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By: slhawley Sun, 11 Dec 2011 16:53:32 +0000 @AeinCH
You assume wrong, very wrong. I assume life has not taught you about bad timing. Or the folly of knee jerk assumptions. May your lucky life continue.

By: Danny_Black Fri, 21 Oct 2011 18:03:05 +0000 mcgriffen, after a bubble things are “obvious”. The ex CEO of Morgan Stanley tried to sit out the bubble. He was sacked in 2005 after 4 years of “underperformance” relative to BSC and LEH ( no joke, the comparison was explicitly made ). The new CEO in 2006 to dive headfirst into credit and mortgages.

Countrywide jumped in after shareholders pushed Mozilo after having his lunch eaten by more “aggressive” competitors.

cdo managers were “geniuses” etc.

By: Danny_Black Fri, 21 Oct 2011 14:01:57 +0000 AEinCH, I am 99.9999999999999999999% certain she is a property speculator as well but there is a small chance she is a high high-net worth individual.

Again, with respect to the buysides, I think it is clear my sympathy is not with people who rolled the dice and lost. I am utterly utterly amazed that these guys not only get off scot-free but are now “victims”, especially when the biggest one of them – Frannie – is the real cost to the taxpayer from the bailout.

By: McGriffen Fri, 21 Oct 2011 13:57:47 +0000 @DB: your points above are well listed.

Those sellers, of their own will, invested heavily in these very same MBS and structured finance product lines: traders, sales persons, analysts, and quantitative engineers. A few of here know full well those people don’t come cheaply either.

No one invests that amount of money into human capital to distribute these products, without expecting a reasonable return. And lest one forgets, a few of these companies thought it a GOOD MOVE to buy a Saxon mortgage or First Franklin mortgage. Pre-crisis.

why buy a mortgage company, or mortgage servicer, if you don’t believe in controlling the levers of production & origination & servicing.

By: AEinCH Thu, 20 Oct 2011 20:28:17 +0000 Danny, let’s not be silly. She couldn’t possibly have invested in these products because synthetic CDOs were not sold to individuals, and US pension funds etc were not eligible to purchase them. The ‘victims’ in this case were dumb european fund managers who thought they were getting a free lunch. By and large, the losers here fit into category 2.) when they were buying *real* debt,. Abacus-type sideshows actually prevented them from lending irresponsibly to any *real* property developers. So in my view this outrage is completely incoherent, and basically just an excuse to smear Goldman (and not Paulson?) for the crime of facilitating a bet between two equally informed parties.

In short, if anyone is to blame for running up the property bubble, it is the BUYERS of Abacus-type debt, not sellers. And frankly, it is also property buyers like Seena Hawley, whose crime (leveraged speculation) was not victimless during the good years — ask any long-term renter .

Felix is unfortunately parroting the Wall-Street-ate-my-homework narrative promoted by sulking losers at ‘casino capitalism’ aka US real estate. This class may soon realise that Wall Street doesn’t have their money; to the extent their capital ever existed, it’s gone, and the SEC can’t sue it back into existence.

By: Setty Thu, 20 Oct 2011 13:40:09 +0000 Oh hei, I see you just posted on that. Teach me to post a comment a half-day after checking your new posts :)

By: Setty Thu, 20 Oct 2011 13:38:09 +0000 Getting away from Abacus in particular, and this whole flame war as well, I thought it was interesting that the SEC chose this moment to go after Citibank for one part of the behavior described in this sign. See: 214.htm

Citigroup to Pay $285 Million to Settle SEC Charges for Misleading Investors About CDO Tied to Housing Market
Former Citigroup Employee Separately Charged for His Role in Structuring Transaction…

By: Danny_Black Thu, 20 Oct 2011 10:40:26 +0000 McGriffen, at the risk of telling you something you already know, the idea that issuer pays model led to the AAA is at best an oversimplification. I would argue the other way round:

When credit risk was privileged in the 30s, it sort of made sense. There was little FX risk, little interest rate risk, there was little price risk because more than now people bought and held and coupons where fixed and basically the risk was you would not get paid. So truly AAA=nearly risk free.

Therefore a large number of investors – including the largest ones, pension funds – are constrained by regulation to invest in investment grade debt. Those investors are selected by their investors at the most every 3 years. So you are constrained by rating but need the highest possible yield. The rating is your “get out of jail free” card as an investor.

The rating agencies either publish their model or they have software that gives a tentative rating so when creating the new CDO you just pump the replines into the model and see if you comes out AAA or AA. If not you throw it away. Eventually you get the yield you want subject to the constraint of the rating. That is why most of the tranches sold on were AAA or AA, not some sinister ploy by agencies paid by banks.

Also the issues with the CDOs were not obvious ones when the rating models were published. Typically they consisted of two issues. Firstly, correlation between the loans went up. One of the issues of these models is that they assume either static correlations or some sort of random process to the correlation. The problem with that is the very process of putting previously diverse assets in the same investment makes a correlation between them. For example, there is no obvious correlation between Thailand and Korea except for the fact that in the mid 90s asian emerging market funds were popular and when there is an issue in Thailand then those funds find it easier to sell Korean assets than thai ones and because for end investors Asia is Asia. Secondly, the funding model of alot of the SIVs was based on short-term loans. Again regulation drove this model, because modulo some technical details any loans with a tenor of less than 365 days is considered “risk-free” and so not only can the banks lend at a lower rate but because they don’t have to put aside capital they can lend large amounts.

So rather than regulatory capture is it more a case of regulations distorting incentives.

For the record I think they should simply eliminate credit ratings, if people think the agencies analysis adds value then they can use it but it should not be a regulatory requirement.

By: Danny_Black Wed, 19 Oct 2011 21:56:33 +0000 Just double checked the prospectus and the a1 notes condition of sale was aaa rating. I assume that was the latest prospectus and as the bonds were sold that indeed they had an aaa rating.

Unless I misunderstand regulatory capture definition, this is more a case of what I was saying, ie that the regulation existed and the sole reason for the existence of these products was to comply with said regulation. Eliminate the privileged status of credit risk over others and this issue goes away.