Spoke Louise Story, NYT, and Gregory Zuckerman, WSJ, re the events of the winter of 2007 and learned that the fabled billionaire investor John Paulson was regarded as a chump and outsider in the time frame that the SEC identifies for the now-suspect Abacus (and the Fabulous Fab of Fabrice Tourre) deal. Betting against the subprime market was not difficult, because what you had to do was short the ABX index. But betting against the raging uptrend in the ABX was not popular, was not even considered sane. Paulson took what was then understood as the dangerous (and sucker) side of the trade. February 7/8, Paulson watched as the hot New Country subprime mortgage-maker collapsed 36% the day after it reported earnings for 2006 (books cooked) and the ABX sagged five points. John Paulson and friends made $1.25 billion that day; yet over the next seven months they watched as the ABX rallied with the subprime market and much of the February gains evaporated as the stock market set an all-time high. Then cliff-diving. The SEC now alleges that GS chose the chump Paulson in the winter of 2007 because it knew he was a genius for picking the shorts. Nah. They were guessing; they were prying; they were sweating. My information is incomplete. Other banks did the same trade as Paulson and GS. More to come. The SEC seeks to punish the winners on the downside. Pull up a chair and watch the tenor sing. John Avlon notes correctly that the SEC vote to move against GS and Fabulous Fab was a partisan 3-to-2. Not a good beginning. Partisan games make this opera even richer. Mark Twain again: Man is the only creature who bites the hand that feeds him - as witness Congress biting the banks.
Brief
February 2007 Paulson Moment
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Political? No question. "Punish winners on the downside?" Most definitely. But why split hairs? Punish winners, period. By then, the whole mortgage market had been polluted. Pretty paper printed, with no value behind it. All those freebee mortgages simply were never going to get paid. They should have been trashed and written off as welfare expense immediately.
Instead, all those young geniuses from university economics departments were recruited to obfuscate the fact; to design paper, in effect; with the intent of prolonging the fiction that these securities held any semblance of value. All the while, everyone was fully aware that 'value' was the only essential ingredient that was missing. They then proceeded to contrive a path so complex, no one could trace it back precisely - certainly not to the government's meddling in the system that had effectively sucked all the value out of the mortgage market in the first place.
Once the ploy had been exposed - when investors demanded their money - the system collapsed. Now the race is on to assign blame. The effort to maintain the fiction of ‘valuable’ securities no longer wins applause. These (securities) were then labeled 'toxic' [a misnomer - nothing toxic about them; 'toxic' implies they were imbued with some secret (value) ingredient when, in fact, they were simply ‘valueless’ as they had always been and would always be].
A similar fate can be expected to befall the dollar as the national debt rises so high that no amount of taxes – even generations out - will suffice to offset it. Reminds of the mob that, after having stripped the victim (value) of his valuables, fits him with cement shoes and pushes him off the bridge. The Good Samaritan sees what's happening, jumps in the water and tries to save the victim - but fails. The Good Samaritan then is blamed for the victim’s demise - while the mob continues to operate as before.
http://peterkoelliker.blogspot.com/
one delicious detail from the discussion last night. deutsche bank was structuring similar synthetic cdo's and is also under investigation.
"Angela, hey. This is Barry. I've got some good news and some bad news. Good news first? Ok.
"Our guys at the SEC are going to send you all the details on Goldman ... I knew you'd be pleased.
"Now for the bad news. They'll also send you the package on Deutsche Bank."
i do disagree with peter though many share his view.
cds and some synthetics built from them are valuable and not so difficult to understand. cds make it possible to go short without the complication of borrowing a security and without the risk of having to buy-in in a potentially cornered market.
however as you begin constructing portfolios of portfolios of portfolios understanding is rapidly left behind. lloyd blankfein told a hearing over a year ago that he thought some products had been made that were more complex than anyone knew how to manage.
further as you try to mark to market synthetic positions of instruments that trade rarely or never you introduce a chain of analogy and speculative reasoning that replaces fact with fancy. this is not only toxic, it creates a vector that spreads infection across the whole market.
mark to market (FAS 157) went into effect for entities with fiscal years beginning after November 15, 2007. ring a bell?
yes mark to market helped expose the sludge in the mortgage market. but it went further. it spread the contagion across all fixed income markets creating a feedback loop hard wired into the regulatory accounting system that amplified the crisis into a catastrophe. that this catastrophe was repaired and bailout monies repaid in less than a year is an indication that for those with non-mortgage losses the losses were largely accounting losses rather than real.
HOW DOES IT HELP THE LITTLE GUY TO SPEND MILLIONS OF HIS TAXPAYER DOLLARS ON A LAWSUIT TO PROTECT ONE MULTI- BILLION BANK FROM ANOTHER?
It doesn't. It's being done to help the Dems in November. It's being done to provide a reason for hedge funds to be regulated. It's being done so that when hedge funds are regulated, derivatives will have to be traded on an exchange. What exchange, you ask? Why, the Chicago Board of Trade, of course. Damn. That Chicago gang in Washington is good. Not good for business. But good at getting what they want for themselves and their friends.
Consider this: Because of the sub prime mess, it was not the unregulated hedge funds that needed to be bailed out by Washington. It was the regulated banks.