Bulls Make Money, Bears Make Money and Pigs ...

Go To The Slaughter House ... or do they?

Turns out that there were several sets of pigs in the story of the great depression of 2008 - the Street, the rating agencies, mortgage originators, Congress, the GSE's, law firms and the poor saps that were naive enough to buy into the single family cycle at the top and BTW, the only members of the list that went to the slaughter house.

This IS the last time that I'll summarize the reasons why the whole mess happened. Before I do though, wouldn't it be interesting to actually know if anyone, like one of the authors who have written about the causes, read this blog? We'll never know. Anyhow, here it is again; AVARICE! What? you can sum it up in one word? well, not quite but pretty close.

Here is what's in this blog and what can be built upon to set the stage for the meltdown:
1. The K Street Project opens Congress to a vast increase in donations and a shift in the way that legislation is drafted and by whom.
2. A paradigm sift in morality relating to the establishment of the rationality of the end justifies the means - Business Ethics, WMD, mushroom cloud, Carlyle Group & etc.
3. Off Balance Sheet Finance
4. Small Brains and smaller penises and the negative affect that one exerts on the other.
5. I've only alluded to this one but each and every American's right to get their shot at the big bucks.

Hold that thought. Here is my story - again - My shot was the CMO. It took several years and several machinations to refine to the point where it could be stolen from me and grown into the monster that it eventually became. In spite of that however, I still got my shot. With two friends, I started the first "private label" CMO issuer. We structured a deal with Lehman that would have paid me alone, $60 million 1984 dollars. When I brought the whole thing together, Lehman restructured the profit split and we told them, so long, (big mistake) thinking that we could replace them quickly. The market moved, I got one more chance with Morgan Stanley, but in the end, missed my shot at the easy bucks.

The point of the story is this this, we each deserve our shot. That it may be marginally illegal or built on a foundation of sand, matters little in modern US society.

Don't judge the people who did the Abacus deal - look at the name, do you know how to use an abacus? or even what one is? It wasn't supposed to be understood. That's the point. Paulson got his shot. Goldman did what investment banks are supposed to do ... they underwrote and distributed the deal and got paid a fee. The deal did what it was structured to do. It imploded and the firms that were naive or greedy enough to fund it lost money ... sorry.

Like most of what is written here, I've lost concentration.

Think about this though. We created a system and the system worked. It raised trillions of dollars for US and international housing finance. It worked so well that the players lost sight of where it was heading and, just like tulips and other financial fiascos, it fell apart. The problem, dear reader, lies in the system that created the atmosphere that enabled the whole mess to get out of hand.

Do you actually think that that same system is actually going to do anything about changing itself?

Too bad we can't legislate intelligence.

The Experts Are Off Again

So, now the whole mortgage mess was a fraud. The fraud is, that regulators as well as other facilitators, such as rating agencies and law firms stood aside and let the whole thing happen.

The fact of the matter is, the Street exists to make money. There was a ton of it to be made doing CMO's, CDO's and CDS'. The problem was, they went too far and broke the cardinal rule of doing these deals which should have been, find a buyer for the most toxic tranche of the deal before you step up and buy the collateral. I actually think that people at Lehman and Bear let themselves think that the housing market would continue to go up and lost sight of the fact that the crap that is sub-prime is exactly that ... crap, not worthy of a AAA rating regardless of over-callateralization. They bungled it when they became owners of the toxic tranches and kidded themselves into thinking that they could finance it until maturity.

Look back at my posts. 1. the rating agencies were way too naive, 2. Congress really dropped the ball by letting Fannie and Freddie (who should have known better) buy sub-prime and 3. the institutions who bought the paper had way too much faith in the system that had convinced itself that the single-family market was, in fact, one dimensional.

Now, I hope that Goldman will fight the SEC because its own complicity as well as that of the entire regulatory structure will be exposed for the incompetence that pervaded it.

More detail on the Goldman case

"Never give a sucker an even break"

Here is a quick summary from the Times:
Investor Devised a Bet Against Risky Loans
Three and half years ago, a New York hedge fund manager with a bearish view on the housing market was pounding the pavement on Wall Street. Eager to up his bets against subprime mortgages, the investor, John A. Paulson, canvassed firm after firm, looking for new ways to profit from home loans that he was sure would go sour. Only a few investment banks agreed to help him. One was Deutsche Bank. The other was the mighty Goldman Sachs. Paulson struck gold. His pre- science made him billions and transformed him into something of a rock star both on Wall Street and in Washington.
But now his brassy bets have thrust Paulson, 54, into an un- comfortable spotlight. On Friday, the S.E.C. filed a civil fraud suit against Goldman for neglecting to tell its customers that mort- gage investments they were buy ing consisted of pools of dubious loans that had been selected by Paulson because they were highly likely to fail. By betting against the pool of questionable mortgage bonds, Paulson made $1 billion when they collapsed just a few months later, the S.E.C. said. Investors who bought what regulators are essentially calling a pig in a poke lost the same amount. Although Paulson, 54, is not a defendant in the S.E.C. suit, the commission found that he was deeply involved in the creation of the investment, known as Abacus 2007-AC1.
After analyzing mortgages made on homes in Arizona, California, Florida and Nevada, Paulson went to Goldman to talk about how he could bet against those loans. He focused his analysis on adjustable rate loans taken out by borrowers with relatively low credit scores and turned up more than 100 loan pools that he considered vulnerable, the S.E.C. said.
Paulson then asked Goldman to put together a portfolio of these loan pools, or others like them that he could wager against. He paid $15 million to Goldman for creating and marketing the Abacus deal, according to the complaint.
One of a small cohort of money managers who saw the mortgage market in late 2006 as a bubble waiting to burst, Paulson capitalized on the opacity of mortgage related securities that Wall Street cobbled together and sold to clients. These instruments held thousands of mortgage loans that few investors analyzed.
GRETCHEN MORGENSON and LOUISE STORY - who, BTW broke this story months before the SEC even had the smallest clue as to what was going on.

And a quick editorial from the Times:

Months ago, The Times exposed Goldman Sachs’s practice of creating and selling mortgage-backed investments and then placing financial bets that those investments would fail. It wasn’t clear whether the practice was fraud. The Securities and Exchange Commission has now decided that it was.
Keep a close eye on this case. If it is handled correctly, it should finally answer the question of whether malfeasance was partly responsible for the financial meltdown.
Goldman insists that what it was doing was prudent risk management. In its annual report, it argued that “although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a "bet against our clients.’” The bank also insists that the investors who bought the structured vehicles were professionals who knew what they were doing. The S.E.C. is now charging just the opposite.
It accuses Goldman of intentionally designing a financial product that would have a high chance of falling in value, at the request of a client, and lying about it to the customers who bought it. It says that Goldman allowed John Paulson, a hedge fund manager, to pick bonds he wanted to bet against, and then packaged those bonds into a new investment. Goldman then sold this investment to its clients, telling them the bonds were chosen by an independent manager, and omitted that Paul- son was on the other side of the trade, shorting it. Five months after Goldman sold the investments, 83 percent of the bonds contained in the packaged securities were downgraded by rating agencies.
Goldman vigorously denies any wrongdoing, calling the S.E.C.’s charges “completely unfounded in law and fact.” It will undoubtedly assemble a daunting legal team. But if the S.E.C. makes its case, it will be a watershed moment, changing the dominant narrative of the financial crisis.
Up to now, the bankers have argued that the financial crisis was like what insurers call an “act of God,” a cataclysm over which they had no control. This has allowed them to shrug off responsibility, even as taxpayers bailed them out. It has allowed them to sleep soundly after collecting their huge bonuses. Goldman is not the only bank to have sold mortgage-backed securities and then bet against them. We sus- pect that after Friday, others on Wall Street may have a harder time sleeping.
Watch This Case

USA V. Goldman

This is going to be really interesting. It's likely that Goldman will settle. The real fraud though, is the degree of closeness that the firm had to Treasury Secretary Paulson during the period just before Lehman failed and not its internal asset management which, if done correctly, should be separated from the trading desk anyhow. Its not going to happen, but it would be pretty cool to see if anyone with insider type knowledge has the nerve to step up and rat them out.

It'll be fun to watch ...