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Pot warns that kettle is engaged in bond manipulation

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A group of hedge funds including Paulson & Co. warned the SEC that banks may start buying bad loans that are collateral for subprime mortgage backed bonds at inflated prices to avoid derivatives losses. The hedge funds in question would rather the bonds just default without the banks stepping in, so they can continue to swim in giant silos filled with gold that were erected in February when the subprime market tanked. Ten hedge funds set to profit from these defaults formed the 'ABS Credit Derivatives Users Association' to issue this warning to the SEC, or at least whine a little bit. The funds hired Kalorama Partners, run by former SEC Chairman Harvey Pitt, as an adviser to give the group some Street cred. The only problem so far - the group has no evidence that banks are engaged in this "manipulation," and it's a hard thing to prove.
There is a lot at stake, with $800bn in bonds backed by subprime mortgages, $75bn of which are estimated to be issued to people with poor or limited credit histories and at the highest risk of default. Paulson & Co. alone had one of its funds gain 67% in February from the subprime fallout and wants to continue to ride that wave.
Hedge Funds Warn SEC to Watch for Manipulation of Subprime Debt [Bloomberg]


Xu Xiang or Pol Pot, in happier times. See page for author [Attribution], via Wikimedia Commons

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