It really does go to show that in order to make a fortune as quickly as he did, you either have to do something illegal and/or completely unethical. I was always a bit skeptical of Paulson and his riches. The majority of TF knew this **** was gonna blow up. He just schemed a way to profit from it.

Can't all those pension funds afford big shotlawyers? There are no cops when you need them and now there are no sharks when you need them. California is on the hook for CALSTRS it is time for our AG to sue.

As posted in other threads and at Jesse's Cafe Americain, "someone" at GS knows how this went down. Hopefully Gretchen's diligent reporting will ferret out their Sherran Watkins. Just a matter of time, but a travesty it did not happen before blessing Bernanke another 4 years for "saving" the US from "total" collapse.

This reminded me of an article written by Michael Lewis awhile ago for portfolio.com. About a hedge fund that wanted to short the sub-prime market, but didn't know how until banks came to them with this exact process. Some of the pertinent paragraphs (on page 4):

"His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog sh** lower than the original bonds.”

FrontPoint had spent a lot of time digging around in the dog sh** and knew that the default rates were already sufficient to wipe out this guy’s entire portfolio. “God, you must be having a hard time,” Eisman told his dinner companion.

“No,” the guy said, “I’ve sold everything out.”

After taking a fee, he passed them on to other investors. His job was to be the C.D.O. “expert,” but he actually didn’t spend any time at all thinking about what was in the C.D.O.’s. “He managed the C.D.O.’s,” says Eisman, “but managed what? I was just appalled. People would pay up to have someone manage their C.D.O.’s—as if this moron was helping you. I thought, You prick, you don’t give a f*** about the investors in this thing.”

Whatever rising anger Eisman felt was offset by the man’s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”

That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shi**y credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

http://www.portfolio.com/news-markets/na....

Quote:

But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

Yep.

Exactly.

I doubt Paulson did anything illegal, but maybe he got Goldman to be the patsie. They sold the crap, not him. Of course, Goldman just has to say "we thought it was good stuff when we created it" (see we sold insurance on it!), "but only later we realized it was crap, so we had to buy insurance on it." Blah, blah, blah.

Time to bring in these guys from Gitmo and get somebody to squawk:

Quote:

"This is allowed?”

This really is complex - and I would call it debt pyramiding. In this way, the total credit outstanding could dwarf the underlying assets. That is, the debt was founded on hot air. Gen may not care whether John Paulson can play in this sandbox, but I sure do. Why? Because he is a licensed securites dealer. He is precisely the guy wet-behind-the-ears pension fund managers seek out to help them maximize returns. Nobody ever told the male black widow spider that immediately after experiencing marital bliss with the female, he would be eaten - so it is with Paulson's customers and counterparties.

It isn't complex at all.

The investors assume that what they are buying is backed by collateral and it wasn't. CDOs are backed by mortgages. Synthetic CDOs are backed by nothing. That isn't legal. At least when you put synthetic motor oil in your car, it acts like real motor oil and provides the same benefits as real motor oil and won't blow your engine.

How about synthetic tax collection?

Hmmm. Found a few web pointers to the lawsuits over the synthetic CDO the Wisconsin school districts bought into with 200 Million of borrowed money. They "thought" they were rated AA and AAA.

( There are a lot of allusions to how much of this was sold to state pension plans )


The broker is being sued in Wisconsin, Indiana and Colorado.
On Oct 1, 2009, the secretary of Indiana sued to have then run out of the state after they paid the civil penalty.


http://www.schoollawsuitfacts.com/

http://docs.google.com/fileview?id=0BzWC....

How about real

Karl,

Quote:

"CDO" is that some bank bought a bunch of bonds, compiled them into a CDO and then sold off the tranches.

The CDO itself is typically held off-balance sheet in a SIV/SPV, lest the bank be forced to recognize it as part of it's "assets." This is permissible because the bank doesn't own the assets, the legal entity does, and it got the money to buy them from the people who bought the tranches that were issued.

I've read that the sellers of the CDOs typically had to keep the low rated tranches since they were hard to sell - pensions only took the "AAA" tranches. So I think that it would be non permissible to keep the tranches that the bank owned in the SIV.

I think you left out the allegations that after Goldman convinced AIG they were writing a Credit Default Swap against really safe, high quality AAA CDOs, Goldman then turned around and said that the CDOs had junk assets and that therefore, on Goldman's say so, AIG needed to put up collateral, as in hand money to Goldman, and that then the act of handing money to Goldman then caused AIG credit worthiness to be reduced, which then caused AIG to have to hand more money to Goldman. Or so I remember reading somewhere, forget the link.

I encourage everyone to fully read http://www.portfolio.com/news-markets/na....
as it explains this stuff very well.

Karl's original rant about this was that, there is a spread between the mortgage value and the cost and no matter how you slice and dice it, that's ALL the profit that exists in that security.

I don't understand how investors could get sucked into these "free lunch" deals. Even a ignorant idiot like myself can see right away there's only so much profit there and that's it, without Karl pointing it out.

If this ever gets prosecuted, the defense will be "house prices were going up! Who could have predicted the downturn?".

I encourage everyone to fully read http://www.portfolio.com/news-markets/na....
as it explains this stuff very well.