers of these illiquid securities.

"You want to buy a bond that has some security, meaning it has some cushion below it, that's high in the cap structure so you're going to more likely get a return on your principal and you want something that's performing fairly well," says Elton Wells, head of structured products at SecondMarket.


SEC Plan Puts Stricter Rules on Asset-Backed SecuritiesGreenspan: Congress Pushed Fed on Housing BoomFewer Sellers Cut US Home Prices in March
Najarian chose an A-1 bond full of underlying collateral in places hardest hit by the recession, including California, Michigan, Arizona, and Florida. In all, the bond contains mortgages from 13 states. 27 percent of those loans are delinquent more than 60 days; nearly 20 percent are in foreclosure.

CNBC will monitor the performance of the the loans in Najarian's MBS and will regularly report any new information.

The move comes just as the SEC is proposing new rules for the sale of asset-backed securities that would require greater transparency by issuers and provide better protection for investors. (Read more here).

Follow Jon Najarian at http://twitter.com/optionmonster

Slideshow: America's Riskiest Municipal Bonds
Real Estate Markets Due for Double Dip
Trader disclosure: On Apr 7, 2010, the following stocks, commodities and or options were owned by Fast Money trader Jon Najarian; Jon Najarian Owns owns Call Spreads in (PALM), Jon Najarian Owns owns Call Spreads in (TXT), Jon Najarian Owns owns Call Spreads in (AAPL)

© 2010 CNBC.com

[QaB2i]

thats sweet!

[Tina]

OT: Well that's because














the shorts are covering them up ;)

[QaB2i]

O T.




I cant see any bite marks

[Tina]

OT: Here ya go.

Some ihub poster pic links in the ibox ;)

http://investorshub.advfn.com/boards/board.aspx?board_id=9233

[Tina]

Posted by: louisa Date: Sunday, March 21, 2010 11:51:48 PM
In reply to: None Post # of 7096

The most amazing investing story you will ever read

You won't believe this. The 2nd half is really incredible. Enjoy:
http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004


Betting on the Blind Side
Michael Burry always saw the world differently—due, he believed, to the childhood loss of one eye. So when the 32-year-old investor spotted the huge bubble in the subprime-mortgage bond market, in 2004, then created a way to bet against it, he wasn’t surprised that no one understood what he was doing. In an excerpt from his new book, The Big Short, the author charts Burry’s oddball maneuvers, his almost comical dealings with Goldman Sachs and other banks as the market collapsed, and the true reason for his visionary obsession.
By Michael Lewis• Photograph by Jonas Fredwall Karlsson
April 2010



Excerpted from The Big Short: Inside the Doomsday Machine, by Michael Lewis, to be published this month by W. W. Norton; © 2010 by the author.

In early 2004 a 32-year-old stock-market investor and hedge-fund manager, Michael Burry, immersed himself for the first time in the bond market. He learned all he could about how money got borrowed and lent in America. He didn’t talk to anyone about what became his new obsession; he just sat alone in his office, in San Jose, California, and read books and articles and financial filings. He wanted to know, especially, how subprime-mortgage bonds worked. A giant number of individual loans got piled up into a tower. The top floors got their money back first and so got the highest ratings from Moody’s and S&P, and the lowest interest rate. The low floors got their money back last, suffered the first losses, and got the lowest ratings from Moody’s and S&P. Because they were taking on more risk, the investors in the bottom floors received a higher rate of interest than investors in the top floors. Investors who bought mortgage bonds had to decide in which floor of the tower they wanted to invest, but Michael Burry wasn’t thinking about buying mortgage bonds. He was wondering how he might short, or bet against, subprime-mortgage bonds.

Every mortgage bond came with its own mind-numbingly tedious 130-page prospectus. If you read the fine print, you saw that each bond was its own little corporation. Burry spent the end of 2004 and early 2005 scanning hundreds and actually reading dozens of the prospectuses, certain he was the only one apart from the lawyers who drafted them to do so—even though you could get them all for $100 a year from 10kWizard.com.

The subprime-mortgage market had a special talent for obscuring what needed to be clarified. A bond backed entirely by subprime mortgages, for example, wasn’t called a subprime-mortgage bond. It was called an “A.B.S.,” or “asset-backed security.” If you asked Deutsche Bank exactly what assets secured an asset-backed security, you’d be handed lists of more acronyms—R.M.B.S., hels, helocs, Alt-A—along with categories of credit you did not know existed (“midprime”). R.M.B.S. stood for “residential-mortgage-backed security.” hel stood for “home-equity loan.” heloc stood for “home-equity line of credit.” Alt-A was just what they called crappy subprime-mortgage loans for which they hadn’t even bothered to acquire the proper documents—to, say, verify the borrower’s income. All of this could more clearly be called “subprime loans,” but the bond market wasn’t clear. “Midprime” was a kind of triumph of language over truth. Some crafty bond-market person had gazed upon the subprime-mortgage sprawl, as an ambitious real-estate developer might gaze upon Oakland, and found an opportunity to rebrand some of the turf. Inside Oakland there was a neighborhood, masquerading as an entirely separate town, called “Rockridge.” Simply by refusing to be called “Oakland,” “Rockridge” enjoyed higher property values. Inside the subprime-mortgage market there was now a similar neighborhood known as “midprime.”

But as early as 2004, if you looked at the numbers, you could clearly see the decline in lending standards. In Burry’s view, standards had not just fallen but hit bottom. The bottom even had a name: the interest-only negative-amortizing adjustable-rate subprime mortgage. You, the homebuyer, actually were given the option of paying nothing at all, and rolling whatever interest you owed the bank into a higher principal balance. It wasn’t hard to see what sort of person might like to have such a loan: one with no income. What Burry couldn’t understand was why a person who lent money would want to extend such a loan. “What you want to watch are the lenders, not the borrowers,” he said. “The borrowers will always be willing to take a great deal for themselves. It’s up to the lenders to show restraint, and when they lose it, watch out.” By 2003 he knew that the borrowers had already lost it. By early 2005 he saw that lenders had, too.

A lot of hedge-fund managers spent time chitchatting with their investors and treated their quarterly letters to them as a formality. Burry disliked talking to people face-to-face and thought of these letters as the single most important thing he did to let his investors know what he was up to. In his quarterly letters he coined a phrase to describe what he thought was happening: “the extension of credit by instrument.” That is, a lot of people couldn’t actually afford to pay their mortgages the old-fashioned way, and so the lenders were dreaming up new financial instruments to justify handing them new money. “It was a clear sign that lenders had lost it, constantly degrading their own standards to grow loan volumes,” Burry said. He could see why they were doing this: they didn’t keep the loans but sold them to Goldman Sachs and Morgan Stanley and Wells Fargo and the rest, which packaged them into bonds and sold them off. The end buyers of subprime-mortgage bonds, he assumed, were just “dumb money.” He’d study up on them, too, but later.

He now had a tactical investment problem. The various floors, or tranches, of subprime-mortgage bonds all had one thing in common: the bonds were impossible to sell short. To sell a stock or bond short, you needed to borrow it, and these tranches of mortgage bonds were tiny and impossible to find. You could buy them or not buy them, but you couldn’t bet explicitly against them; the market for subprime mortgages simply had no place for people in it who took a dim view of them. You might know with certainty that the entire subprime-mortgage-bond market was doomed, but you could do nothing about it. You couldn’t short houses. You could short the stocks of homebuilding companies—Pulte Homes, say, or Toll Brothers—but that was expensive, indirect, and dangerous. Stock prices could rise for a lot longer than Burry could stay solvent.

A couple of years earlier, he’d discovered credit-default swaps. A credit-default swap was confusing mainly because it wasn’t really a swap at all. It was an insurance policy, typically on a corporate bond, with periodic premium payments and a fixed term. For instance, you might pay $200,000 a year to buy a 10-year credit-default swap on $100 million in General Electric bonds. The most you could lose was $2 million: $200,000 a year for 10 years. The most you could make was $100 million, if General Electric defaulted on its debt anytime in the next 10 years and bondholders recovered nothing. It was a zero-sum bet: if you made $100 million, the guy who had sold you the credit-default swap lost $100 million. It was also an asymmetric bet, like laying down money on a number in roulette. The most you could lose were the chips you put on the table, but if your number came up, you made 30, 40, even 50 times your money. “Credit-default swaps remedied the problem of open-ended risk for me,” said Burry. “If I bought a credit-default swap, my downside was defined and certain, and the upside was many multiples of it.”

He was already in the market for corporate credit-default swaps. In 2004 he began to buy insurance on companies he thought might suffer in a real-estate downturn: mortgage lenders, mortgage insurers, and so on. This wasn’t entirely satisfying. A real-estate-market meltdown might cause these companies to lose money; there was no guarantee that they would actually go bankrupt. He wanted a more direct tool for betting against subprime-mortgage lending. On March 19, 2005, alone in his office with the door closed and the shades pulled down, reading an abstruse textbook on credit derivatives, Michael Burry got an idea: credit-default swaps on subprime-mortgage bonds.

The idea hit him as he read a book about the evolution of the U.S. bond market and the creation, in the mid-1990s, at J. P. Morgan, of the first corporate credit-default swaps. He came to a passage explaining why banks felt they needed credit-default swaps at all. It wasn’t immediately obvious—after all, the best way to avoid the risk of General Electric’s defaulting on its debt was not to lend to General Electric in the first place. In the beginning, credit-default swaps had been a tool for hedging: some bank had loaned more than they wanted to to General Electric because G.E. had asked for it, and they feared alienating a long-standing client; another bank changed its mind about the wisdom of lending to G.E. at all. Very quickly, however, the new derivatives became tools for speculation: a lot of people wanted to make bets on the likelihood of G.E.’s defaulting. It struck Burry: Wall Street is bound to do the same thing with subprime-mortgage bonds, too. Given what was happening in the real-estate market—and given what subprime-mortgage lenders were doing—a lot of smart people eventually were going to want to make side bets on subprime-mortgage bonds. And the only way to do it would be to buy a credit-default swap.

[ABIGIDIOT]

sighhhhhhhhhhhhhhhhhhhhhhhh..... the choices some make in life.


fish, or cut bait? buy, or sell? michelle bombshelle or kat von D ??? LMAOFFFFFFF !!!! cant wait to see this azzzzzhole talk his way out of this one.

kat von D for me !!!

Poor Sandy:

[TEX]

ya, she's great.

[Tina]

OT: As usual, I'm always late to the party - TV wise!

I just heard about that yesterday and was reading a few blogs. I would hate to be that other chick. There's a lot of rage out there.

Rightfully so! America LOVES Sandra. I don't think I've ever seen anything negative ever written up about her. I mean what's there not to love? She's the girl next door, funny, goofy, down to earth and would just seem like the most loyal friend and perfect wife. There's not too many women like her IMO. She's classy even when she's not being classy.

I remember her on an interview and when she turned 40 and she was asked what kept her so young looking, I was floored (and admiring) that instead of some high end expensive hollywood beauty cream, she came right out and said "I use Preparation H on my face." I would bet anything the next day, butt cream went flying off the shelves! lol

[ListenToMe]

OT:... Well I guess since you put it that way...!!!!

[QaB2i]

OT : a near perfect blend of goofy comic, intelligence, wit, sweet, soft, raw talent, drama, rich and liquid, sex appeal, and a body that's built for sin.

Can she cook? (who gives a ratz)



Look at the arch in her foot (J.C would drop trou on the spot!!!)





underwater Camel :)

[ListenToMe]

not sure.... she seems to be a bit goofy.

[QaB2i]

OT : Some light comic BS at the
expense of my favorite thesbian

Germany tells Greece "you want the IMF's money... Go to the IMF!"

Poor Sandy:





DUDE!!!!!!!!

[ListenToMe]

I must say WOOGSTER you seem to have a real grasp on what is going on here and although I find it incredibly interesting I think it is over my head. I am trying to follow it and appreciate all your info and insight and I am learning as I go.

[Tina]

Episode 28: "The Mad Max of Wall Street"

Anthony Elgindy. He's young, self-assured... and loaded. He claims to be a crusader, fighting fraud on Wall Street. But, this so-called good guy is running an insider trading scam... and his partner is a crooked FBI agent.

American Greed profiles "The Mad Max of Wall Street!"

http://www.cnbc.com/id/18057119/


http://investorshub.advfn.com/boards/read_msg.aspx?message_id=47808422

[QaB2i]

Noose tightens around credit default swap market
EU considers naked selling ban

STRASBOURG, France -- The European Commission said on Tuesday it will consider banning the naked selling of derivatives contracts some EU politicians say were used by speculators to bet on a Greek bond default.

Commission President Jose Manuel Barroso also said the European Union’s executive would like the G20 group of developed and developing nations to discuss speculation in credit default swaps (CDS), a form of insurance against default.

Naked selling involves selling a CDS to a buyer who does not hold the underlying sovereign bond. A naked CDS contract is typically a bet taken by investment firms like hedge funds that the bond will end up on the rocks.

“A new, ad hoc reflection is needed on credit default swaps regarding sovereign debt,” Mr. Barroso said.

“In this context, the Commission will examine closely the relevance of banning purely speculative naked sales on credit default swaps of sovereign debt,” he said.

EU finance ministers and the Commission are expected to discuss ways to dampen speculation on sovereign credit default swap markets at a meeting on March 16.

Mr. Barroso said the 27-nation bloc should tackle naked CDS selling in a coordinated way — a sign the executive does not want a repeat of unilateral moves by member states to ban shortselling in bank shares in 2008 which confused markets.

Analysts say the CDS market is too small to drive down underlying bonds or the euro and warn that a ban could backfire by sparking sales in government debt.

The noose is tightening around the sector, however, as French Economy Minister Christine Lagarde said proposals on CDS selling would be unveiled in coming days.

Germany and Eurogroup President, Jean-Claude Juncker, have said they back such plans but so far Britain, the EU’s main derivatives centre, has not signalled any public support.

The G20 agreed last September that derivatives like CDS should be traded on an exchange and centrally cleared, where appropriate, in order to cut risk and improve transparency.

The Commission has already said it will propose a draft law this summer to turn those pledges into EU law but Greece, France and Germany want the bloc to got a step further and crack down on naked CDS selling.

A Commission proposal would have to be approved by a majority of EU finance ministers and the European parliament.


Mr. Barroso said transatlantic cooperation among CDS regulators also needed raising and that a study of the CDS market should look for any “questionable practices” which could be dealt with under the bloc’s competition rules.

In Washington, Greek Finance Minister George Papaconstantinou piled the pressure on its EU partners by calling for an outright ban on naked selling of CDS.

“What has become very clear in this affair is that over and above the fiscal problems that any particular country...there are kinds of questions about what kinds of use people make of things like credit derivative swaps, how opaque these markets are, how it’s not clear who’s trading what and how these can push countries...to the brink,” Mr. Papaconstantinou said in an interview on CNBC television.

“(There should be) more transparency, a ban on naked selling, for example,” Mr. Papaconstantinou said.

Britain is the EU’s biggest CDS centre and a bloc-wide initiative from the Commission — as opposed to one from euro zone countries like France — would likely have a bigger impact.

Mr. Barroso said that before the end of 2010, EU Internal Market Commissioner Michel Barnier will also propose beefing up the bloc’s market abuse directive, which tries to prevent insider trading among other practices.

Two central bankers also stressed on Tuesday the need for central clearing of derivatives as part of wider efforts to make markets safer and learn from the financial crisis.

Chicago Federal Reserve Bank President, Charles Evans, said there was a need to study the CDS market carefully and that such products can offer hedges that can be valuable to firms.

Proposals to net CDS positions in a clearing house would be useful, Mr. Evans told reporters in Arlington, Va.

Bank of France Governor and European Central Bank Governing Council member, Christian Noyer, said clearing houses should be set up in each major currency area where CDS contracts are transacted and be locally supervised.

© Thomson Reuters 2010

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