cdos

  • 11 Jun 2013 at 5:52 PM

Lynn Tilton Gets Some Good News

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“There are three universal lies: Margins are weak, but we’ll make it up in volume; the check’s in the mail; and I won’t come in your mouth” is really a thing that Partiarch Partners founder and CEO Lynn Tilton says, but “we’ll double down and make up all our losses” probably deserves a spot on the list too. That seems to have been MBIA’s plan when it entered into some cockamamie CDO transactions with Patriarch in 2003. These … did not work out for MBIA, and so in 2009 they sued, and today Tilton won the lawsuit, and also may have won some hearts in the courtroom:

Thirteen witnesses presented evidence to Judge Sweet in the lawsuit. He praised Ms. Tilton’s testimony in a section of the lawsuit on “witness credibility.”

Ms. Tilton is a well-known Wall Street personality, with a penchant for brazen remarks and an eye-catching style uncommon in the financial industry.

“She was vigorous, authoritative, informed and almost entirely supported by documentary evidence,” Judge Sweet wrote.

The case is a pretty nutty example of pre-crisis structured finance practices. The story begins with MBIA having written some insurance policies on some distressed-debt CDOs. Those policies were looking bad: Read more »

From Now On Goldman Will Only Sell A Product To Clients If Some Goldman Partners Understand It

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I can’t find the quote but I recently read someone arguing that you should never worry about anything you see on the news. By definition, the argument goes, horrible things that make the news are newsworthy, and they are newsworthy because they are rare, and so the odds of you dying in a terrorist attack, bridge collapse, Ebola outbreak, or anything else you see on TV are basically nil.

Financial news is endearing because it’s the opposite of that: it consists mostly of pointing at perfectly unexceptional market-standard practices that happen every day and saying “holy fuck, did everyone know about that? That’s messed up.” As Matthew Klein has said, “many things that are considered normal in finance look like fraud to almost everyone else,” so the vein is rich. Libor manipulation, Apple’s taxes, really take your pick. Or today’s Times article “Banks’ Lobbyists Help in Drafting Financial Bills”; my impression is that an article titled “Financial Bill Written Without Drafting Help From Banks’ Lobbyists” would, for sheer unlikeliness, be the financial-regulatory equivalent of a news report about terrorists blowing up a bridge using the Ebola virus.

Closest to my heart among these scandals of differing perceptions might be the “you built me a CDO designed to fail” cases. For starters: the fact that they come out of market-standard practices is reflected in the fact that pretty much every bank has one of them.1

But while every other bank seems to have come out of the CDO scandals with a reaction along the lines of “it’s a fair cop, here is a pile of money,” Goldman, who sort of originated the idea,2 has spent the last few years putting together increasingly convoluted committee structures and online animations to make sure it’ll never happen again, for some “it.” Here is the latest 26-page report on Goldman’s business standards improvement, and here is a genuinely delightful “lifecycle of a transaction” animation that I am tempted to replace with this: Read more »

  • 26 Mar 2013 at 10:22 AM

UBS to SEC: Let’s Make A Deal. Maybe.

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UBS would like to make a mortgage-backed securities case—apparently linked to every other mortgage-backed securities case—go away. Read more »

  • 23 Jan 2013 at 4:58 PM

Morgan Stanley Finalizes Its Entry In The “Who Said The Worst Things About Its Own Products?” Competition

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One thing that would probably be fun would be reading the internal emails sent around at the places that bought terrible RMBS CDOs in the end times of 2006-2007. What did they say? Was it “these mortgages are worth twice what Morgan Stanley is selling them for! We are ripping their faces off”?1 Was it “I looked through a representative sample of the mortgages underlying the collateral in this deal and I think the yield more than justifies the risks”? Was it “my asset-level diligence was light because my macro view is that house prices will go up a lot in the next 18-24 months”? Was it “we have to invest $100mm somewhere and this gets 2bps more yield than other AAA-rated options”? Was it “I don’t know that much about mortgages but I sure am glad we can trust our friends at Morgan Stanley to put us in such a high quality product as this here CDO”? The possibilities are endless and, I think, fascinating: each trade has two sides, and each side has a view, even if that view is sometimes more of a vacant stare.

But the arrow of lawsuits runs only one way so instead we get this:

On March 16, 2007, Morgan Stanley employees working on one of the toxic assets that helped blow up the world economy discussed what to name it. Among the team members’ suggestions: “Subprime Meltdown,” “Hitman,” “Nuclear Holocaust,” “Mike Tyson’s Punchout,” and the simple-yet-direct: “Shitbag.”

The shitbag email chain is part of a collection of internal documents produced in China Development Industrial Bank’s lawsuit against Morgan Stanley over this “Stack 2006-1″ CDO deal that Jesse Eisinger describes today in DealBook and ProPublica. Morgan Stanley has issued the standard “these emails were just a joke and have nothing to do with anything” statement,2 and while normally that is just a meaningless lie that you say after your employees are caught sending around emails saying “this deal is shit, no, I mean it, this deal is composed of actual feces, I am not kidding, come look” – the emails here aren’t that bad. Basically they were like “ugh we gotta name this deal before we print it” and everyone was all “what about Macalester Albermarle Roundtree Paddington Pemberley Structured Finance Limited” and one dope replied with some gallows-humor names. In March 2007. When it was A SUPER DUPER SECRET that subprime mortgages were in trouble:3 Read more »

  • 22 Oct 2012 at 4:22 PM

Timberwolf Continues To Stalk Goldman Sachs

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Financial product salespeople, if they know what’s good for them, should be thankful for car dealers. Not used car dealers, either, new car dealers: because of the world’s familiarity with their business model, if you sell a client a product at 100 and then tell them the next day that it’s worth 95, you have at least some outside shot at pacifying them by explaining, slowly and patronizingly, “it’s like buying a car: the price drops as soon as you drive it off the lot.”

I mean, that’s true of buying a toaster or a bunch of carrots, too, but nobody marks those to market, so. I guess people do mark their cars to market? That seems to be a thing. In any case, “mumble mumble mumble drive it off the lot” sounds much better than the alternative, which goes something like “yeah, we thought it was worth 95 but we sold it to you at 100, problem?”

Remember Timberwolf? Timberwolf was an RMBS CDO that Goldman Sachs marketed. It was also “one shitty deal,” in Tom Montag’s immortal words, and some of it was sold it to some Australians with the buzzword-salad name Basis Yield Alpha Fund (Master), and Tom Montag was right, so, that worked out poorly for Basis Yield Alpha Fund (Master). Working out poorly was a feature of a lot of Basis Yield Alpha Fund (Master) investments; before they bought Timberwolf they bought another MBS CDO called Point Pleasant, also from Goldman, and whereas a Timberwolf will of course rip your face off – that’s just evolution – the face-ripping they experienced from a Point Pleasant seems to have come as some surprise.1 Anyway, they sued, and while Goldman has engaged in marvelous jurisdictional kerfufflery that got it tossed from federal court, they are still in New York state court, which refused to toss it late last week.

Here, from the opinion refusing to toss the case, is Basis Yield Etc.’s core allegation: Read more »

  • 29 Aug 2012 at 6:31 PM

Citi Pays $590mm To Settle Lawsuit Over Not Selling Crappy Mortgage Bonds

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Citi settled a CDO case for $590 million today, and if you are following along at home you’ll note that that is more than 2x as much as it settled its last CDO case for. There are a number of reasons for that but a big one is: in this case, Citi is in trouble for buying the CDOs, whereas in the last one it was in trouble for selling them. You can’t win, of course, but you can minimize your losses, and the method is clear: next time you find yourself with billions of dollars of assets that you’ve got marked at par but that you’re pretty sure will quickly decay into a pool of oozing crap, you should sell them quickly and deceptively. You’ll get sued less.

Also you won’t lose billions of dollars on the actual CDOs, which is arguably better.

I kid I kid this is different and Citi will probably be whacked repeatedly and in creative ways by shareholders over the fraudulent selling of the CDOs – that $285mm it’s paying to the SEC is really just a down payment – so there really is no way to win (except to accurately mark your assets and disclose your exposure clearly and accurately but who would do that?). Like: CDO investors will sue over the fact that Citi sold them crappy CDOs. Citi shareholders will sue over the fact that Citi was going around selling crappy CDOs without disclosing in its 10Q “we are in the business of selling crappy CDOs.” The advanced move will be when people sue because Citi didn’t tell them that other people were going to sue it, which sounds very silly until you remember that that exact thing is happening to BofA right now. Read more »

  • 31 Jul 2012 at 5:29 PM

Federal Jury Doesn’t Want SEC To Take This The Wrong Way, But It Thinks This Citi CDO Case Is Bullshit

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So remember when Citi did that thing that was all the rage in 2007 where they constructed a synthetic CDO referencing mortgage-backed securities in order to facilitate their own prop bet against those MBS, but then maybe inadequately disclosed to investors that they were in fact naked short those MBS? And then they got sued by the SEC for fraud, and settled that case for $285mm, or tried to anyway*? Well the SEC also sued one Brian Stoker, the Citi VP who structured that deal, because it’s important for the SEC to pursue powerful individuals responsible for financial crisis wrongdoing and who could be more powerful than the vice president of Citigroup? And unlike Citi, Brian Stoker chose to roll the dice, and today he won big but with an asterisk:

A jury on Tuesday cleared a former Citigroup executive of wrongdoing connected to the bank’s sale of risky mortgage-related investments at the peak of the housing boom, dealing a blow to the government’s effort to hold Wall Street executives accountable for their conduct during the financial crisis.

In addition to handing up its verdict, the federal jury also issued an unusual statement addressed to the Securities and Exchange Commission, the government agency that brought the civil case.

“This verdict should not deter the S.E.C. from investigating the financial industry and current regulations and modify existing regulations as necessary,” said the statement, which was read aloud in the courtroom by Judge Jed S. Rakoff, who presided over the trial.

Thanks jury! Bringing lawsuits about mortgage CDO marketing practices has been the major focus of the SEC’s response to the financial crisis,** and this was the first time that approach was tested in court, and the SEC’s lawyers spent building the case only to see a jury shoot them down in two days, and they have no courtroom victory or precedent to show for their work, but they won the one thing that is truly important in this vale of tears: an encouraging note from a group of anonymous strangers. Read more »

  • 19 Apr 2012 at 3:53 PM

Quis Custodiet Ipsos Egan-Joneses?

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Let’s not stop there with the clichés.* Here’s a great one: “never attribute to malice that which can be adequately explained by stupidity.” In applied form: your model of all the AAA mortgage CDOs that were maybe not so AAA could be “ratings agencies were paid by banks so they were venal and corrupt and sold the banks good ratings on products they knew were bad.” Or it could be “ratings agencies created medium-dumb criteria to make a thing be AAA, and bankers who were smarter than medium-dumb arbed those criteria to make more things be AAA than should have been AAA.” The incentives model has good economic theory behind it, and some suggestive evidence; the stupidity model has that lovely cliché but also some evidence, about which more later.

But first hilarious contrarian ratings agency Egan-Jones is in trouble: Read more »

  • 29 Mar 2012 at 6:27 PM
  • Banks

Today In Swiss Banks With Creepy But Defensible Structured Products

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I don’t really understand it but the TVIX thing is creepy fun. If you haven’t followed it, Credit Suisse issued this exchange-traded note called TVIX that was a 2x levered bet on the VIX. They suspended new issuance about a month ago due to position limits, and people were just so damn excited to own the thing that its price crept up to 189% of its fair value, where “fair value” is a reasonably easily measurable thing based on the formula in the TVIX prospectus. Then last week Credit Suisse announced that they would be creating more units, and the price plummeted to and then through fair value, which is what you’d expect to happen. Except that it started plummeting a few hours before that announcement, which is Suspicious.

So of course people are sad and there’s a Bloomberg Brief with sort of sad-funny quotes like:

“When it started to fall, I bought more because I couldn’t believe how low it was going. I didn’t realize I was playing with a hand grenade.”
– Michael Gamble [heh! - ed.], 67, who doubled down on his TVIX investment before the price collapsed.

Investors “all think: ‘Oh, I’ll just buy these things, I’ll be hedged against volatility and everything will be wonderful.’ And now they’ve seen the market goes down and their volatility protection goes down too, and they’re going ‘Hmm, what happened here?’ These people are going to have to pay a really expensive lesson.”
– Larry McMillan, who manages $30 million as president of McMillan Analysis Corp.

So, yes, Larry, they are going to pay a really expensive lesson. But what is it? Stephen Lubben has a little thing in DealBook today where he frets: Read more »

  • 28 Mar 2012 at 12:35 PM
  • Banks

Court Finds That UBS Exploited Clients And Tricked Them Into Overpaying For Toxic Securities, But In A Legal Way

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This is kind of exciting: a bank won a CDO case! Or: something nice happened for UBS!

So the story goes like this (from the court opinion): in March 2002, UBS did a synthetic CDO deal called North Street 2002-4 with Landesbank Schleswig-Holstein, a German landesbank, where LSH (now called HSH, due to mergers probably caused in part by this unpleasantness) sold $500mm of protection on a $3bn portfolio “comprised predominantly of assets linked to the United States real estate market (for example, mortgage-backed securities and instruments issued by real estate investment trusts).” The protection attached after $74mm of losses (i.e. UBS bought the most subordinated $74mm of notes) and UBS could manage the stuff in the pool of reference assets:

Under the credit default swap at issue here, [North Street], as protection seller, in exchange for UBS’s agreement to pay premiums, agreed to make certain payments to UBS, as protection buyer, upon the occurrence of defined adverse “credit events” affecting securities in the aforementioned reference pool. While the securities in the reference pool were required to meet certain ratings specifications, UBS selected the initial securities for the pool, and also had the right to substitute assets in and out of the pool during the life of the credit default swap, within defined parameters and through the use of internal procedures specified in a reference pool side agreement between UBS and HSH. The governing documents required that by March 2004, 70% of the reference pool would be comprised of asset-backed securities, real estate investment trust assets, and commercial mortgage-backed securities.

The landesbanks were kind of famous for being muppets back before being a muppet was cool, and this was a pretty muppety deal. Which they’ve now figured out, and sued UBS in New York state court, claiming that UBS was selling them the deal based on the ratings of the underlying securities but actually stuffing North Street with the worst available securities with those ratings: Read more »

  • 15 Mar 2012 at 7:27 PM

Appellate Court Willing to Entertain the Possibility that Citi Was Not Committing Fraud

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I’ve had some fun these last few days proposing counterintuitive theories for why Citi might not suck as much as you probably think it does and it’s nice to see others joining in the pastime, even if this sounds a little far-fetched:

The district court’s logic appears to overlook the possibilities (i) that Citigroup might well not consent to settle on a basis that requires it to admit liability, (ii) that the S.E.C. might fail to win a judgment at trial, and (iii) that Citigroup perhaps did not mislead investors.

That piece of rank conjecture is from the Second Circuit’s opinion on an appeal* of Judge Rakoff’s rejection of the settlement between the SEC and Citi over some mortgage-backed securities. Here’s DealBook: Read more »