Always remember to put the broadest possible disclaimers of liability into all your marketing documents and contracts. It’s not like anyone is going to read those things anyway, at least not until they’ve already lost $1 billion. Read more »
The SEC settled a little crisis-era CDO fraud case with UBS today and the fraud is pretty entertainingly shitty. Basically UBS provided the warehouse for a synthetic CDO where the notorious ACA was the collateral manager, and the disclosed deal was that, when the CDO closed, it would enter into (as protection seller) any CDS contracts that UBS had entered as part of the warehouse at (1) the market price of those CDS or (2) the price UBS had received for them as initial counterparty, whichever was more favorable to UBS.1 Now right there you’ve got some optionality and room for fuzziness, and you could imagine various unpleasant schemes where, for instance, UBS cherry-picks some contracts to transfer at market and some at historic price, or where UBS mis-marks some contracts to get a better deal when it transfers them.
But the actual scheme was simpler and dumber: Read more »
Jurors In Tourre Case Approached Deliberations With Razor Sharp Intensity, Ideas For Production Team Casting The Banker And The EmoticonBy Bess Levin
To help inject humor into what was an otherwise intense process, Ms. Rhett said she and other jurors compared the lawyers’ likenesses to actors. “I’m only going to say that there was someone who looked like Dan Aykroyd, someone who looked like Kevin Spacey and someone who looked like a cross between Patrick Stewart and Stanley Tucci,” she said. But when it came time to consider the seven claims against Mr. Tourre, they moved methodically and efficiently. The group chose 52-year-old Steven Zucker, a former retail broker on Wall Street who is now co-dean for art and history at the Khan Academy, a nonprofit educational organization, to be foreman. The jurors devised rules, and Mr. Zucker would call on people to speak. The jurors strove to begin on time every morning and worked through lunch, which consisted of sandwiches of grilled chicken and ham and cheese, in addition to soda and leftover muffins from the morning. [WSJ, earlier]
Poor Fab! I, for one, was utterly persuaded that he didn’t commit securities fraud by sending an email that he admitted was “not accurate” but not “false,” but the significance of that distinction seems to have eluded the jury:
A federal jury found former Goldman Sachs Group Inc. trader Fabrice Tourre liable for misleading investors in a mortgage-linked deal that collapsed during the financial crisis, delivering a historic win for a U.S. regulator eager to prove its mettle inside the courtroom.
The panel of nine jurors reached their verdict during the second day of deliberations, finding Mr. Tourre liable on six of seven claims that he violated federal securities law. … Mr. Tourre, who left Wall Street to pursue a doctorate in economics, may face a fine and a ban from the securities industry.
I think it’d be a shame to deprive the securities industry of Fab’s financial-structuring creativity and proclivity for sending embarrassing emails, but as we’ve established I’m in the minority here. Read more »
Presumably, out there in the universe exists at least a handful of people for whom words and phrases like “Which tranche of this collateralized debt obligation would be the fulcrum security in a liquidation scenario?” constitute foreplay, or, at the very least, interest them in the slightest/don’t cause them to nod off like they just got shot with a tranquilizer gun. You may not have found them yet, but if you’ve got the will, there’s surely a way to locate these CDO nymphos. Put out a personal ad, maybe start a website. Walk up and down Park Avenue wearing a sandwich board that reads “My lawyer’s going to help me make an end run around your CDO’s indentures.” Post fliers in Penn Station. Inquire at your neighborhood coffee shop. One place you can save time by skipping over is the jury room where Fabulous Fab’s fate is being decided. Read more »
If you wanted to short the housing market in 2007 you could just buy protection on mortgage-backed securities via a synthetic CDO, and that’s what John Paulson did in the Abacus deal, for which Goldman Sachs and Fab Tourre got in trouble. But the problem with that is that buying protection costs money; just for instance the super-senior protection in Abacus would run you about 50bps, or around $4.5 million a year on the $909mm notional that ACA Capital wrapped.1 And who wants to throw away millions of dollars a year waiting for the housing market to crash?
So another way to short the market is to buy a lot of protection on senior tranches of CDOs (cheap because: what are the odds that the housing market will crash?) while also selling a little protection on junior tranches (expensive because the odds that there’ll be some defaults are higher). If you do this, you can have a positive carry (you get paid as more each year on the protection you sold than you pay on the protection you bought), but you can make just about as much money if the housing market craters and there are massive defaults. (The tradeoff is that if performance is mediocre, with some defaults, then you lose money on the junior protection you sold and don’t make it back on the senior protection you bought.)
I haven’t been following Fabrice Tourre’s trial all that closely but I gather that the main evidence against him is that a Goldman saleswoman, Gail Kreitman, told her client ACA Capital Management that Paulson & Co. was going to be a long investor in a CDO called Abacus. That turned out to be false, and arguably in a material and fraudy way. So: why isn’t the SEC suing Gail Kreitman? Well, because someone told her that that it was true, and there’s at least, like, a 60/40 chance that that someone was Fab. Because he was pretty competent: Read more »