Deutsche Bank and CDO disclosure
John Carney and Teri Buhl have a tantalizing story up at the Atlantic today:
Traders at Deutsche Bank sold similar collateralized debt obligations (CDOs) — built from credit protection on a portfolio of mortgage-backed securities selected in consultation with hedge fund manager John Paulson — to the German bank. And like Goldman, Deutsche Bank didn’t reveal Paulson’s role in the construction of the CDOs.
Two questions I think are key here. First, was there a Magnetar-style disclosure that the sponsor of the deal might have a net short position in the deal? And second, was there a nominally-independent CDO manager, like ACA, which claimed to have chosen the entire portfolio with an eye to making it high quality, but who in fact was severely constrained by the input of Paulson?
The key problem with the Abacus deal was not so much that Goldman didn’t disclose Paulson’s name. It’s that Goldman didn’t disclose the role of the sponsor to the nominally-independent CDO manager. And given that the manager was also an investor in the deal, that’s a significant omission when it comes to disclosure.