No one could have predicted
Jacob Weisberg wrote
The assumption that the rating agencies knew their business, a key enabler of the subprime meltdown, is analogous to the view before the Iraq war that Saddam Hussein had WMD. There are a lot of people now who scoff about what an obvious fallacy that was and not many who can point to doubts expressed at the time. But even if Rubin had better understood the risks Citi traders were taking and been in a position to do something about it, he almost certainly would not have said, “sell the AAA-rated CDOs.” Nor would anyone else have.
When Weisberg writes “not many” he means “none of the guys I hang out with” which means “no one who counts” or “none of the cool kids.”
Via Brad DeLong who wrote “in addition to Robert Shiller and Dean Baker, three people who can point to doubts expressed at the time come to mind: Raghuram Rajan, Alan Greenspan, and me.
What are we, chopped liver?”
But that’s not 2 % of it. The set of nobodies who don’t count included majorities in the House and the Senate and George W Bush Jr.
In September 2006, Congress passed the Credit Rating Agency Reform Act, after hearings and investigations that began in the wake of the Enron meltdown. The measure gave authority to the Securities and Exchange Commission to designate, regulate and investigate rating companies.
The law also prohibits notching, the threat of unsolicited bad ratings unless an agency is hired to assess a security. It also requires the rating companies to disclose any potential conflicts of interest.
That is a law passed in congress tightening regulation of ratings agencies, because congress was concerned about conflicts of interests. Weisberg may have assumed that the ratings agencies knew what they were doing. Actually congress seems to have agreed, and decided that the ratings agencies knew they were cashing in their reputations as quick as they could.
But I mean who can keep track of every little bill signed into law.
Notice he is talking about any time when AAA CDOs still had yields close to treasuries, that is not just the 1990s, when Rubin was at Treasury, but most of the period (including September 2006) when he was at Citibank.
That oversight isn’t even the grossest intellectual error in the brief passage I quoted. From one sentence to the next “not many” becomes not “anyone.” Obviously there were people effectively shorting AAA CDOs by investing heavily in CDSs on AAA CDOs. One is named John Paulson who has been in the news a bit lately. Andrew Lahde and Michael Burry are two others. Weisberg’s claim “not have said, “sell the AAA-rated CDOs.” Nor would anyone else have.” Is false and anyone who has been paying any attention knows it.
Weisberg sees no difference between saying a probability is low and that it is zero. So if the probability that a financier picked at random sys “sell the AAA-rated CDOs” is low then it is zero. I have one bit of financial advice – don’t take financial advice from Jacob Weisberg. When talking about the financial crisis he assumes that low probability events never happen.
***Jacob Weisberg wrote
The assumption that the rating agencies knew their business, a key enabler of the subprime meltdown, is analogous to the view before the Iraq war that Saddam Hussein had WMD***
Well yeah, Weisberg is probably correct that ratings agencies and WMD are analagous. The problem is that everyone on the planet with half a brain knew damn well that Saddam Hussein had few or no WMDs and that credit agency ratings were largely bogus. The WMD thing is why George the Clueless and his british sidekick were unable to find many countries to sign up for the criminal assault on Iraq (which I fervently hope they will end up explaining to the International Criminal Court some day).
I doubt that anyone other than a few widows, orphans, and Norwegian villagers took credit ratings seriously. What the AAA rating meant is that retirement fund managers and others who were theoretically barred from gambling with the money they watch over were able to take a fling at earning higher returns by dabbling in risky investments mislabeled as safe. Anyone who seriously thinks that Rubin didn’t know full well that some (not all) AAA securities were risky really has a shaky grip on reality.
Weisberg appears to be a fool. Stockpile that information against future need. In case you are wondering who Jacob weisberg is, he is the ex editor of Slate, a wheel in the Washington Post organization and a columnist for the Financial Times and ‘frequent’ commentator for NPR. If you ask me, he should be downsized from those positions if he is unable to produce proof that his coffee was drugged the morning he wrote that crap, http://en.wikipedia.org/wiki/Jacob_Weisberg
Gasparion’s book (The Sellout) is the best of many good books explaining the nuts and bolts of how this happened and the management failures throughout the system.
Wall Street looks very, very bad. Rubin looks really bad.
I have far less of a problem with this than I do with the clowns who still deny what happened. I saw a post not long ago (James Pethokoukis – now at Reuters!!, cited approvingly at length at Newmark’s Door which talked about how the past 25 years of prosperity proved something or other Reagan’s wisdom. Weisberg at least recognizes that there was some sort of severe event not long ago from which the economy has not yet recovered. I don’t think its possible to communicate in any way with someone who is legally blind when it comes to hindsight.
Robert–Thanks for this post. I’m gradually starting to understand who was driving that truck that just ran us over. Cactus–Great comment. That wonderful phrase goes in my memory bank! Nancy O.
Any conversation regarding economics reporters who obfuscate and distract rather than inform must include the Atlantic’s disastrous Megan McArdle. I was listening to NPR’s on the Media this morning and caught her explaining why people probably didn’t really learn anything important from the GS hearings. She almost put me off my toast – I caught the piece halfway through and knew it was her before I even heard the wrap at the end.
For those who can stomach her pitiful attempt to misinform it’s here: http://www.onthemedia.org/transcripts/2010/04/30/02
As an economics journalist she’s a real waste of food.
Jacob Weisberg is not an economics reporter. He is a political journalist.
If one rating agency did downgrade the CDOs they would likely of lost business to another rating agency who would have given the same bonds a more favorable rating.
Who gives a crap if one of them did the right thing when the system would of marginalized an honest rating anyways?
I understand holding the rating agencies responsible for their own lax analysis but its nonsense to believe that this scenario would have played out any differently if just one rating agency was honest.
MG: “He is a political journalist.”
Which is to say that he is a propagandist. Political journalists associated with any of the major media outlets, including NPR, seem to march to the beat of the drummers in charge. it need not be a quid pro quo, write this and you’ll receive something good. It is a filtration system that hires and promotes those whose reporting best represents the point of view of the day. With an occasional exception this is the state of journalism to date. It is not just Fox News which presents such extreme absurdity that even the Weisbergs and McArdles look good in comparison. I suppose that the first amendment provides for freedom to obfuscate. Too bad.
This is unfortunately not a new phase in the history of political journalism. The NY Post is proud of its origins connecting it to A. Hamilton, but even that relationship was based on Hamilton’s need for a friendly and biased news outlet. Even Marat could wear the tag of journalist. A bit extreme perhaps, but at least his heart was in the right place. Too bad Ms Corday thought otherwise.
According to Bush/Republican/Free Market ideology, Ratings Agencies always produce accurate information.
The Bush administration could not have known that taking a chainsaw to bankster oversight would lead to a financial crisis. It is not predicted by their Free Market ideology. WhoCouldaKnowed????
i really don’t know what EMH has to do with the fundamentals, or the ratings agencies for that matter, or whatever risk management based on cash flows and defaults — because as we have seen the main risk of holding these instruments is liquidity. that would be the end of the story, except that they were held by (or as part of) leveraged entities which were frequently marked — and as such were very much subject to liquidity issues.
when the liquidity crisis hit it did not matter which instruments were correctly modeled and which were not.
I don’t think congress can pass a law outlawing bad economic forecast. Most forecasts are bad and get worse the further out in time you go. Look at the forecast for the stimulus bill, that was a bad forecast, it never held up forecasting employment and now ever after several quaters with positive growth we are not coming close to appoaching the forecasted number. Thus their correlation between economic growth and employment has failed to materialize. When forecast go bad it seems the logical thing to do is to not rely on them and rate them and weight them according to their accuracy (which is also hard to do since its almost impossible to distinguish between luck and skill).
Congress can’t regulate forecast since doing so would introduce bias and undermine the rating agencies independence. We are better served by allowing the rating agencies to develop reputations and judge them based on this criteria. A rating agency that showed their forecasts were superior would do well in the marketplace.
From one sentence to the next “not many” becomes not “anyone.” Obviously there were people effectively shorting AAA CDOs by investing heavily in CDSs on AAA CDOs. One is named John Paulson who has been in the news a bit lately.
Everyone on Wall Street knew that Paulson was a bear with regards to the mortage market. Since 2006, he even had two bear hedge funds dedicated to profiting on the demise of the the this market. Thus any due diligence on Paulson would indicate that Paulson would be the first to take a short position. I might not expect gandma and grandpa from Paducah Kansas to know this, but the German and Dutch banks, the two parties to the transactions should have and probably did.
Federal agencies overseeing Wall St have become like those of us who managed “too big to fail defense” contracts, for indispensable weapons that did not work for missions that were outdated in 1944.
Our motivation was not what is good for the US taxpayer, it became what is good for the folks we managed. This was partly due to revolving doors, partly due to the Stockholm syndrom, partly due to the politics of defense being a lucrative vote rending jobs program.
On Wall St the feds have had many of the same paving stones for their road to hades. They certainly could not flip the light switch on to expose the circular partying, their bosses could not stand the light and the revolving door and so the stockholm syndrome.
Big government is bad when it handles big money or responsibility for the benefit a very few players.
Which is not the same as big government handling lots of money for a large population of “players” like SS and Medicare.
The body politic has always been pillaged by the experienced, well connected, privileged few, not the fettered, exploited masses
Hand me the right change & I’ll crow.
There is some good reporting going on lately. The NY Times had two revealing articles today.
The first, a long piece regarding bankruptcy riches for those involved:
http://www.nytimes.com/2010/05/02/business/02workout.html?src=me&ref=business By NELSON D. SCHWARTZ and JULIE CRESWEL
What was it that Shakespeare said about the coming of the revolution and lawyers?
The second by Gretchen Morgenstern, as usual:
http://www.nytimes.com/2010/05/02/business/02gret.html?ref=business describing a little slight of hand in the telling of a tale.
Credit where credit is due.
That may be so, but what they did not know, according to news reports, is that Paulson had somerole in selecting the “assets” of the instruments being set up by GS. That is one part of the breach. And if GS was then buying CDS to insure itself against the default of the Abacus paper would the parties to the original sale not be wondering what was up? I’d be curious to know what conversations took place between GS staff and the staff of those German and Dutch banks before finalizing the contracts for the deal.
In this type of transaction, one or more parties needs to be long and one or more parties need to be short. When I trade, I don’t want my principal sharing my identity with the party who is on the other side of the trade, and if the other party’s identity was revealed to me, that would be enough for me to terminate my relationship with said principal.
Paulson wasn’t *Paulson* when Abacus was created. He was one of many small hedge fund managers that had a bearish view on housing. ABN Amro’s reaction to knowing he was on the other side of the trade, I imagine, would have been quite similar if you found out I was on the other side of a trade with you, Jack.
You would be correct.
When the Fed took LTCM apart, it was near to impossible to determine the amount and lines of leverage within it. One Fed expert estimated the leverage at 100:1. The same probably holds true for the Abacus Derivatives which were broken into 4 different parts; tranched RMBS, tranched CDO, and CDS on the RMBS and CDO, and Synthetic CDS all of which in the end were AAA rated. Interesting factoid, 93% of the AAA rated subprime mortage securities written in 2006 have been down graded to junk status.
The Paulson Abacus/GS scam raises questions:
· – Could investors have evaluated those underlying Abacus Risks as GS cllaims.
· – Derivatives such as CDO, CDS, and Synthetic CD serve a useful purpose?
· – Goldman’s historical reputation has been one of integrity and being client oriented. It claim that it had no need to alert investors is a different stance from what it has touted.
Investors (ACA) have claimed GS told them Paulson would take the long side rather than the short side. In itself and if true, GS reputation would have backed Paulson’s Abacus derivatives. Given all of this, the reputation of GS, the AAA ratings, the complexity of the Abacus derivatives (90 RMBS alone); I doubt seriously whether any iinvestor could make an informed decison without attempting to unravel the enire package which Goldman and Paulson were not going to do. Would you be willing to sort through 90 RMBS and the subsequent other parts of Abacus? Or do you believe in Goldman Sachs and the AAA ratings?
There is such a thing as integrity you know, something Goldman Sachs used as leverage to gain clients. People believed in Goldman Sachs because it had a history of integrity and being client oriented. Goldman Sachs has, or had, a reputation which it appears to have sacrificed in order to make a few backs on erroneously AAA rated derivatives sold to its clients. One AAA rated, these bacame safe havens for retirement funds, etc.
How deep is the rabbit hole for Goldman Sachs. Its rescue through the portals of AIG certainly gives us a hint of how deeply they were involved with junk derivatives. Interesting article on this topic which appears to tie together the loose ends: http://mostlyeconomics.wordpress.com/2010/04/30/understanding-the-goldman-abacus-issue/ “Understanding the Goldman Abacus Issue” Amoi […]
Gonna disagree with you on Paulson. Wharton here: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2481 does a rather nice analysis of the issue where Paulson went short and others went long based upon Goldman’s reputation. The allegation made was Goldman told investors Paulson was going long. This doesn’t sound to me like a small player. Paulson did walk away with $1 billion.
As for me, I was happy to buy a few hundred shares of Ford stock at <$1.90.
That Paulson made a $1bn is extreme hindsight bias.
If Paulson hadn’t known that ACA had a role in picking the mortgages to take the long side of the bet and his hedge fund went under as a result of instead losing the bet, would the SEC be making the same material misrepresentation claim?
Arguendo, assume the facts and circumstances changed from what allegedly happened, such that Paulson did go long and was intending to be long, but during the due dilligence process his research staff uncovered something scary about housing so that he wanted to be short. After paying $15MM to GS to set up Abacus, he didn’t want to reveal his changed intentions to GS, so he got short by purchasing CDS from somewhere other than GS, like Deutschebank or JP Morgan. Still a problem?
Quick googling – Paulson started his Credit Opportunities fund, designed to short sub-prime, with $150 million in assets in 2006. Abacus was launched at the beginning of 2007.
Apparently, you don’t know much about Jacob Weisberg.
I wasn’t overly concerned about his article, considering his previous working relationship with Rubin. But to try to lump him with economic journalists is a stretch.
Are we reading the same words? How did you come to interpret my words as trying “to lump him (Weisberg) with economic journalists…”? You said he is a political journalist. I simply concluded that you were correct and that puts Weisberg a major step below the integrity of even an economic journalist. I think the word I used was propagandist. Possibly a spinmeister who knows from whence the butter comes that he spreads on his bread. Me thinks that you are trying too hard to find fault with your fellow commentators.
But that is not what is reported to have been the case. A what if scenario is not relevant to the issue. It has been reported that Paulson had a key role in selelcting the assets of Abacus with the stated intention of “betting” against the CDO. That little detail is reported to have been left ouot of any other GS discussions with clients who would be long on Abacus. That is a far cry from having a role in selecting the underlying assets of a fund or instrument that you wanted to invest in in a positive manner. Granted that the European banks that took the positive side should have looked more closely at the “quality” of the derivative. There in lies the interest in the discussions they may have had with GS advisors. Was GS acting as an advisor? Or was GS simply producing and then selling a sow’s ear as though it were a silk purse? Was GS acting as an investment bank? Or was GS simply peddling purloined goods.
“In the Abacus deal, completed in April 2007, Paulson took the short side and two major investors took the long side: IKB, a large German bank, and ACA Capital Management, a New York-based investment firm. Paulson worked with ACA to choose the 90 underlying mortgage-backed securities. But there is dispute about Paulson’s exact role.”
Before I come out here and say something, I like to understand the issues. The Wharton School of business article appears to be unbiased. I haven’t been able to finds what you are claiming about Paulson. The issue still remains, did GS tell clients Paulson went long?
Jack – this is from Henry Blodget.
ACA also had a key role in selecting some of the securities and in fact, rejected some of those proposed by Paulson (without, alledgedly, knowing his intentions). Regardless, they knew someone was going to be short the CDO. In theory, Paulson could have intended to purchase the equity tranche and short all of the senior tranches. If the equity “survived” he could have won on that side of the bet because it could have been undervalued relative to the senior tranches and if the senior tranches were wiped out, he’d lose on his equity bet, but make more on the senior tranches going down.
As an aside, and as you seemingly know, many times “crappy” in the investment world, means “unloved” therefore having the potential for big returns on the long side.
For me the rating agencies proved they had lost the plot when the assigned, for a period of 30 days if memory serves, a AAA rating on icelandic banks, because they viewed them as key to the country, and that the central bank would not let them fail.
On that day, proof positive was given that rating agencies don’t have a clue.
Who is George W. Bush Jr.?
Weisberg sounds suspiciously as if he is doing the insider/serious-person/paid-pundit shuffle. If the people who pay you also continue to pay more people who got Iraq wrong than who got Iraq right, then you say “everybody agreed” Iraq had WMD. If ratings agencies are important to a number of important people, you say “not many people would have sold (AAA rated) CDOs”. In the view of Weisberg, a world in which one can be paid for opinions that are demonstrably wrong is the best of all possible worlds, because it is a world in which Weisberg can be paid.
Think of it this way — punditry is analogous to bond rating. The substantive value of the opinion (rating) doesn’t need to be high, as long as there are no culturally (institutionally) acceptable alternatives. The job, then, of the pundit (ratings agency) is to see to it that there are no culturally (institutionally) acceptable alternatives. Weisberg shows up at work every day asking himself “how do I keep this best of all possible worlds spinning on in its accustomed manner?” His answer? “Keep big, powerful interests who have influence over my employer happy.”
According to the B/R/FMI, ratings agencies produce irrelevant information. You already had complete information and a full knowledge of the risk and price associated with any asset. So did I. To the extent that we disagree, the price we arrive at in exchanging the asset papers over the problem. In this B/R/FMI world, bad ratings can’t actually do any harm.
m.jed’s argument is an argument which makes sense in a trade in which there is a simple asset or set of assets which can be evaluated against a market, and in which neither side has influence over the market-maker. Neither of these is true in the present case. Paulson influenced the shape of the product. The product was a portfolio of synthetic CDOs. There is no market analogous to the Treasury or stock market against which to measure synthetic CDO performance. Some recent work (out of Yale, I believe) shows that in portfolios of complex derivatives, looking at the portfolio after its creation simply won’t allow for understanding. You’ve got to put it together to know how it works. Goldman offered the product saying that some third party created it, a party with no interest in the trade. The fact is that Paulson influenced the assets that went into the portfolio. That fact was hidden from investors. The remaining question is whether the fact is material. Goldman is arguing that a falling market is all that is needed to explain losses. It isn’t. The extent of losses matters, and some assets lost more value than others. Paulson gained more, investors lost more, if Paulson managed to pick assets which lost more value than others of similar “rated” risk profile.
ACA was marketed as having put together the portfolio, they had an interest in the trade (to the long side) and it looks like they had a significant role in determining what went into it.
From the SEC complaint:
“On January 9, 2007, GS&Co sent an email to ACA with the subject line, “Paulson Portfolio.” Attached to the email was a list of 123 2006 RMBS rated Baa2. On January 9, 2007, ACA performed an “overlap analysis” and determined that it previously had purchased 62 of the 123 RMBS on Paulson’s list at the same or lower ratings.. . .”
“On January 22, 2007, ACA sent an email to Tourre and others at GS&Co with the subject line, “Paulson Portfolio 1-22-10.xls.” The text of the email began, “Attached please find a worksheet with 86 sub-prime mortgage positions that we would recommend taking exposure to synthetically. Of the 123 names that were originally submitted to us for review, we have included only 55.””
“On February 5, 2007, Paulson sent an email to ACA, with a copy to Tourre, deleting eight RMBS recommended by ACA, leaving the rest, and stating that Tourre agreed that 92 bonds were a sufficient portfolio.”
“On February 5, 2007, an internal ACA email asked, “Attached is the revised portfolio that Paulson would like us to commit to – all names are at the Baa2 level. The final portfolio will have between 80 and these 92 names. Are ‘we’ ok to say yes on this portfolio?” The response was, “Looks good to me. Did [Paulson] give a reason why they kicked out all the Wells [Fargo] deals?” Wells Fargo was generally perceived as one of the higher-quality subprime loan originators.”
I think that invading Iraq would have been even more catastrophic if there had been WMD. We know the US/UK forces didn’t secure sites full of explosives. I think if there had been WMD in Iraq terrorists would have gotten their hands on them and used them. I believed that there were chemical and biological weapons in Iraq. That was one of the main reasons I thought invading was a terrible idea. the invasion was a disaster even without WMD but it would have been a worse disaster if there had been WMD. In contrast the costs of leaving Saddam Hussein alone would not have been greater if he had weapons that he didn’t dare use or give to terrorists.
Anyway, I thought there were WMD in Iraq and that caused me to be even more opposed to the invasion than I was when I found out there weren’t WMD in Iraq.
There was an insane consensus among the US elite that it was better to invade than to allow Saddam Hussein to keep a kilo of nitrogen mustard. The absence of WMD has allowed people not to ask why most other people (including just about everyone not in the USA) thought that view was crazy.
The puzzle isn’t that ratings went all wrong in the 21st century. The puzzle is that they were so useful in the 20th century. Ratings of corporate bonds are extremely useful predictors of default. What was right with the incentives back then ?
Personally I think http://www.angrybearblog.com/2008/11/credit-rating-game.html
that the problem is that the ratings agencies could decide if the whole CDO of RMBS market existed or not. This is quite different from the risk of losing business to another agency.
The last paragraph does not follow from the first. If an instrument is correctly modeled its price and liquidity are correctly modeled. I think you mean to claim that it did not matter whcih instruments had cash flows and defaults which were correctly modeled.
I also think that claim was overstated. My understanding is that hedge fund managers who made huge amounts of money all looked at the underlying assets in CDOs. The read prospectuses. The fundamental value of an RMBS based on liars loans was lower than that of one based on documented income loans. The incorrectly modeled cash flows and defaults created profit opportunities. Notably, raters were forced to rate without spinning the mortgage tapes, that is, without using all available information (I forget where I read that but it was a first person account).
Yes there was overshooting in the panic. That explains huge profits of deep pocketed firms like Berkshire Hathaway (doesn’t Buffett ever get bored being right all the time) and Goldman Sacks. But the crash wasn’t a pure irrational panic. The underlying cash flows were modeled poorly.
Notably, cash flows and default probabilities were modeled in large part based on CDS prices assuming a super strong version of the EMH in which CDSs are infinitely liquid. I call that Schizzo finance where people think they can earn extraordinary risk adjusted returns, because they switch the EMH on and off. Off so they think it is possible to beat the market and then on when they design a hedging strategy. Bassically risk management was *not* based on actual data on cash flows and defaults. It was based on CDS prices and the assumption that CDSs are optimally priced given a jointly normal underlying latant variable. Which assumption has no basis in the data or in any theory or in anything.
People who looked at the sort of data which ratings agencies use to rate corporate bonds made a killing.
Cardiff the marketplace is not magic. Firms do well in the marketplace if they serve their customers. The customers of ratings agencies are issuers of securities. They want high ratings not accurate ratings.
The ratings agencies worked very well for decades. This was not because they were competeing. All three major agencies were paid to rate almost all corporate bonds. The customers didn’t choose one agency. They chose all three, because the fees were tiny.
This was not the market forcing the ratings agencies to do their jobs. This was the ratings agencies just doing it mostly because it wasn’t very hard. When they began to compete (a little) the quality of the ratings declined. The reason is that their customers are the asset issues and not investors. But even in the past decade the most instruments were rated by both Moody’s and S&P (and about half by Fitch). If customers buy all that can be bought from two firms, those firms are not competing. That’s the way it still mostly is.
The ratings are not valuable only because people believe them, they are valuable because regulations explicitely refer to the ratings. To semi-privatize the regulatory process by allowing 3 private firms to decide how much capital banks must have and which assets pension funds may buy is not laissez faire. The only reason to do such a crazy thing is that it worked excellently for decades without competition and without government oversight but only so long as they stuck to rating full faith and credit bonds.
They were a goose that laid golden eggs and what we have on our hands is a dead goose.
It is odd to suggest that Rubin used his position in Washington to get a good job on Wall Street. He had the best job on Wall Street and left it to chair the NEC. He left just when GS was going public and converted his chairman’s share to bonds. In doing that he knowlingly tossed away a huge capital gain in order to be able to do what he really wanted to do — argue that rich people should be taxed more.
Not everyone is motivated by Greed. Rubin is so rich that no sane person would feel the need to get any more money. Rubin is clearly sane in that sense. He’s not after money.
So why did he accept the Citibank position ? Well hell $ 100 million for doing almost no work is pretty damn tempting even to the non greedy. I’m quite sure he refused to work again as an executive. He’s a very strange and interesting case. However, just because he is so unusual, learning about him tells us little about anyone else. So why bother.
m.jed I’m not expert on the case, but I think it is agreed that GS said the Paulson “sponsored” abacus and did not say, in so many words, that he took a long position.
The problem is that the concept of sponsoring a CDO is fairly new and it isn’t clear if the verb has a specific meaning in that context. Some assert that to sponsor a CDO is to hold the equity tranche, so GS falsely asserted that Paulson held the equity tranche. Others disagree. I only know that in the pro-publica article on Magnetar the hard working journalists whose names I forget said that the sponsor of a CDO was the entity which held the equity tranche. So what. Jurisprudence is like law but journalism sure isn’t. Some poor judge is going to have to decide what the word means. From then on, the precedent will establish a meaning.
Of course I might be wrong about the facts of the case, but I think the meaning of the phrase “to sponsor a CDO” is central to the case.
Pre-repeal there already was an established relationship between Weill and Rubin and it has been suggested Weill was his mentor. The Citi salary was $15 million/year, stock options, salary incentives, and personnal use of Citi’s planes. I do not believe it is odd at all as this was not an arm’s length transaction between two strangers. Rubins departure from the Treasury to go to Citi after the repeal of the restrictive Glass-Steagall, which would make the combining of Travellers and Citi impossible and illegal, certainly raises a cloud of suspicion as to his motives for doing so.
Sorry Robert, it doesn’t pass the smell test.
Could be wrong, but I don’t think there’s a coefficient for liquidity in any theory of EMH.
Paulson issued a statement that his firm was not a sponsor of the CDO. Whether ABACUS was marketed as Paulson owning the equity tranche, again, I’m not clear on the relevance. As Jack stated above, he is (was?) long Ford equity. For all we know he could be short their senior debt as a hedge. Assuming similar facts & circmustances, if Jack recommended I buy Ford equity without disclosing he was or intended to short their debt, is that material misrepresentation? What if he didn’t intend to short their debt when he bought Ford, but saw a mispricing a day, a week, a month later and then found it more efficient to short the debt than to sell the equity?
I ain’t “Jack” and I did buy Ford under $1.90/share . . . Jack didn’t,
If you are regarded as an expert in the field of stock trades, have advertised yourself as an expert in this arena as GS has for years, and have portrayed one’s self as being client oriented; than indeed if you or GS has given me information that may cause me to invest based upon your prior recommendations, a misrepresntation may indeed cause me to over look criteria I may have considered if it were someone else. If GS said Paulson went long and based upon their history of being client oriented, etc.; I, and others, would believe their advise. At worst it is fraud and collusion and at best it is an unethical behavior on the part of GS. In any case, GS will lose and they should for gaming the system.
Did you expect Paulson to admit he was in cahoots with GS?
GS acts in multiple roles, and sometimes those roles are unclear posing conflicts, but in this case, their role was pretty clear. GS was an underwriter of the deal – they put it together with the intention of selling it. They were not an advisor.
Of course, over time they develop a reputation of underwriting “good deals” or not, with “good” usually meaning they work for the longs. This is true in the IPO issuance market too. Of course “good” for the buyers of the IPO usually means that the seller of the IPO didn’t get the best price available to them.
There’s no reason that GS, as the underwriter, has a greater obligation to ensure the deal works for those going long the deal as those going short.
You are missing the point which is:
“What would a reasonable man expect” would happen from a firm that represents itself as client oriented.
Surely, you understand the reasonable man concept of law which is the basis for the UCC. If they said it and a jury believes they said it, even if they didn’t, they are screwed. It doesn’t matter if they did or not. That they approach this precipice may be their undoing. They took the risk and they are NOT free and clear. In the end. why take the risk?
I understand your point – but “what would a resonable man expect” is different when interacting with an advisor versus an intermediary. And besides Paulson was a client too.
In other intermediary businesses, real estate or insurance agents, for example, in most states, there is a legal delineation between “broker” and “agent”. A broker has a fiduciary obligation to the client, whereas an agent is relieved of this obligation.
Let’s take a different example. Goldman markets a big block trade of stock – it’s in their inventory because they posted principal capital to service the need of a client who wanted to sell it. Having it in inventory, they now want to sell it. Do they have an obligation to inform me that their risk models are telling them consumer spending is about to take a precipitous decline? Would your “reasonable man” expect them to?
Now contrast this with Goldman as a research firm on an IPO of a stock that they’re not receiving underwriting fees for and thus have no conflict. In this role they’re an advisor and would want to inform me using their judgment whether they think the stock should be bought or not.