Comments on: Citi’s Abacus http://blogs.reuters.com/felix-salmon/2011/10/20/citis-abacus/ 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: Danny_Black http://blogs.reuters.com/felix-salmon/2011/10/20/citis-abacus/comment-page-1/#comment-32102 Thu, 20 Oct 2011 21:54:08 +0000 http://blogs.reuters.com/felix-salmon/?p=10614#comment-32102 simplemind1, also remember buy side are investment advisors. As such they have a legal fiduciary responsibility to the clients. Market makers do not.

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By: AEinCH http://blogs.reuters.com/felix-salmon/2011/10/20/citis-abacus/comment-page-1/#comment-32095 Thu, 20 Oct 2011 20:26:10 +0000 http://blogs.reuters.com/felix-salmon/?p=10614#comment-32095 “It’s wrong to create a mortgage-backed security filled with loans you know are going to fail ”
Nobody knew the loans were going to fail. Mostly, people thought enough of them would NOT fail that they were assigned a AAA rating. It is strange to see contrarian guesswork portrayed here as clairvoyance, but hey it’s your jingle.

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.

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By: simplemind1 http://blogs.reuters.com/felix-salmon/2011/10/20/citis-abacus/comment-page-1/#comment-32093 Thu, 20 Oct 2011 20:00:05 +0000 http://blogs.reuters.com/felix-salmon/?p=10614#comment-32093 Pessimist 2 – You have it exactly right.

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?

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By: najdorf http://blogs.reuters.com/felix-salmon/2011/10/20/citis-abacus/comment-page-1/#comment-32085 Thu, 20 Oct 2011 16:46:09 +0000 http://blogs.reuters.com/felix-salmon/?p=10614#comment-32085 Danny, you know enough to know that on net, even after the lawsuits and arbitrations, the buy-side got slaughtered in the structured products marketplace. You can call them idiots for it (I would agree), but it was hardly a one-way bet in their favor.

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2011/10/20/citis-abacus/comment-page-1/#comment-32083 Thu, 20 Oct 2011 15:15:11 +0000 http://blogs.reuters.com/felix-salmon/?p=10614#comment-32083 pessimist2, this is the one way bet world of the buy side. Make a bet like this, if it pays off good if it blows up run to the courts. Hands up who thinks investors are going to be motivated to do proper due diligence in the next bubble.

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.

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2011/10/20/citis-abacus/comment-page-1/#comment-32082 Thu, 20 Oct 2011 15:10:35 +0000 http://blogs.reuters.com/felix-salmon/?p=10614#comment-32082 pessimist2, this is the one way bet world of the buy side. Make a bet like this, if it pays off good if it blows up run to the courts. Hands up who thinks investors are going to be motivated to do proper due diligence in the next bubble.

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

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By: pessimist2 http://blogs.reuters.com/felix-salmon/2011/10/20/citis-abacus/comment-page-1/#comment-32081 Thu, 20 Oct 2011 14:42:23 +0000 http://blogs.reuters.com/felix-salmon/?p=10614#comment-32081 The CDO managers who were long this deal knew that SOMEONE was on the other side of this deal. The positions were synthetic, there wasn’t a natural demand for long investors like bonds. The product is a pure bet. Whether the person betting against the longs was Citi or someone else shouldn’t matter.

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.

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