SIVs

If someone builds structured credit securities out of some dodgy stuff, and someone else rates those securities AAA for no particularly good reason, and someone else sells those securities to you without reading the offering memo, and you buy those securities without any due diligence since you figure that the structurer and rater and broker wouldn’t all be messing with you, and it turns out they were, and the stuff blows up, and you end up losing a lot of money on the AAA rated securities, the natural question for you to ask, this being America, is: whose fault was that?

That question is being asked in all the best circles these days, and the answer is probably “everybody’s,” as it usually is. One place it’s being asked and slooooowly answered is in a New York federal court considering the case of the Cheyne Finance SIV, which is special for at least two reasons. First: there is a widespread belief that credit ratings are opinions, and opinions are protected by the First Amendment, and so you can’t restrict the creativity and expression of those free spirits and S&P by suing them when their opinions turn out to be, well, wrong. But for (weird!) reasons we’ve discussed, the judge in this case, Shira Scheindlin, is unimpressed by those arguments, so this is a rare lawsuit against ratings agencies that may actually go to trial.

Second: this SIV may – may – have been the origin of “structured by cows.”* Read more »

Don’t do this:

One particular municipal entity had been a customer of Wells Fargo, or a predecessor, since at least 1988. This customer’s investment objectives were safety of principal and income. … Wells Fargo’s internal records for the customer’s account specifically stated that the account should not invest in MBS. In addition, applicable state law prohibited municipal entities such as this customer from investing in certain “high-risk mortgage-backed securities.”

Respondent McMurtry nevertheless selected and purchased for this municipal customer a SIV-issued asset-backed commercial paper program which was backed by MBS and related high-risk mortgage-backed derivatives. … On April 30, 2007, McMurtry selected and purchased Golden Key on behalf of the customer. McMurtry did not know what a SIV was at that time he selected Golden Key for his customer. Further, he did not read the PPM for Golden Key, nor did he inform the customer of the risks related to the SIV structure or the underlying high-risk mortgage-backed assets held by Golden Key.

Well, I mean, in his defense it seems that McMurtry had a very good excuse for not informing the customer of the risks of Golden Key, specifically that that he didn’t know what those risks were, or what Golden Key was, or presumably where he was or how he got there or how many fingers the customer was holding up.

The world is safe from Shawn McMurtry for the next six months, since he and his employer entered into a settlement with the SEC today suspending him and fining Wells $6.5 million for its unconcern with the fact that its salesmen were not particularly interested in doing their jobs and/or illiterate: Read more »

Yesterday we talked a bit about this lawsuit bubbling around where some investors are suing Moody’s and S&P for doing a not so great job rating some asset-backed SIVs called Cheyne and Rhinebridge. I said then that the rating agencies were probably pretty keen to avoid going to trial for negligence, because, well

Because … look, maybe the ratings agencies weren’t negligent in rating these things, maybe their models made sense at the time and were falsified by unexpected future events that no reasonable person could have predicted, but … I’m gonna guess that if this goes to trial they will look bad. I mean, they look bad already, no?

A reader helpfully pointed to a preview of what a trial would look like for S&P and Moody’s, in the form of this interview report,* filed by the plaintiffs in February, of former S&P senior quantitative analyst Kai Gilkes, who among other things says that their models made no sense at the time and he predicted that they’d be falsified by expected future events: Read more »

One thing that looks pretty certain is that lawsuits over crisis-era structured credit products will be around for the rest of our natural lives, burbling around in courts and every now and again surfacing in a Reuters article with a bunch of nine-digit numbers and acronyms of defunct German banks. This is comforting, in a way, but also worrying. How many are there? What are they all about? What is the aggregate amount of liability? Who owes it? It all seems unknowable. Remember how Judge Jed Rakoff rejected that SEC/Citi MBC CDO settlement, and it got appealed, and the appeals court disagreed but it’s still kicking around? Just in the past few days, Rakoff approved a $315mm class action settlement over $16.5bn of Merrill MBS. Did you know that was happening? There’s this thing, with some banks suing the New York insurance regulators over the restructuring of a monoline that insured some structured products, which is like a derivative on a derivative on a derivative on a derivative of the mortgage mess. The supply is endless. Everyone is suing everyone about everything.

Particularly enjoyable, though, are the lawsuits against ratings agencies for rating structured products that are bopping around in federal court in New York. Here’s some news on that front: Read more »