Comments on: Goldman’s unwanted super-senior position http://blogs.reuters.com/felix-salmon/2010/04/21/goldmans-unwanted-super-senior-position/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Sandrew http://blogs.reuters.com/felix-salmon/2010/04/21/goldmans-unwanted-super-senior-position/comment-page-1/#comment-13815 Wed, 21 Apr 2010 18:57:38 +0000 http://blogs.reuters.com/felix-salmon/?p=3502#comment-13815 What’s your source on that, Felix? I’ve been trying to work out the who-held-what-when questions since Monday, and I’ve yet to see anything compelling to suggest that Paulson managed to short (i.e. buy protection on) the *entire* capital structure (0-100) of the ABACUS 2007-AC1 reference portfolio.

Paulson probably would have loved to have purchased protection on the whole thing, but Goldman wouldn’t likely sell it to them unless it had someone on the other side on whom to offload the risk. From what I can glean from reports/allegations/defense docs/bloomberg, the ABACUS deal only had $192M of securities issued (to only IKB for $150M and ACA for $42M). I believe these securities represent what is effectively a 34.4%-45% tranche on a $1.818B reference portfolio. Incremental to this (but never passing-through the ABACUS legal entity) there was a supersenior (50-100) trade between GS and ACA/ABN to the tune of $909B. (Note: this is where I get $1.818B = $909Bx2). Of course, Goldman sold all of that protection (and a little bit more) to Paulson.

If you’re wondering where all the lower tranches (the 0-34% first-loss risks) went, stop wondering. If my suspicious are correct, it never existed. The lower tranches referred to in the pitchbook never found a way to market because Goldman couldn’t find any investors. Now, mechanically, there are a number of ways to accomplish this feat; one way is for Goldman to enter into a single-tranche bespoke basket default swap facing the ABACUS SPV (in the first instance, but this was ultimately backed-to-backed with Paulson). A single-tranche bespoke basket default swap is basically a customized tranche (e.g. 34.4% to 45%) of an unfunded synthetic CDO all wrapped up in an ISDA-friendly derivative contract. It’s a bilateral derivative agreement with a specified reference portfolio (usually it just points to the deal docs for the notes) and attachment/detachment points.

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By: oriduck http://blogs.reuters.com/felix-salmon/2010/04/21/goldmans-unwanted-super-senior-position/comment-page-1/#comment-13800 Wed, 21 Apr 2010 15:20:29 +0000 http://blogs.reuters.com/felix-salmon/?p=3502#comment-13800 mr salmon — you’re incorrect. the structure of the deal is as follows. Goldman is Abacus’ counterparty on the CDS for Abacus’ underlying portfolio. Abacuse provides Goldman with protection on the underlying reference entities, and Goldman pays Abacus for that. Paulson comes in once the CDO has been created, and obtains protection on the resulting CDO tranches. why all this elaborate effort, when he could have just obtained CDS on the reference entities directly? because it was far more expensive to do that — the reference entities were BBB-rated. instead, the CDO’s value entirely depends on those BBB-rated underlying tranches, but the CDO tranches get higher ratings. so Paulson has to pay less for a CDS on a CDO AAA tranche (even though that tranche depends for its value on all those BBB tranches) than he would have to pay for CDS on the RMBS BBB tranches themselves. whatever else it may have been, it was really, really smart.

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By: Felix Salmon http://blogs.reuters.com/felix-salmon/2010/04/21/goldmans-unwanted-super-senior-position/comment-page-1/#comment-13796 Wed, 21 Apr 2010 14:01:59 +0000 http://blogs.reuters.com/felix-salmon/?p=3502#comment-13796 Sandrew, Paulson didn’t buy protection on Abacus. He bought protection on a bunch of Reference Securities, which would pay out $1 billion or so if they all went to zero. The first loss there, the first payments of 0-$90 million, were equity, then the next ones were single-A, etc. The super-senior exposure always existed, the only question was who ultimately had it.

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By: Sandrew http://blogs.reuters.com/felix-salmon/2010/04/21/goldmans-unwanted-super-senior-position/comment-page-1/#comment-13794 Wed, 21 Apr 2010 13:20:04 +0000 http://blogs.reuters.com/felix-salmon/?p=3502#comment-13794 Do we know when Paulson’s short of the 45-100 tranche occurred? Note that this piece of Paulson’s trade doesn’t appear to have been part of the ABACUS structure per se (though it is surely related, as they’re both connected to Paulson’s reverse inquiry to purchase protection on senior tranches of a subprime mezzanine backed CDO). That is, as far as I can tell, Goldman never purchased protection on the 45-100 tranche from ABACUS 2007-AC1, since I imagine no one was willing to fund this large, low-yielding tranche. I was working from the presumption that the ACA/ABN 50-100 trade occurred concurrently with the Paulson 45-100 trade. If the timing was off, this indeed would go a long way to helping explain how Goldman retained the strange 45-50 semi-supersenior tranchelet.

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By: Greycap http://blogs.reuters.com/felix-salmon/2010/04/21/goldmans-unwanted-super-senior-position/comment-page-1/#comment-13787 Wed, 21 Apr 2010 11:13:07 +0000 http://blogs.reuters.com/felix-salmon/?p=3502#comment-13787 @KidDynamite, 90mm seems to be just the headline number, what they lost on the tranche. As you say, even if the desk didn’t hedge the position, the firm surely had some sort of hedge on. But the biggest mitigant would have been the large first-profit position they had as deal arranger.

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By: mister_x http://blogs.reuters.com/felix-salmon/2010/04/21/goldmans-unwanted-super-senior-position/comment-page-1/#comment-13780 Wed, 21 Apr 2010 06:05:44 +0000 http://blogs.reuters.com/felix-salmon/?p=3502#comment-13780 What was that odd bit about ABN AMRO paying 27mil to GS for insuring AcA’s credit risk, if I recall correctly? I never understood that part.

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By: tja3 http://blogs.reuters.com/felix-salmon/2010/04/21/goldmans-unwanted-super-senior-position/comment-page-1/#comment-13772 Wed, 21 Apr 2010 02:50:22 +0000 http://blogs.reuters.com/felix-salmon/?p=3502#comment-13772 Blankfein should be more careful with statements like that. That rah-rah stuff may rally the troops now, but if some of it turns out to be not entirely true – like they “assumed” risk in the deal, rather than got stuck with an unsold stub – and the team will turn on him. This is a high stakes game, internally and externally. I’ve seen first hand this sort of thing blow up on CEOs before – shading the truth to pump people up, create an us vs. them environment. It’s ugly when the real truth comes out from an outside source.

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By: DanHess http://blogs.reuters.com/felix-salmon/2010/04/21/goldmans-unwanted-super-senior-position/comment-page-1/#comment-13771 Wed, 21 Apr 2010 02:41:57 +0000 http://blogs.reuters.com/felix-salmon/?p=3502#comment-13771 Apparently Fabulous Fab earned a 2 million at the end of the year. Did Goldman him reward him with a giant bonus for losing the firm 90 million? Unlikely! That statement about losing 90 million looks like another giant present lie!

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By: KidDynamite http://blogs.reuters.com/felix-salmon/2010/04/21/goldmans-unwanted-super-senior-position/comment-page-1/#comment-13767 Wed, 21 Apr 2010 00:59:35 +0000 http://blogs.reuters.com/felix-salmon/?p=3502#comment-13767 so you think they actually lost money on this trade, then? and not that they’re mincing words, and saying they lost this $90mm, but actually made that up by hedging the tranche with CDS that’s technically not part of this CDO transaction?

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