Some of the advances in structured product technology over the past decade have truly tested the limits of comprehension of both man and machine. As soon as one leveraged instrument was created, somebody else was figuring out a way to take leverage on that leverage. But investment banks and hedge funds had some of the most high-powered computers and statistical minds on the case at each step of the way. So how do you know when you’ve gone too far? Where do you draw the line in the sand between useful investment tool and mathematical video game? John Thain has an idea.
In a recent Q&A session at Wharton, JT recalled a time before he and Ken Lewis became partners in crime. When the world was a different place.
These instruments were so complicated. One of these — I’m talking now about ABS CDOs, and actually the CDOs-squared are even worse. Merrill created one. I picked one particular one. To actually model out the things that are inside an ABS CDO [is difficult] because derivatives are already inside the CDOs. They’re already derivatives created out of derivatives. So you have to go way underneath to get to the actual pools of mortgages. To model correctly one traunch of one CDO took about three hours on one of the fastest computers in the United States. There is no chance that pretty much anybody understood what they were doing with these securities.
Creating things that you don’t understand — that the buyer doesn’t understand, that the rating agency doesn’t understand, that the regulator doesn’t understand — is really not a good idea no matter who owns it. I think that the degree of complexity that was created in the securities, and the lack of anybody’s ability to really understand how they were going to perform, was simply an error and a bad thing. The fact that the firms that created them were stupid enough to own them doesn’t make me feel any better.
John Thain Comes Clean [Seeking Alpha]
How about a CDO^5 bearer bond with a 7% coupon, priced at par, and rated AAA/AAA/AAA.
Good as treasuries!
Most honest thing I’ve heard a (former) ibank CEO say, maybe ever.
john thain was a good banker who got a raw deal in a bad situation. if only he had stayed on at NYX, he could now be near the top of the list for the BAC CEO job. O WELLZ
Greg, I am going to give you a Fresca when you ask for a Coke.
-Jeff Macke
@1 i bid 102.5
*queefe*
@1 it’s “treasurys” not “treasuries” when pluralizing US government securities
@5:
Well, thank you for generosity and the 2 1/2 points. If you wire the funds immediately, I’ll part with ‘em for 102, and fed ex the bearer bonds to your trustee.
And, thank you for doing business with JT Marlin Securities, where we always place our clients’ best interests above all else.
@7
Thanks, but the ones I’m referring to are different than treasurys. They’re safer.
Stan O’Neal most certainly understood what he was doing, and he did it to perfection.
Your Dearest Uncle,
It is “tranche” not “traunch”
It is “tranche” not “traunch”
If it is a CDO^5 AAA bond structured TODAY (in spite of the jokers at the agencies), it probably is a lot safer than US Treasury (which possibly is AA in disguise). Prudent advice would be to go NAKED long this animal all NIGHT long…
;)
I’ve said this from day one I never undersood why Thain gets such a bad wrap.
He is the only CEO that took over for a dipshit and at least tried to clean up the mess. When he realized things were totally fucked he took care of MER’s shareholders, debt holders and employees, stand up guy IMHO.
THAIN IS FULL OF LIES
The most complex instrument known to man is Greg’s gas powered combination jackhammer and dildo
Eat my shit @14.
This “dipshit” has a sub 10 handicap, took home over 150mm in comp after destroying ML AND sits on the board of Alcoa… and it’s my birthday to boot!!
Eat my shit @14.
This “dipshit” has a sub 10 handicap, took home over 150mm in comp after destroying ML AND sits on the board of Alcoa… and it’s my birthday to boot!!
Thain was your typical bull market manager. Pay ridiculous amounts of money to bring in accomplished, though unexceptional people, and take care of yourself. His ego, like many ex-Goldman partners, was out of control. Denied any responsibility for legacy positions, yet paid himself off the marks and did nothing about managing the risk. He didn’t get a bad “wrap.”
@13:
The cry “Broker!!!!” just went out across our trading floor.
I will have a senior broker contact you shortly. And thank you too for your interest in our product.
These CDOs will be a nice diversifier in a retirement account, a child’s college savings plan, or just as a regular holding.
How many bonds can I tell the broker you’re interested in. He’s very busy, and these things are flying off the shelf. Flying, I tell ya!
HAHAHA @15
@1, Hell I’ll bid in at 6%!
@21:
You’re in too, at about 105, which will make the yield about 6%.
(Pay no attention to the top line of the bond, where it says “Matures on 1/1/2500.” That’s just a typo.
And, you will receive an actual bond with blue and gold markings, as soon as the color copier repair guys can get the parts on back-order.
@16/17, this guy inherited an RV with a corpse and a feral pig in it. When B of A came along, he said ‘fuck it, you deal with the hog’ as he damn well should have.
@23:
I didn’t know that cg worked for Merrill back then. Who is the corpse, though?
Jesus I did not need the jackhammer dildo mental image..
@pfluger where can you cut me a 5 off 7 IO?
Jesus I did not need the jackhammer dildo mental image..
We can work with you on slicing up the CDO^5s if you wish.
I will get our quants on it, and get back to you on pricing shortly.
BTW, we also offer these bonds with a put feature. For a 5 point premium, JT Marlin Securities will purchase your CDO^5 put bonds, maturing 1/1/2500, at par, with a one week tender notice from the owner.
Thain was unfairly maligned. He came to MER after it was mortally wounded by Stan O’Neil and kept it alive until he could get it sold to that fool Lewis for $10 billion. Getting his people paid was just some icing. He got shareholders and employees a lot more than could reasonably expected from a BQ company (think LEH).
@24 some whunt with a monkey tattoo. No ones knows for sure who did it, but Stan the Man never liked that kind of thing. There was a chain leash around her neck, so Dollar Dom was brought in for questioning, but her alibi was sound.
@29
I still hold that the only reason Thain pulled that sale off was that he had incriminating photos of Boone’s Boy after a night of hard partying. Think about it. All the posturing, all the back and forth by Lewis about what the Hammer and the Beard did or did not say/do to him.
CDO squared – the street cart lamb gyro mystery meat of bonds.
put enough spices on it and cook it for enough days out on W53rd and for $5 everyone will get hooked.
@32 – “It’s people. CDO^2s are made out of people. They’re making our investments out of people. Next thing they’ll be breeding us like cattle for derivatives. You’ve gotta tell them. You’ve gotta tell them!”