Sen. Sanders – Break ‘Em Up!
November 10, 2009
Sen. Sanders – More than a year has gone by since Congress passed the $700 billion bailout of Wall Street. The Federal Reserve has committed trillions of additional dollars in virtually zero-interest loans and other assistance to large financial institutions resulting in the largest taxpayer bailout in the history of the world.
President Bush and Ben Bernanke told us we needed to bail out Wall Street because we could not allow big financial institutions and insurance giants to fail because if they failed it would have led to the collapse of the U.S. and global economies.
Today, most of the huge financial institutions still standing have become even bigger — so big that the four largest banks in America (JP Morgan Chase, Bank of America, Wells Fargo, and Citigroup) now issue one out of every two mortgages; two out of three credit cards; and hold $4 out of every $10 in bank deposits in the entire country.
If any of these financial institutions were to get into major trouble again, taxpayers would be on the hook for another massive bailout. We cannot let that happen. We need to do exactly what Teddy Roosevelt did back in the trust-busting days and break up these big banks.
That is why I introduced legislation that would give the secretary of the Treasury 90 days to identify every single financial institution and insurance company in this country that is too big to fail and to break up those institutions within one year.
If it’s too big to fail, it’s too big to exist.
“Too Big To Fail” Bill Gives Feds Power To Freeze Derivatives Contracts
November 10, 2009
Huffington Post – The “Too Big To Fail” legislation currently being debated by a House committee has been widely criticized as toothless. But one provision gives the federal government a powerful mechanism to prevent another implosion like the one that launched the current financial crisis.
The bill, which would give the Federal Deposit Insurance Corporation the power to take over failing firms that pose a risk to the entire financial system, gives the FDIC the authority to repudiate the firm’s derivatives contracts, pay the parties less than what they’re owed, or transfer the contracts to another, healthy financial firm.
Perhaps most importantly, the FDIC would have the authority to delay the parties from closing out their contracts and taking their money with them. That’s part of the reason why the Lehman Brothers bankruptcy announcement caused the financial markets to crash, and it’s what helped bring about the demise of the 158-year-old investment firm — everyone wanted to get their money out before it was too late.
The FDIC already has this power when it comes to failed banks. But its authority is strictly limited to insured depositories. So the FDIC can take over a Citibank, for example, but not all the operations of a Citigroup. It’s an important difference, and part of the reason why the administration and House Financial Services Committee Chairman Barney Frank are proposing to give the FDIC this expanded authority.
Here’s how it works:
These days, when the FDIC takes control of a bank, it can liquidate it (receivership) or take it over in preparation for a sale (conservatorship). Receivership is the most common approach. In those cases, the FDIC will sell off a bank’s assets, or it can open a temporary bank in order to minimize the disruption that would come from immediately selling off all of a bank’s assets.
In derivatives contracts, a firm’s failure or bankruptcy often triggers a clause that calls for the contract to be immediately closed out.
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We Need To Ban Credit Default Swaps
November 10, 2009
FT – David Einhorn, founder of Greenlight Capital, was one of the earliest and most prescient users of credit default swaps. Now he is calling for these instruments, in effect a form of insurance on individual firms (or governments) that pays out when the institution defaults or restructures, to be banned.
“I think that trying to make safer credit default swaps is like trying to make safer asbestos,” he writes in a recent letter to investors, adding that CDSs create “large, correlated and asymmetrical risks” having “scared the authorities into spending hundreds of billions of taxpayer money to prevent speculators who made bad bets from having to pay”.
CDSs are “anti-social”, he goes on, because those who buy credit insurance often have an incentive to see companies fail. Rather than merely hedging their risks, they are actively hoping to profit from the demise of a target company. This strategy became prevalent in recent years and remains so, as holders of these so-called “basis packages” buy both the debt itself and protection on that debt through CDSs, meaning they receive compensation if the company defaults or restructures. These investors “have an incentive to use their position as bondholders to force bankruptcy, triggering payments on their CDS rather than negotiate out of court restructurings or covenant amendments with their creditors”, Mr Einhorn says.
The Man Who Caused the Credit Crunch
November 10, 2009
Times / UK – If “chick-lit” is the genre of fiction featuring young female protagonists obsessed with appearances and shopping, and “mis-lit” is the genre of biography preoccupied with the narrator’s triumph over trauma, then maybe the fad for semi-autobiographical works by young financial professionals describing City careers that have left them with feelings of self-loathing, not to mention huge pads in London, should be referred to as “crunch-lit”.
The City analyst Geraint Anderson got the ball rolling last year with Cityboy: Beer and Loathing in the Square Mile, his bestselling “no-holds-barred, warts-and-all account of life in London’s financial heartland”. Now everyone seems to be at it, with the publication next month of Binge Trading by the former stockbroker-turned-writer Seth Freedman, which claims to be an “account of the visceral, real-life stories that characterize today’s Square Mile” and the publication this week of How I Caused the Credit Crunch by Tetsuya Ishikawa, in which the 30-year-old Oxford graduate and Old Etonian provides “a vivid and personal account of 21st-century banking excess”, based on his six years as a credit banker at ABN AMRO, Goldman Sachs and Morgan Stanley.
Comparing Ishikawa’s account with Anderson’s is a grim business, the literary equivalent of deciding between a scotch egg and a sausage roll in a late-night provincial petrol station. But if you were to identify a defining feature of the emerging genre of crunch-lit, aside from the poor quality of the writing, the speed at which the books are being written (four months for Ishikawa) and the way they fetishise the excesses they are supposedly condemning, it is the question marks that hang over their veracity.
Anderson’s claim that his account is “80 per cent truth” is, at best, debatable and HICTCC seems to suffer from a similar problem. The latter claims to be “a vivid and personal account of banking excess”, but, like Cityboy, is fictionalized and begins with the caveat that “any resemblance to actual firms or persons…is entirely… coincidental”.
Inevitably, on meeting Ishikawa outside Goldman Sachs in the City and walking along Fleet Street in search of somewhere quiet to talk, our conversation revolves around establishing how much of his biography tallies with that of the book’s narrator, Andrew Dover. “I’d say close to 90 per cent,” he says. “Put it this way – when I wrote the book I didn’t have to do a great deal of research.”
From the chat that follows, I’d put it at 75 per cent. Dover and Ishikawa share the same financial specialism, but Ishikawa wasn’t, like his protagonist, hired for his last job with a $3 million guarantee. “In six years I earned more than £1 million before tax,” he admits. Ishiwaka has never had expensive spending habits (Dover spends $12,000 on Zegna suits and cotton shirts, Ishikawa merely says he “almost did”). And, unlike his narrator, Ishikawa says that he was never a keen consumer of cocaine. “I smoked marijuana when I was a kid, that’s all.”
Surprisingly, however, the clichéd excesses of the narrator’s personal life, which I expect to be fictionalized, turn out to be almost exactly alike. Ishikawa admits to having been a frequenter of Spearmint Rhino, as does his fictional alter ego (“If you’re out on a Friday night and want to sit somewhere for a quiet drink, it’s good”); visiting a German brothel (“I’ve been, but not with a client”); sleeping with escorts (“I did a lot of travel abroad and the first thing I asked on arriving was: ‘Where is the brothel?’”); having sex in the office ( “Uh, I have”) and dating a Brazilian lap dancer (“She became my first wife. My current wife is Korean and works in banking”).
It feels unnatural to ask such a personal question within 15 minutes of meeting someone, but this confession inevitably prompts the query: did it all go wrong with the Brazilian, as it does for his protagonist, when he slept with her sister? “Uh, no.” A pause. “It could very easily have happened, though.” I decide not to explore what he means by this.
We are now sitting in the foyer of the Waldorf Hilton on Aldwych, and as Ishikawa orders sparkling water, I tally the revelations against what he looks like. It’s easy to imagine him as high-flying City worker: he is dressed casually, but it is very much “City casual”: a pristine pressed white shirt and designer jeans and a pair of expensive brown leather slip-on, ie, not really casual at all. But he seems too polite, too young and, despite being Japanese born and claiming to feel more Japanese than anything else, too English, to have lived such a decadent and eventful life.
As he positions his BlackBerry in front of him – his wife is expecting to go into labour and he needs to be contactable – I ask how she feels about the confessions in the book. A sip of water. “I’m very lucky that she’s an incredibly understanding person.” What about his parents? His father, now retired, worked for a Japanese conglomerate and got posted to the UK when Ishikawa was 4; his mother is a language teacher. “They haven’t read it yet. I think my parents have always trusted me…maybe too much.”
Frankly, his parents’ response is not the only reaction he needs to worry about. I can’t see the book getting a positive critical reception. It suffers from more structural problems than the global banking system, the characterization is thinner than Alan Greenspan’s hair, the prose is littered with business-speak and, most problematically, when you start getting into the story, you get stopped by a dense lecture on the intricacies of the credit derivatives industry.
Ishikawa has done this deliberately. He says that the aim of the book – the idea for which came from a friend, who hearing him talk about being fired from Morgan Stanley, said that he “should write a book called How I Caused the Credit Crunch, because it sounds like you did” – was to “explain how the credit crunch really came about”.
I can see why he has done it. Working as a syndicate banker, Ishikawa coordinated the process by which mathematicians packaged groups of mortgages and other assets into sub-prime deals and assets called “CDOs”, creating and organizing the sale of the very “toxic assets”, which have poisoned banks’ balance sheets and brought them to the brink of failure. (When sub-prime borrowers were unable to pay back their mortgages in 2006, it sent fear through the system and the demand for these investments dried up. The subsequent oversupply sent the value of these assets crashing, which quickly built up into a tsunami effect and the kind of products that Ishikawa had been involved in creating and selling fell sharply in value, leading many of these assets to be toxic.)
But given that even Eddie George, the former Governor of the Bank of England, has said that he doesn’t understand the products that Ishikawa explains at length, and given that even Nassim Nicholas Taleb, the veteran trader, and author of The Black Swan, has written that “complex derivatives need to be banned because nobody understands them”, the level of detail Ishikawa goes into is a mistake. It is asking too much of almost any reader to expect him or her to go from an account of a character visiting a strip joint to the news that his bank “would be the manager of a €1 billion synthetic arbitrage CDO, and they would buy €100 million of the €850 million of the AAA tranche”.
It’s the dollar
November 9, 2009
Too Little Regulation for Derivatives
November 9, 2009
NYT – The Obama administration and Congress have vowed to regulate derivatives, the complex and often highly speculative financial instruments that were at the heart of the meltdown. Two House committees have approved legislation, but — after heavy lobbying from the banking industry and corporate America— both versions are weak and unlikely to prevent another fiasco.
Right now, many derivative deals are executed as private one-on-one contracts, outside the view of the public or regulators. This lack of transparency — about participants, prices and volumes — proved disastrous. In the bailout of American International Group, tens of billions of taxpayer dollars went to pay the world’s biggest banks for derivative bets gone spectacularly wrong.
The bills require that many derivatives be traded on public exchanges, but then carve out far too many exceptions. One huge loophole would exempt derivatives from exchange trading for corporations that use them to hedge operational risks, say, an airline that wants to lock in fuel prices. The supposed logic is that corporate derivative users did not cause the crisis.
But such derivatives make up a big chunk of the $592 trillion industry. If they are exempted, potentially trillions of dollars worth of transactions could avoid the exposure — and stability — that comes with exchange trading. Even worse, under the current wording, this exemption could be read to apply to many more companies, including hedge funds and other investor groups.
The stated aim of the exemption is to keep transaction costs low when corporations use derivatives to hedge their various risks. But there is no compelling evidence that exchange trading will drive up costs. And even if the cost were to rise somewhat, transparency is a more important goal.
The bill approved by the Financial Services Committee has an additional weakness: it denies regulators powers they need to fully police the market. For instance, they would not have the authority to ban dangerous products and abusive practices. Bans are a heavy-handed tool. But the ability to impose bans on toxic instruments should be part of the tool kit.
Both versions must be improved, on the House floor and in the Senate. In a sign of what we hope will be tough battles ahead, Senator Maria Cantwell, Democrat of Washington and a member of the Finance Committee, has written to Treasury Secretary Timothy Geithner, asking him to explain the administration’s support for the flawed bill from the Financial Services Committee.
Insisting on strong derivatives reform is a matter of putting taxpayers first — ahead of the big banks and corporate America that are fighting hard for a return to risky business as usual.
Greg Gordon: Goldman Sachs
November 8, 2009
Greg Gordon, a reporter for McClatchy Newspapers, talks with Alex Jones about Goldman Sachs Group peddling more than $40 billion in securities backed by at least 200,000 risky home mortgages and never telling the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
Wall Street’s Naked Swindle
November 6, 2009
Matt Taibbi – On Tuesday, March 11th, 2008, somebody — nobody knows who — made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness — “like buying 1.7 million lottery tickets,” according to one financial analyst.
But what’s even crazier is that the bet paid.
At the close of business that afternoon, Bear Stearns was trading at $62.97. At that point, whoever made the gamble owned the right to sell huge bundles of Bear stock, at $30 and $25, on or before March 20th. In order for the bet to pay, Bear would have to fall harder and faster than any Wall Street brokerage in history.
The very next day, March 12th, Bear went into free fall. By the end of the week, the firm had lost virtually all of its cash and was clinging to promises of state aid; by the weekend, it was being knocked to its knees by the Fed and the Treasury, and forced at the barrel of a shotgun to sell itself to JPMorgan Chase (which had been given $29 billion in public money to marry its hunchbacked new bride) at the humiliating price of … $2 a share. Whoever bought those options on March 11th woke up on the morning of March 17th having made 159 times his money, or roughly $270 million. This trader was either the luckiest guy in the world, the smartest son of a bitch ever or…
Or what? That this was a brazen case of insider manipulation was so obvious that even Sen. Chris Dodd, chairman of the pillow-soft-touch Senate Banking Committee, couldn’t help but remark on it a few weeks later, when questioning Christopher Cox, the then-chief of the Securities and Exchange Commission. “I would hope that you’re looking at this,” Dodd said. “This kind of spike must have triggered some sort of bells and whistles at the SEC. This goes beyond rumors.”
Cox nodded sternly and promised, yes, he would look into it. What actually happened is another matter. Although the SEC issued more than 50 subpoenas to Wall Street firms, it has yet to identify the mysterious trader who somehow seemed to know in advance that one of the five largest investment banks in America was going to completely tank in a matter of days. “I’ve seen the SEC send agents overseas in a simple insider-trading case to investigate profits of maybe $2,000,” says Brent Baker, a former senior counsel for the commission. “But they did nothing to stop this.”
The SEC’s halfhearted oversight didn’t go unnoticed by the market. Six months after Bear was eaten by predators, virtually the same scenario repeated itself in the case of Lehman Brothers — another top-five investment bank that in September 2008 was vaporized in an obvious case of market manipulation. From there, the financial crisis was on, and the global economy went into full-blown crater mode.
Like all the great merchants of the bubble economy, Bear and Lehman were leveraged to the hilt and vulnerable to collapse. Many of the methods that outsiders used to knock them over were mostly legal: Credit markers were pulled, rumors were spread through the media, and legitimate short-sellers pressured the stock price down. But when Bear and Lehman made their final leap off the cliff of history, both undeniably got a push — especially in the form of a flat-out counterfeiting scheme called naked short-selling.
That this particular scam played such a prominent role in the demise of the two firms was supremely ironic. After all, the boom that had ballooned both companies to fantastic heights was basically a counterfeit economy, a mountain of paste that Wall Street had built to replace the legitimate business it no longer had. By the middle of the Bush years, the great investment banks like Bear and Lehman no longer made their money financing real businesses and creating jobs. Instead, Wall Street now serves, in the words of one former investment executive, as “Lucy to America’s Charlie Brown,” endlessly creating new products to lure the great herd of unwitting investors into whatever tawdry greed-bubble is being spun at the moment: Come kick the football again, only this time we’ll call it the Internet, real estate, oil futures. Wall Street has turned the economy into a giant asset-stripping scheme, one whose purpose is to suck the last bits of meat from the carcass of the middle class.
What really happened to Bear and Lehman is that an economic drought temporarily left the hyenas without any more middle-class victims — and so they started eating each other, using the exact same schemes they had been using for years to fleece the rest of the country. And in the forensic footprint left by those kills, we can see for the first time exactly how the scam worked — and how completely even the government regulators who are supposed to protect us have given up trying to stop it.
This was a brokered bloodletting, one in which the power of the state was used to help effect a monstrous consolidation of financial and political power. Heading into 2008, there were five major investment banks in the United States: Bear, Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs. Today only Morgan Stanley and Goldman survive as independent firms, perched atop a restructured Wall Street hierarchy. And while the rest of the civilized world responded to last year’s catastrophes with sweeping measures to rein in the corruption in their financial sectors, the United States invited the wolves into the government, with the popular new president, Barack Obama — elected amid promises to clean up the mess — filling his administration with Bear’s and Lehman’s conquerors, bestowing his papal blessing on a new era of robbery.
To the rest of the world, the brazenness of the theft — coupled with the conspicuousness of the government’s inaction — clearly demonstrates that the American capital markets are a crime in progress. To those of us who actually live here, however, the news is even worse. We’re in a place we haven’t been since the Depression: Our economy is so completely fucked, the rich are running out of things to steal.
If you squint hard enough, you can see that the derivative-driven economy of the past decade has always, in a way, been about counterfeiting. At their most basic level, innovations like the ones that triggered the global collapse — credit-default swaps and collateralized debt obligations — were employed for the primary purpose of synthesizing out of thin air those revenue flows that our dying industrial economy was no longer pumping into the financial bloodstream. The basic concept in almost every case was the same: replacing hard assets with complex formulas that, once unwound, would prove to be backed by promises and IOUs instead of real stuff. Credit-default swaps enabled banks to lend more money without having the cash to cover potential defaults; one type of CDO let Wall Street issue mortgage-backed bonds that were backed not by actual monthly mortgage payments made by real human beings, but by the wild promises of other irresponsible lenders. They even called the thing a synthetic CDO — a derivative contract filled with derivative contracts — and nobody laughed. The whole economy was a fake.
For most of this decade, nobody rocked that fake economy — especially the faux housing market — better than Bear Stearns. In 2004, Bear had been one of five investment banks to ask the SEC for a relaxation of lending restrictions that required it to possess $1 for every $12 it lent out; as a result, Bear’s debt-to-equity ratio soared to a staggering 33-1. The bank used much of that leverage to issue mountains of mortgage-backed securities, essentially borrowing its way to a booming mortgage business that helped drive its share price to a high of $172 in early 2007.
But that summer, Bear started to crater. Two of its hedge funds that were heavily invested in mortgage-backed deals imploded in June and July, forcing the credit-raters at Standard & Poor’s to cut its outlook on Bear from stable to negative. The company survived through the winter — in part by jettisoning its dipshit CEO, Jimmy Cayne, a dithering, weed-smoking septuagenarian who was spotted at a bridge tournament during the crisis — but by March 2008, it was almost wholly dependent on a network of creditors who supplied it with billions in rolling daily loans to keep its doors open. If ever there was a major company ripe to be assassinated by market manipulators, it was Bear Stearns in 2008.
Then, on March 11th — around the same time that mystery Nostradamus was betting $1.7 million that Bear was about to collapse — a curious thing happened that attracted virtually no notice on Wall Street. On that day, a meeting was held at the Federal Reserve Bank of New York that was brokered by Fed chief Ben Bernanke and then-New York Fed president Timothy Geithner. The luncheon included virtually everyone who was anyone on Wall Street — except for Bear Stearns.
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New Book: ‘No One Would Listen: A Real Financial Thriller’
November 5, 2009
Amazon – Harry Markopolos and his team of financial sleuths discuss first-hand how they cracked the Madoff Ponzi scheme
No One Would Listen is the exclusive story of the Harry Markopolos-lead investigation into Bernie Madoff and his $65 billion Ponzi scheme. While a lot has been written about Madoff’s scam, few actually know how Markopolos and his team-affectionately called “The Fox Hounds” by Markopolos himself, uncovered what Madoff was doing years before this financial disaster reached its pinnacle. Unfortunately, no one listened, until the damage of the world’s largest financial fraud ever was irreversible.
Since that time, Markopolos openly has testified and questioned the enforcement and fraud investigation capabilities of the Securities and Exchange Commission (SEC), shared a sliver of this page-turning story with 60 Minutes, and become perhaps the world’s most visible and insightful whistleblower on fraud and conflicts of interest in financial markets.
Throughout the book, Markopolos and his Fox Hounds tell their first-hand story of investigating Madoff-with the help of bestselling author David Fisher. They explain how they discovered the fraud, and then how they provided credible and detailed evidence to major newspapers and the Securities and Exchange Commission (SEC) many times between 2000 and 2008, only to have his warnings ignored repeatedly by the SEC.
Provides a firsthand account of how Markopolos uncovered Madoff’s
scam years before it actually fell apart.
Discusses how the SEC missed the red flags raised by Markopolos.
Describes how Madoff was enabled by investors and fiduciaries alike.
The only book to tell the story of Madoff’s scam and the SEC’s failings
by those who saw both first hand.
Despite repeated written and verbal warnings to the SEC by Harry Markopolos, Bernie Madoff was allowed to continue his operations. No One Would Listen paints a vivid portrait of Markopolos and his determined team of financial sleuths, and what impact they will have on financial markets and financial regulation for decades to come.
How Bernie Did It
November 5, 2009
Securities Industry News – Two years ago, Bob McMahon wondered why antiquated systems at Bernard L. Madoff Investment Services weren’t replaced with more modern and efficient off-the-shelf systems.
The Madoff systems were expensive to maintain and made it difficult to grow the business by expanding into new classes of securities. McMahon’s job: To organize and document projects that would create custom technology for the firm’s trading operations.
On Dec. 11, 2008, he got his answer.
That day, Bernie Madoff was arrested and charged with stealing tens of billions of his clients’ money over decades. McMahon knew if “technologists” replaced the proprietary systems with more modern and open computers, they would have invariably found the absence of data on countless stock trades that supposedly took place. In a sense, the preservation of old computer technology helped Madoff successfully go undetected for years until his massive Ponzi scheme collapsed that day.
Over the past six weeks, Securities Industry News has dug into and beyond the court records to construct the most extensive report yet on how Madoff actually operated: The systems and technology he and underlings used to create-or fake-the most detailed set of customer accounts underlying a fraud in the history of the securities industry.
Included are the first details of a declaration filed Oct. 16 on behalf of the court-appointed trustee, Irving Picard, investigating the case, which describes how the real and the fake trading floors worked. And why the securities investors believed they owned are never going to be declared “missing.” The answer: Because they never existed in the first place.
On the eve of the first anniversary of Madoff’s arrest, this then is the story of how the legitimacy of his House 5 was turned into the bastard product of House 17-used solely to create and maintain an alternate reality of trades never made.
But it’s more than that. It’s also a cautionary tale to information technology managers and executives at shops up and down Wall Street. If you think something is amiss, don’t let it rest. Do your own investigation. Before the company you work for turns out to be missing as well.
LEGITIMATE AND ILLEGITIMATE
“I asked myself how Bernie could have hidden and maintained this for so long. A lot of it was done because he had proprietary and legacy systems. And he relied on IT people he hired and paid,” to not upset the status quo, says McMahon.
As a project manager, he always felt like an odd duck at Bernard L. Madoff Investment Services (BLMIS), an outfit which seemed to lack standards and procedures routine at former employers of his such as the International Securities Exchange and CheckFree Investment Services (now Fiserv, Inc.). Little was documented and the company seemed to be overwhelmed keeping the older systems from breaking down.
“I immediately recognized there was massive institutional chaos in the way the place was managed. No one found value in participating in project management meetings or in writing things down. There was no documentation,” says McMahon, today an operational performance consultant for Standard & Poors.
CDO Trading Returns
November 5, 2009
Bloomberg – Babson Capital Management LLC and GoldenTree Asset Management LP are among investors bargain- hunting in the $650 billion market for collateralized debt obligations linked to corporate debt as credit markets open.
An estimated $11 billion of CDOs backed by high-yield, high-risk loans or linked to corporate bonds using credit derivatives, have exchanged hands this year, according to Morgan Stanley and JPMorgan Chase & Co.
Trading in CDOs that contributed to $1.6 trillion of writedowns and credit losses at banks worldwide increased after the Federal Reserve doubled its balance sheet to more than $2 trillion to rescue financial institutions. Prices have more than tripled since May for some securities tied to company debt as analysts and investors lowered their predictions for defaults and the economy showed signs of emerging from the longest recession since the Great Depression.
“CDO trading activity has been huge since May,” said Joseph Naggar, a partner at GoldenTree in New York, which oversees $11 billion and has bought loan CDOs and so-called synthetic CDOs composed of credit-default swaps. “Access to the capital markets has dramatically improved for companies. As some of the underlying corporate assets have improved, CDOs have followed.”
The market for buying and selling CDOs, which repackage assets such as mortgage bonds and loans used in corporate buyouts into new debt with varying degrees of risk, was shut down last year in the wake of Lehman Brothers Holdings Inc.’s bankruptcy filing, Naggar said.
Prices Recovered
Trading has restarted and prices recovered as government support of the banking system increased liquidity, Citigroup Inc. analyst Ratul Roy said.
The three-month London interbank offered rate, the amount banks charge to lend to one another, has declined to 0.28 percent, from 4.82 percent on Oct. 10, when the spread between the lending benchmark and the Fed’s target rate reached a record following the Lehman collapse.
Victoria Finance Ltd., a structured investment vehicle that defaulted last year, plans to liquidate $4.3 billion of CDOs tomorrow.
The Victoria auction includes $623 million of corporate- debt backed deals, according to a list obtained by Bloomberg News. Stone Tower Management LLC, a New York-based investment firm that took over running the SIV from Ceres Capital Partners LLC after the vehicle could no longer sell commercial paper, is overseeing the auction. They are selling $2.3 billion of residential mortgage-backed securities and almost $500 million of corporate bonds Victoria held.
‘Watershed Event’
“The liquidation of Victoria Finance will be a watershed event” to show market appetite, Roy said in a telephone interview. “There is increased risk appetite for almost all forms of CDOs at the right price. There has been a huge increase in the amount of secondary trading.”
More than $6 billion of collateralized loan obligations, a form of CDO that pools high-yield, high-risk loans, have traded publicly since May, according to JPMorgan. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Morgan Stanley analysts, who in January called the secondary market for CDOs of corporate credit-default swaps “a $300 billion distressed opportunity,” estimate $5 billion of the CDO securities have traded this year.
‘Active Market’
“There’s quite an active market now,” said Sivan Mahadevan, a derivatives strategist at Morgan Stanley in New York. “Every time there’s a seller in the market, these investors will come in and participate in the auctions or buy them directly.”
Babson has bought more than $200 million of CDOs since April, Matthew Natcharian, the head of Babson’s structured credit team, said in a telephone interview. The $110 billion investment firm, based in Springfield, Massachussetts, is among buyers of distressed CDOs such as Elliott Management Corp. in New York and Bain Capital’s $19 billion debt investment arm Sankaty Advisors LLC in Boston.
Babson has primarily bought CDOs of loans, Natcharian said. GoldenTree has purchased mainly CLOs and some synthetic CDOs, Naggar said.
Paulson Defies Bulls, Makes $10 Million a Day on Wager
November 4, 2009
Bloomberg – Smarts, good timing and a touch of the renegade. That’s what it took to pull off the investment coup that Gregory Zuckerman brings to life in “The Greatest Trade Ever.”
The trade was John Paulson’s bet against the U.S. housing bubble — a wager in credit-default swaps that allowed his hedge fund, Paulson & Co., to make $15 billion in 2007, when markets began melting, Zuckerman says.
“Paulson’s personal cut was nearly $4 billion, or more than $10 million a day,” writes Zuckerman, a Wall Street Journal reporter. Pause for a minute to ponder those winnings.
For months, I’ve been reviewing books that describe, in heartbreaking detail, how Wall Street’s best and brightest got it wrong and drove us into the worst financial crisis since the Great Depression. Zuckerman presents a behind-the-scenes account of how a small band of outliers got it right.
“Cracking Paulson’s moves seemed at least as instructive as the endless mistakes of the financial titans,” Zuckerman says. He’s being too modest.
What we get here is more than a cinematic narrative of how Paulson and others figured out how to short the market. We’re also reminded of how opaque and illiquid some financial instruments are, how little Wall Street executives understood them, and how difficult it was for more knowledgeable bankers to say that the subprime emperor had no clothes.
“You’re making us look stupid,” a senior salesman told one trader, Greg Lippmann of Deutsche Bank AG, who dared to challenge the bull-market consensus.
Accuracy Dispute
Paulson has called the book a disappointment, saying in an e-mailed statement that it contains “numerous inaccuracies” — without specifying which — and faulting what he calls its “gossip tabloid” style. Zuckerman’s publisher, Broadway Books, says it stands by the account, with publicist Rachel Rokicki calling it “fair and accurate” in an e-mail. Sounds to this reviewer like a manufactured controversy.
The story opens on Paulson grimacing at data flickering on computer screens in his corner office overlooking Manhattan’s Central Park. It was 2005, the housing market was booming, and Paulson wasn’t making much money compared with rivals, we read.
“This is crazy,” he told one of his analysts, Paolo Pellegrini. He challenged Pellegrini and others to find a bubble they could short.
Pellegrini, a brainy native of Italy whose Wall Street career had fizzled, sifted through housing data and concluded that prices had reached unsustainable levels, Zuckerman says. Paulson — who had never traded real-estate investments — agreed, yet knew he had to get the timing right and to figure out how to bet against housing.
Credit Default
The answer lay in credit-default swaps. At the time, Paulson’s knowledge of such swaps was limited to “a vague understanding that these instruments provided insurance against losses from debt investments,” Zuckerman writes.
Soon, Paulson and Pellegrini were dabbling with housing bets. What they didn’t know was that rivals were already chasing the same trade. These included Michael Burry, a doctor in California who had turned hedge-fund manager, and Lippmann of Deutsche Bank, who laid his own wagers against housing and taught hundreds of Paulson’s competitors to make their own bearish bets, Zuckerman says.
Others joining the fray included real-estate developer Jeffrey Greene, a Los Angeles bachelor who dated would-be starlets and hosted parties for friends including Mike Tyson and Paris Hilton, Zuckerman says.
The Big Takeover
November 4, 2009
Wall Street Insiders Are Using the Bailout to Stage a Revolution-1/2
The global economic crisis isn’t about money – it’s about power. How Wall Street insiders are using the bailout to stage a revolution
Rollingstone – It’s over — we’re officially, royally fucked. No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country’s heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.
The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That’s $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG’s 2008 losses).
So it’s time to admit it: We’re fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we’re still in denial — we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream. When Geithner announced the new $30 billion bailout, the party line was that poor AIG was just a victim of a lot of shitty luck — bad year for business, you know, what with the financial crisis and all. Edward Liddy, the company’s CEO, actually compared it to catching a cold: “The marketplace is a pretty crummy place to be right now,” he said. “When the world catches pneumonia, we get it too.” In a pathetic attempt at name-dropping, he even whined that AIG was being “consumed by the same issues that are driving house prices down and 401K statements down and Warren Buffet’s investment portfolio down.”
Liddy made AIG sound like an orphan begging in a soup line, hungry and sick from being left out in someone else’s financial weather. He conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U.S. and international regulators, or that one of the causes of its “pneumonia” was making colossal, world-sinking $500 billion bets with money it didn’t have, in a toxic and completely unregulated derivatives market.
Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town — and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off the other high rollers at its table. Or that this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires.
People are pissed off about this financial crisis, and about this bailout, but they’re not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d’état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.
The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — “our partners in the government,” as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.
The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.
‘Fall of the Republic’ – HQ full length version
November 3, 2009
Fall Of The Republic documents how an offshore corporate cartel is bankrupting the US economy by design. Leaders are now declaring that world government has arrived and that the dollar will be replaced by a new global currency.
President Obama has brazenly violated Article 1 Section 9 of the US Constitution by seating himself at the head of United Nations’ Security Council, thus becoming the first US president to chair the world body.
A scientific dictatorship is in its final stages of completion, and laws protecting basic human rights are being abolished worldwide; an iron curtain of high-tech tyranny is now descending over the planet.
A worldwide regime controlled by an unelected corporate elite is implementing a planetary carbon tax system that will dominate all human activity and establish a system of neo-feudal slavery.
The image makers have carefully packaged Obama as the world’s savior; he is the Trojan Horse manufactured to pacify the people just long enough for the globalists to complete their master plan.
This film reveals the architecture of the New World Order and what the power elite have in store for humanity. More importantly it communicates how We The People can retake control of our government, turn the criminal tide and bring the tyrants to justice.
McClatchy – When Goldman Sachs decided it was time to ditch the subprime mortgage business, it put together a sales pitch through a Cayman Islands subsidiary that may have seriously understated the riskiness of the securities it was selling. One bond analyst told his clients that the deal was “a not so cleverly disguised way for Goldman … to unload its unwanted exposures … onto foreign investors.” But many investors bit — and lost.
Inside the thick Goldman Sachs investment circular were the details of a secret, $2 billion deal channeled through a Caribbean tax haven.
The Sept. 26, 2006, document offered sophisticated U.S. and European investors an opportunity to buy into a pool of supposedly high-grade bonds backed by residential, commercial and student loans. The transaction was registered through a shell company in the Cayman Islands.
Few of the potential investors knew it, but the ratings of many of the mortgage securities hid their true risks and, in some cases, Goldman’s descriptions exaggerated their quality.
The Cayman offering — one of perhaps dozens made through the British territory — occurred as Goldman began to ditch the subprime mortgage business before the U.S. housing market collapsed under an avalanche of homeowner defaults.
In all, Goldman sold more than $57 billion in risky mortgage-backed securities during a 14-month period in 2006 and 2007, including nearly $39 billion issued from mortgages it purchased. Meanwhile, the firm peddled billions of dollars in complex deals, many of them tied to subprime mortgages, in the Caymans and other offshore locations.
Many of those securities later soured, but the sales allowed Goldman to become the only major U.S. investment bank to escape the brunt of the subprime meltdown.
One bond analyst who reviewed the 2006 Cayman deal dismissed it in a report to clients as “a not so cleverly disguised way for Goldman Sachs & Co. to unload its unwanted exposures to the subprime real estate market onto foreign investors.”
Goldman spokesman Michael DuVally said that the firm “sold mortgage securities only to sophisticated investors” and disclosed “all the appropriate information available.”
McClatchy also found at least two instances in which Goldman appeared to mislead investors. In one, the firm said that $65.3 million in securities were backed by safe “prime” mortgages when the same loans had been labeled a cut below prime in a U.S. offering. In the other, Goldman listed $10 million as “midprime” loans when the underlying mortgages had been made to subprime borrowers with shaky finances.
DuVally said that the descriptions were consistent with the standards set by Moody’s, the bond-rating agency.
The secret Cayman Islands deals provide a window into one method that Goldman and other Wall Street firms used to draw European banks and other foreign financial institutions into investing hundreds of billions of dollars in securities tied to risky U.S. home loans.
Experts estimate that Wall Street investment banks sold 25 percent to 50 percent of these bonds and related securities overseas, resulting in massive losses in Europe and elsewhere when the market collapsed.
Last spring, the International Monetary Fund projected that global write-downs on “U.S.-originated assets” stemming from the subprime disaster could reach $2.7 trillion.
Underscoring the role of tax havens as a Wall Street marketing tool, a Treasury Department report found that as of June 30, 2008, $164 billion in U.S. mortgage-backed securities were held in the Cayman Islands and $22 billion more were held in Luxembourg, another tax-friendly zone.
Gary Kopff, a securitization expert who analyzed unpublished industry data, said that Goldman packaged or marketed offshore deals worth at least $83 billion from 2002 to 2008. These deals, called collateralized debt obligations, amounted to a $1.3 trillion global market, and Goldman reaped as much as $1.66 billion for assembling and selling them.
