Mclathy investigation on Goldman CDO bets..

http://www.nakedcapitalism.com/2009/11/how-goldman-secretly-bet-on-the-u-s-housing-crash-aig-as-bagholder-watch.html

http://online.wsj.com/article/SB123734123180365061.html

The transactions worked like this: Investment banks such as Goldman Sachs Group Inc. and Deutsche Bank sold financial instruments to hedge funds letting them bet that mortgage defaults would rise. These instruments were credit default swaps, a form of insurance that pays out in the event of a debt default.

It is not known which hedge funds made those bets with specific banks. However, several large funds made big, ultimately profitable, wagers that mortgage defaults would increase.

Many of the assets AIG insured were tied to subprime mortgages. The deterioration of those high-risk mortgages, along with AIG's own financial woes, forced the insurer to put up billions of dollars in collateral, mostly to the banks that were its trading partners. AIG sold protection on securities backed by physical assets, as well as on positions almost entirely backed by other financial bets.

Some of the U.S.-government exposure traces back to the hedge funds that spotted problems in the U.S. housing market in 2005. They wanted to "sell short" -- or bet against -- securities backed by mortgages to questionable borrowers. These hedge funds entered into trades with investment banks. The banks then used a complex set of financial maneuvers to pass on some of the risk of those trades to AIG and other insurers.

The transactions meant that AIG was wagering that the U.S. housing market would remain robust. With housing markets now in free fall, the hedge funds stand to collect money from their bank counterparties. AIG is, in turn, compensating the banks.

The banks that had sold credit default swaps to the hedge funds wanted to turn around and hedge their own risks. But finding that protection wasn't easy.

So at Deutsche, the German bank's securities arm created a handful of offshore companies known as collateralized debt obligations, or CDOs. These companies carried a series of exotic names, according to securities filings, mostly based around the moniker "START," short for STAtic ResidenTial CDO. They allowed Deutsche to neutralize its exposure to the hedge funds' bets by buying swaps from START on the same securities its clients were betting against.

START held assets from a hit parade of lenders closely linked to the subprime crisis, including Bear Stearns, Countrywide Financial and New Century Financial, according to documents reviewed by the Journal.

In 2005, Deutsche found a willing taker for a chunk of the mortgage risks held by START: AIG Financial Products. The derivatives arm of AIG agreed to pay out up to $1 billion under two of the START vehicles, if underlying assets deteriorated or the insurer's own credit rating fell below a certain threshold. AIG stood to earn a fraction of a penny each year for every dollar of protection it sold, according to securities filings, meaning it made less than $10 million annually on the $1 billion in insurance.

The START CDOs share some similarities with mortgage pools created by Goldman named "Abacus" and also insured by AIG Financial Products, according to people familiar with the matter.

These pools were made up of credit-default swaps tied to individual mortgage securities. AIG had to post collateral to Goldman when the assets dropped in value. Some of this money, too, could go to hedge-fund clients of Goldman.

Must see video...

http://online.wsj.com/article/SB123734123180365061.html#video%3DA571ED99-B862-4FA6-B552-96F64417AD16%26articleTabs%3Dvideo

I'm not sure where this thread is hopjng to go. GS has openly admitted they hedged their subprime portfolio - their CFO David Viniar spoke about this in successive conference calls over the last 2 years. It is common for banks to have more than one set of trading books - a customer facilitation book, which is the one where the mortgages would have ben created, held, and then traded, and a back, or proprietary book, which the bank - all banks, not just GS - uses to make bets on the same underlying markets on it's own account.

The only issue here is of a duty to disclose, and absent the quasi assertion in the Mclatchy video at the beginning of this thread, there has never been any allegation that I am aware of that GS had that duty to disclose. At least not in a legal sense. In a moral sense? yes, certainly. But so what?

this is a riversider thread. they go nowhere. endless conversation with itself.

The fact they needed top hop around the world, creating shell vehicles. The fact that the CDO wasn't a CDO but a hedge instrument for the benefit of Goldman(How many people really read the prospectus THEY SHOULD). The fact that Goldman thought they were hedged but weren't because their counter-party was broke. The fact that the tax payers covered the bad bet. U.s. tax payers made good on hedges to Goldman Sachs, who knew in 2005 that mortgage underwriting was beyond sloppy.

Liquid, Goldman didn't buy mono-line wrap on bonds they owned. They didn't place bet with counter-party using ABX or single security CDS. They literally went out and made a kitchen sink CDO using every name they wanted to ensure and sold it to AIG and most likely unsuspecting buyers.

Where I'm going with this, is that private placements should be banned or severely limited. This offering should've been fully public and SEC registered with the threat of lawyers suing their asses, keeping things honest. Banks like Goldman do their dirty work in the murky world of Private Placements and the Cayman Islands.

gs still alive by pau... but the question is for how long?

http://www.bloomberg.com/apps/news?pid=20601039&sid=aLllpEiqrgpQ

It turns out the decision to make the banks whole wasn’t AIG’s. It was made by the Federal Reserve Bank of New York, back when its president was the current U.S. Treasury secretary, Timothy Geithner, and its chairman was Goldman Sachs director Stephen Friedman. (Friedman resigned from the New York Fed in May, after the Wall Street Journal reported he had bought more than 50,000 shares of Goldman stock following AIG’s takeover.)

Before AIG was seized, its executives had been negotiating for months with the banks, trying to get them to accept discounts of as much as 40 cents on the dollar, Bloomberg reported, citing people familiar with the matter.

Taking Over

Then, late in the week of Nov. 3, the New York Fed took over the negotiations with the banks from AIG, together with the Treasury Department (at the time run by former Goldman boss Henry Paulson) and Chairman Ben Bernanke’s Federal Reserve Board. Less than a week later, the New York Fed instructed AIG to pay the counterparties in full, Bloomberg reported.

Judging by the result, you might think Geithner’s team was on the banks’ side, rather than AIG’s.

AIG wound up paying $32.5 billion to retire the swaps, $13 billion more than if it had paid, say, 60 cents on the dollar. The New York Fed also arranged to pay the banks $29.6 billion for collateralized-debt obligations backed by subprime mortgages and other loans, a tad less than half their face value. (The swaps were side bets by the banks that rose in value as the CDOs fell.)

columbiacounty ,you seem upset. Is it because aboutready wished us farewell? Conveniently timed the morning she was going on vacation?

She'll be back. She wished streeteasy farewell two years ago. Jsmith posted the link to her farewell, didn't you see it?

jsmith9005
about 11 hours ago
ignore this person
report abuse I think I've heard this before - http://streeteasy.com/nyc/talk/discussion/2496-the-sky-is-falling
Who wants to take an over/under that she posts again within 3 months?

aboutready
about 2 years ago
ignore this person
report abuse I'm sure a number of you will be happy to see my departure (although Spunky, I will truly miss you) but I have found a number of real estate blogs where I don't even feel compelled to post very often, because I agree generally with what's being said (and they're run by real estate brokers, no less.) I'm sure that nervous habit, or excessive boredom, will cause me to check in once in awhile (particularly about specific buildings I might be interested in), but generally I find you guys to be storks with your heads so stuck in the sand its gotta cause some major itching.

New York IS different, just not THAT much. Bye, and good luck.

You already did this one.