ACRIMONEY » Banking

Darth Goldman: The Enterprise Value Strikes Back

Norb Vonnegut — Fri, 16 Jul 2010 12:54:48 +0000

Yesterday, Goldman Sachs settled fraud charges associated with Abacus CDOs for $550 million. Not surprisingly, the settlement excluded Fabrice P. Tourre, who will no doubt be hung out to dry as the Tourre de Toxic winds to a close.

Personally, I think the government just got pimp-slapped. Here's why:

The $550 million settlement equals 4% of Goldman's 2009 profits.
Last year's bonus pool at Goldman was 29 times the settlement.
The two banks that lost about $1 billion in Abacus received an average of twenty-five cents on the dollar.
Meanwhile, John Paulson's hedge fund is keeping everything from its casino bet.
After hours, Goldman's shares traded up 5 percent. That's roughly $3.7 billion in additional market capitalization, or 6.7 times the penalty. I'd take that trade all day long.

Robert Khuzami, director of the SEC's enforcement division, heralded the settlement as a big win. So did Senator Carl Levin. That's the thing about a $550 million fine. If you're on the receiving end of the payment, there's always somebody to take credit and claim responsibility. Here's what the New York Times reported.

“Goldman played fast and loose in the Abacus deal, misled its clients, and got called on it today,” said Senator Carl M. Levin, a Michigan Democrat who led a separate Congressional investigation that examined the Abacus deal.

I don't think so. Everybody's moving on, and Goldman Sachs is still the biggest winner. The company just won a little less. What do you think?

Norb Vonnegut

Morgan Stanley and Dead Presidents

Norb Vonnegut — Wed, 12 May 2010 19:11:23 +0000

U.S. Probes Morgan Stanley

The news is out. US prosecutors are investigating several Morgan Stanley CDOs. Like the Abacus inquiry at Goldman Sachs, the issue is what representations Morgan Stanley made to clients. How did the bank market those Weapons of Money Destruction? Here’s what The Wall Street Journal reports:

Among the deals that have been scrutinized are two named after U.S. Presidents James Buchanan and Andrew Jackson, a person familiar with the matter said. Morgan Stanley helped design the deals and bet against them but didn’t market them to clients. Traders called them the “Dead Presidents” deals.

So without further ado, I’d like to shout out to my friends at Morgan Stanley. I give you Little Walter and Dead Presidents:

I have no idea what Morgan Stanley said to its customers. But one thing is clear. The bank had no special insight into the collapse of sub-prime mortgages.

Morgan Stanley lost $9 billion on mortgage bets during 2007.

In The Big Short, Michael Lewis explains the loss. Morgan Stanley bet against the worst sub-prime mortgages it could find. (I’m not sure whether these deals included the dead-president CDOs now under investigation.) To make this bet, the bank purchased credit default swaps—which required massive capital outlays every year in the same way that insurance policies require annual premium payments.

Then, Morgan Stanley invested in the “safest” tranches of CDOs. In theory interest income from “safe” investments would fund payments on the credit default swaps, the negative bets. At the time, it seemed like a reasonable theory. Uh-oh. There was one problem.

Most sub-prime investments tanked during 2007—even the securities thought to be “safe.”

Details from the Morgan Stanley investigation have yet to emerge. But how can you accuse a firm of duping clients when that firm, in essence, made the same investment mistake as its clients?

Norb Vonnegut

Goldman Sachs Charged With Fraud

Norb Vonnegut — Fri, 16 Apr 2010 15:40:17 +0000

SEC Charges Goldman With Fraud

Here’s what The Wall Street Journal reports:

According to the SEC, Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

Earlier this week, I described the Magnetar Trade—the idea that a hedge fund can promote a CDO and bet against the same pool of assets. I have no idea whether the SEC’s charges involve Magnetar, but one thing is clear even now.

Other law suits will follow.

Here’s why. Magnetar was not the only hedge fund that employed a Magnetar Trade strategy. And Goldman was not the only investment bank selling CDOs assembled by hedge funds with negative bets on subprime. According to ProPublica, Magnetar promoted CDOs with nine different banks.

I bet the SEC charges more banks and names hedge funds in the weeks to come. It’s an uh-oh moment for Hedgistan and the gods of Greenwich.

Norb Vonnegut