As to ‘naked short prop trade’ — thisis also what buyers of synthetic securities are also assuming when they buy this stuff. If it were not a prop trade, the interest rate would be the risk free rate of return. Moreover *there is no derivative product traded* where the seller has not been involved in some way in selecting the underlier. A short is required for all zero sum products of this kind, or the product cannot be constructed at all.
maybe it’s fun to watch rich bankers hauled into court for the crime of calling the market correctly. But it isn’t going to make anyone’s house worth more. Synthetic CDOs didn’t cause any bubbles. No synthetic houses were repossessed in their wake. Apart from Ambac shareholders or creditors , the non-gambling public lost no money through this product. Nor did any syth-CDO make default of the underliying bonds more likely, any more than weather derivatives make rain appear or the sun shine.

There would be no deal at all without someone who was betting that the underlying would default. The identity of who is short the underlying and who proposed the underlying was irrelevant. “Investors” were writing mortgage insurance.

There was no doubt that both the buyers and sellers got an underlying portfolio with the characteristics they wanted. There was no confusion or misrepresentation about what went into the reference portfolio.

Did anyone for a minute think the selection agent was charged with a duty to select a portfolio that wouldn’t collapse?

It is possible that the buyers did a competent credit analysis and, as it happened, got it wrong. More likely, they simply checked a ratings box and perhaps had some (conscious?) faith in correlation models. They choose not to step in front of their own management groupthink trains. This was (pick one or more of the following) – stupid, ignorant, wilfully blind, indifferent, or incompetent.

Where’s the indignation over the conduct of the buy side? Why not flow any recovery through to buy-side shareholders?

In this case we don’t even have a company that made a ton going short the Market a la Paulson.

Also if, as you claim, the underlings were “known in the Market to be particularly awful” did csac make a leveraged bet on them? Don’t you think the sec should be going after lazy, incompetent buysiders who DO have a fiduciary responsibility to their investors.

In this case we don’t even have a company that made a ton going short the Market a la Paulson.

Many of the the longs didn’t bother to look at the underlying “bonds” in the deal. Those that did bother to look at the underlyings still bought into it. Why such gross incompetence should be rewarded with a refund is beyond me.