Michael Lewis "The Big Short"

[mike777]

ACtually they did, they just did not know per the article, who put the package together. but they did know the loans.

 

 

If they did not know the loans, whose fault is that?

 

the article just said they did not know who picked the loans(constructed the security).

 

They must know they were insuring the stuff, they got paid to insure it.

 

 

 

If they dont know why the guy wants to buy insurance against default, again whose fault is that.

 

 

Again of course Goldman should not lie about who constructed the security, but really........these are grown ups.

[hrothgar]

ACtually they did, they just did not know per the article, who put the package together. but they did know the loans.

 

 

If they did not know the loans, whose fault is that?

 

the article just said they did not know who picked the loans(constructed the security).

I am continually amazed that you have the gall to charge people for financial advice.

 

I'd like refer people back to some of my earlier posts regarding the covariance of the assets that made up a CDO...

 

More specifically, recall that the CDOs only work when the underlying securities are independent of one another.

 

Guess what happens to a CDO when someone is cherry picking all of the underlying assets to have the same set of characteristics?

 

Do you understand why this type of information might have a material impact on the value of the asset?

 

With this said and done, CDOs are constructed from hundreds (sometimes thousands) of mortgages...

 

I can guarantee you that the entities buying these CDOs had neither time nor the information required to inspect all of the loans that made up an individual CDO. Rather, these entities trusted that the companies selling the CDOs would provide appropriate disclosure regarding the nature of the products being sold.

 

It is alleged that Goldman Sachs did not provide appropriate disclosure.

 

If the statements being made are true - Goldman Sachs sold a structured product without describing all material information about the nature of said instrument - then I suspect that a number of folks are headed off to jail...

 

Richard (who actually spent a fair amount of time using random forests to value CDOs)

[mike777]

Stop, you again do not read what I write sigh

 

Read the book about the doctor of medicine who did this........in fact.

 

Read about the other 3 buddies who did this in the book.

 

 

 

 

these guys knew the loans, they knew the loans.....read the article

 

 

If you cherry pick all the loans, I still know the loans, I know the characterics..sigh

 

 

If you do not take the time to know them....that is your fault. Grow up.

 

In fact if you read the book there is a link where you can pay 100$ bucks and get all of this information. Not hard. That was the whole point of the book.....these guys paid about 100 bucks and studied the loans. In fact one guy did this, see the book. And he was a Doctor of medicine, not finance.

 

If you are in the insurance bus and do not know basic covariance and check it out....your fault...

 

Do not rely on the seller, do not rely on someone doing your due diligence on 200 billion or whatever loans....

 

 

Again of course if Goldman lied sue them. If the prospectus is a lie.....send them to jail, agree. If Paulson knew the prospectus was a lie....send him to jail, but the article does not say that.

 

But imo a bunch of sour grapes because they were lazy.

[hrothgar]

Stop, you again do not read what I write sigh

 

 

 

 

these guys knew the loans, the knew the loans.....read the article

 

 

If you cherry pick all the loans, I still know the loans, I know the characterics..sigh

 

 

If you do not take the time to know them....that is your fault. Grow up.

 

In fact if you read the book there is a link where you can pay 100$ bucks and get all of this information. Not hard.

 

 

Again of course if Goldman lied sue them.

Interesting theory, which has absolutely nothing to do with jurisprudence in the US.

 

I recommend spending a bit of time looking at the requirements for the identification and disclosure of material information for 10-Ks and the like...

 

caveat emptor went out the window a LONG LONG time ago...

[hrothgar]

If you do not take the time to know them....that is your fault. Grow up.

 

In fact if you read the book there is a link where you can pay 100$ bucks and get all of this information. Not hard. That was the whole point of the book.....these guys paid about 100 bucks and studied the loans. In fact one guy did this, see the book. And he was a Doctor of medicine, not finance.

 

If you are in the insurance bus and do not know basic covariance and check it out....your fault...

So, every time anyone buys and sells a structured product, they need to research all of the underlying assets and try to determine whether or not someone deliberately built a time bomb into the asset?

[hrothgar]

Again of course if Goldman lied sue them. If the prospectus is a lie.....send them to jail, agree. If Paulson knew the prospectus was a lie....send him to jail, but the article does not say that.

Would one of the lawyers on this list care to explain how failure to disclose a material fact differs from a lie?

[mike777]

btw just to remind people.....this book is about basically selling insurance on home mortgages.

 

 

They all went to zero,per the book. Basically pick any pool, they are all worthless. Not one, not two...not only this one!

 

When basically all of the pools are worth zero......or going to zero as the book says..

 

Per the book, basically one guy a doc of medicine had Goldman create these securities. He then bought default insurance on them. He got to pick the worst pools, Goldman did not care and the insurance sellers did not care. All of this stuff was rated AAA. That was all they cared about.

 

His hedge fun clients hated him for taking this risk with their money and screamed at him for a year. He made them all rich........and then quit the business because he hated his clients. :)

 

Paulson was more well known on the street and roughly came to the game a bit later after hearing about this stuff. Paulson was able to raise alot more money, when no one trusted the doc. So Paulson made billions, the doc millions....andmillions....

 

 

 

 

 

 

They did not make the mortgages or service them. These companies insured them in roughly 10 or 100 million chunks...

 

 

 

 

 

What is important to remember is that only about 8-16% of these mortgages have to fail. If they do you owe the whole ten or 100 million. So in an extreme case 92% or so of the mortgages could be fine and not cherry picked lousy and you still pay out 100 million bucks..

 

In fact in many cases 40 -55% of the pool, failed

 

What happened was almost all of these pools failed, pick anyone as the book said they are all going to zero!!!

[mike777]

BTW just saw this Fraud case against Goldman on the news.

 

 

It was unclear in the report what the claim is. Something about not full disclosure.

 

I have long argued for full disclosure on wallstreet in these forums. :)

Glad to see if Fraud, that means we dont need even more regulations. Just enforce the ones we got. :)

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Just to make clear this book is not about buying or selling mortgages. It was not about making good or bad loans.

 

It was about 2 parties making a bet. Neither side needed to actually own or make the home mortgages.

 

Example, I dont own your home but I bet your mortgage will default within ten years or so. Person2 bets it wont. Neither of us own your home or make the loan.

 

Now take a group of 1000 of these and if any 8-16% fail you owe me 100 million bucks....I pay you say 1m or 2m a year in insurance premiums.

 

In the book all of these pools are rated AAA.

 

In the book one guy, a doc, pays 100 bucks online reads up on these pools and talks Goldman into finding a seller of the insurance, if not Goldman themselves.

 

 

----------------

 

 

 

Unclear to me if this Goldman thing is about buying and selling of these mortgages and lack of full disclosure or if it is about the insurance bet on the mortgages.

[Winstonm]

More specifically, recall that the CDOs only work when the underlying securities are independent of one another.

 

This is the entire crux of the matter - the variation within the tranches can only be meaningfully priced if the loan make-up of each tranch acts independently from each other. In other words, if loan A defaults loan B is neither more or less likely to default.

 

 

What occurred in the later stages of the housing boom was the demand for the yield of securitized loans increased to a speculative frenzy and led to the non-bank business model of loaning-to-securitize, and as these non-bank entities were not regulated by the Federal Reserve as is supposed to happen - misfeasance of Alan Greenspan to refuse to do his duty - the loans being made were so bad that virtually all of them had to default unless home prices continued to rise so that the loans could be rolled over to a bigger fool at a higher price.

 

The fiasco had many villains - Alan Greenspan #1 for misfeasance. The ratings agencies for fraud. GS is slimy enough on its own - but they are way down the list of people who need to be sued over the shitstorm that hit us.

 

The basic perp were all those guys and gals who sold us on the idea that markets self regulate and we no longer needed Glass-Steagall, etc.

 

The free-mareketeers *****ed us - thank you Phil Gramm.

[mike777]

Not sure how Glass Steagall figures in all of this.

 

http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act

 

If we assume banks cannot buy certain finance companies ok.....but they can still make bad loans and hold worthless mortgages.

 

Making 30 year fixed rate home loans are risky. IF the banks hold them, risky. If someone else buys them risky. That is why banks securitized them and sold them to FNMA. Let it hold them.

 

btw check out how many 30 year home loans fixed rate there are in Canada, not many.

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As for the GS story still not clear what was sold to whom. Some say a billion bucks worth of subprime mortgages were sold to pension funds, but they knew they were subprime. In other words the pension funds knew what the loans were in detail and that they were lousy loans. I assume they were allowed to know what they were spending a billion bucks on. In a liquidity crises covar. always goes to one in a subprime mkt. As the book said they all are going to fail :) They are not grandma and grandpa investor.

 

I would not be surprised if GS settles out of court. It is hard to fight the usa government and may be cheaper to just settle.

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btw it was announced that the SEC knew about the ponzi scheme of Stanford back in 1997. So much for govt regulation. That one is 7 billion.

 

http://www.kwtx.com/money/headlines/91071919.html

[hrothgar]

More specifically, recall that the CDOs only work when the underlying securities are independent of one another.

 

This is the entire crux of the matter - the variation within the tranches can only be meaningfully priced if the loan make-up of each tranch acts independently from each other. In other words, if loan A defaults loan B is neither more or less likely to default.

I want to focus specifically on the Abacus 2007-AC1 CDOs:

 

This set of mortgages that were included in this CDO were deliberately selected to have a very similar set of characteristics.

 

The chance that these mortgages were independent of one another was significantly less than a randomly selected group of mortgages, or, alternatively, one that was engineered to try and ensure that the mortgages were independent of one another.

[PassedOut]

It's good to see that Obama does not intend to let the lies about financial reform go unchallenged: Holding Wall Street Accountable

 

Now, unsurprisingly, these reforms have not exactly been welcomed by the people who profit from the status quo – as well their allies in Washington.  This is probably why the special interests have spent a lot of time and money lobbying to kill or weaken the bill.  Just the other day, in fact, the Leader of the Senate Republicans and the Chair of the Republican Senate campaign committee met with two dozen top Wall Street executives to talk about how to block progress on this issue.

 

Lo and behold, when he returned to Washington, the Senate Republican Leader came out against the common-sense reforms we’ve proposed.  In doing so, he made the cynical and deceptive assertion that reform would somehow enable future bailouts – when he knows that it would do just the opposite.  Every day we don’t act, the same system that led to bailouts remains in place – with the exact same loopholes and the exact same liabilities.  And if we don’t change what led to the crisis, we’ll doom ourselves to repeat it.  That’s the truth.  Opposing reform will leave taxpayers on the hook if a crisis like this ever happens again.

Bipartisanship only goes so far. If the Republicans are going to be soft on crime in return for a payoff from the criminals, voters have a right to know that.

[Winstonm]

The change that these mortgages were independent of one another was significantly less than a randomly selected group of mortgages, or, alternatively, one that was engineered to try and ensure that the mortgages were independent of one another.

 

The significant aspect of the charge against GS IMO would have to be the pricing - did GS collude with the seller to knowingly create a product that increased the mispricing of the risk for the benefit of the seller?

[hrothgar]

The change that these mortgages were independent of one another was significantly less than a randomly selected group of mortgages, or, alternatively, one that was engineered to try and ensure that the mortgages were independent of one another.

 

The significant aspect of the charge against GS IMO would have to be the pricing - did GS collude with the seller to knowingly create a product that increased the mispricing of the risk for the benefit of the seller?

I couldn't care less about the pricing of the individual derivative.

 

What I care about is whether or not the seller's disclosed all of the material information about said derivatives so that potential investors were in a position to make an informed decision.

[Winstonm]

The change that these mortgages were independent of one another was significantly less than a randomly selected group of mortgages, or, alternatively, one that was engineered to try and ensure that the mortgages were independent of one another.

 

The significant aspect of the charge against GS IMO would have to be the pricing - did GS collude with the seller to knowingly create a product that increased the mispricing of the risk for the benefit of the seller?

I couldn't care less about the pricing of the individual derivative.

 

What I care about is whether or not the seller's disclosed all of the material information about said derivatives so that potential investors were in a position to make an informed decision.

I think in a sense we are saying the same thing - the pricing of the risk would vary depending on the nature of the loans, right?

 

I agree with you that it is withholding information (or possible collusion) that is the significant charge. But without a mis-pricing of the risk there would not be harm, no, and thus no cause of action?

[hrothgar]

I agree with you that it is withholding information (or possible collusion) that is the significant charge. But without a mis-pricing of the risk there would not be harm, no, and thus no cause of action?

The market for these CDOs is pretty thin.

 

I don't think that its possible to arrive at an objective "price" for these types of instruments. Therefore, you can't really use price as a metric.

 

I think that its much easier to measure disclosure...

[Winstonm]

I agree with you that it is withholding information (or possible collusion) that is the significant charge.  But without a mis-pricing of the risk there would not be harm, no, and thus no cause of action?

The market for these CDOs is pretty thin.

 

I don't think that its possible to arrive at an objective "price" for these types of instruments. Therefore, you can't really use price as a metric.

 

I think that its much easier to measure disclosure...

Disclosure is certainly critical. I am wondering about the legals - because if all we have here is two parties to a derivative contract, the losses on the underlying security are unimportant to any cause of action for either party based on the derivative's value.

 

But from what I make of it, the issue is that the buyer of the underlying security is claiming that Goldman Sachs failed to disclose that a short-seller of a derivative based on the security had a hand in structuring the loans and that was a civil fraud against the company who bought the security product from GS.

 

I'm not sure of the ramifications and legalities; however, I am pretty certain that had not Robert Rubin and his chums convinced Bill Clinton to support the total unregulation of these derivative markets that the issue would never have reared its ugly head.

 

It is amazing what the light of day does to vampire squid. :(

[Winstonm]

Concerning the CMFA.

 

Greenspan Testimony to Senate Agriculture Committee in note 18 below (“the Board continues to believe that, aside from safety and soundness regulation of derivatives dealers under the banking or securities laws, regulation of derivatives transactions that are privately negotiated by professionals is unnecessary”).

 

Nice, call, Al. Maestro, my ass.

[Winstonm]

I agree with you that it is withholding information (or possible collusion) that is the significant charge.  But without a mis-pricing of the risk there would not be harm, no, and thus no cause of action?

The market for these CDOs is pretty thin.

 

I don't think that its possible to arrive at an objective "price" for these types of instruments. Therefore, you can't really use price as a metric.

 

I think that its much easier to measure disclosure...

Btw, this is what Barry Ritholtz had to say to someone making the "caveat emptor-like argument":

 

Read the SEC complaint. When you tell investors that a well know hedge fund is the lead investor in a Synthetic CDO, and that he is putting $200 million in it — when the truth of the matter is he is not putting any money into this and is in fact short the CDO, at best that is a material misrepresentation. It sure smells like Fraud to me . . .

[fred]

I just finished reading "The Big Short". I enjoyed it.

 

Those interested in reading this book might get more out of it if they read "Liar's Poker" (also by Michael Lewis) first.

 

Fred Gitelman

Bridge Base Inc.

www.bridgebase.com

[mike777]

This gs fraud charge gets more interesting.

 

I just repeat the facts in this case are in dispute but...:)

 

 

It appears that there were no actual mortgages or MBS in this pool. It was all a series of bets.

 

It appears the company that put the pool together ACS? bought most of these bets on the upside.

 

 

It appears that GS itself bet on the upside and lost 90 million.

 

In any case in about 18-24 months all worthless.....1 billion.

 

 

 

Again facts and details are in dispute.

[y66]

Where have you gone Joe Friday?

[Al_U_Card]

Where have you gone Joe Friday?

Might be a (long) Lost Weekend :)

[Winstonm]

Rule 10b-5: Employment of Manipulative and Deceptive Practices

 

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

 

(a) To employ any device, scheme, or artifice to defraud,

(B) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

© To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

 

in connection with the purchase or sale of any security.”

 

It's hard not to connect to (B) above:

 

According to the SEC, Goldman did not tell investors "vital information" about ABACUS, including that Paulson & Co was involved in choosing which securities would be part of the portfolio

[kenberg]

Listening to a discussion on NPR I got the impression that it is far from clear that the SEC will succeed in the suit. I lack a reference to that discussion, but here is perhaps a preview of the GS defense:

http://www.washingtonpost.com/wp-dyn/conte...id=opinionsbox1

 

Don't get me wrong. I am no apologist for GS. It seems clear that they were screwing people, the question is whether they were legally screwing them or illegally screwing them. Very highly paid lawyers will, in some sense, settle this question.

 

Some things seem clear.

There will always be individuals and corporations that will attempt to make a lot of money while doing nothing that is remotely socially productive.

Government agencies, through understaffing, stupidity, or whatever are often not up to dealing with the more shady aspects. See Bernie Madoff, for example.

Many people, I am an example, find that complex financial transactions are confusing. We approach such matters with simple rules: Don't spend money you don't have, don't get into a poker game with professionals at the table. That sort of thing.

 

So what can be done?

Try to keep the big boys from totally shafting the rest of us to the extent that this can be done, sure, but mostly keep them from seriously gumming up the works while they are busy shafting each other.

 

 

If the SEC lawyers are playing a little hardball with GS lawyers by pushing a less than solid case, I don't actually mind. Some asses are in serious need of some kicking. But what I really want is some action that will keep the boat afloat during stormy weather. If that is done, I'll be happy to watch out for myself when someone tries to sell me either the Brooklyn Bridge or synthetic collateralized debt obligations.