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Tuesday, April 27, 2010

Tuesday Brainstorming - part 1

1. Goldman was involved in every crucial part of this crash - one CDO it created other than the one todays hearing is about lost 80% of its value after it was created - which is criminal intend by all means as the boss of trading at Goldman calls it a shitty deal right from the start. Well that CDO was bought by Bear Stearns Hedge Fund which started the bear market campaign in 2007 as they bought 300 mio out of 1 bil. - is that all coincidence or rather a conspiracy.


Goldman Sachs CDO Labeled ‘Shi**y Deal’ by Montag in E-Mail

April 27 (Bloomberg) -- Thomas Montag, the former head of sales and trading in the Americas at Goldman Sachs Group Inc., called a set of mortgage-linked investments sold by his firm “one shi**y deal,” according to an excerpt from internal e-mails released by Senate lawmakers.

The transaction was Timberwolf Ltd., a $1 billion collateralized debt obligation holding pieces of other CDOs, according to a statement from the Permanent Subcommittee on Investigations. The CDO also included optimistic side-bets on the performance of CDOs, derivatives in which the firm took the opposite pessimistic side in “many” cases, the panel said.

“Boy that timberwo[l]f was one shi**y deal,” Montag, who is now Bank of America Corp.’s president of global banking and markets, said in a June 22, 2007, e-mail to Daniel Sparks, who ran Goldman Sachs’s mortgage business at the time, according to the statement yesterday. Within five months of Timberwolf’s debut, the CDO had lost 80 percent of its value, and it was liquidated in 2008, according to the panel.

The CDO was among securities that Goldman Sachs sold to clients after deciding the New York-based firm needed to reduce its mortgage holdings, Carl Levin, a Michigan Democrat who leads the panel, said in the statement. Chief Executive Officer Lloyd Blankfein and six other current and former executives will testify today in front of the panel about practices in mortgage securities markets before they collapsed.

Truncated Text

The committee, which began to release documents before today’s hearing, didn’t release the full text of the e-mails. A person briefed on the Timberwolf e-mail confirmed that Montag was the author.

Montag, now 53, didn’t respond to a request for comment and Bank of America spokeswoman Jessica Oppenheim had no immediate comment. Blankfein, 55, will tell the panel his firm didn’t wager against clients, according to a prepared text of his remarks.

“We respectfully disagree with Chairman Levin’s statement,” according to an e-mail from Goldman Sachs spokesman Lucas van Praag. “We did not have a big bet against the housing market, as our performance in residential mortgages demonstrates, and we believe we at all times worked appropriately with our clients. We did try to manage our risk, as our shareholders and regulators would expect.”

The Timberwolf CDO was issued in March 2007, following a Goldman Sachs quarter that ended February 2007 in which one department of the bank shifted from $6 billion of bets that mortgage bonds would perform to $10 billion they would default, according to Bloomberg data and information the panel released.

Cioffi Buys

Bear Stearns Asset Management, the manager of two hedge funds overseen by Ralph Cioffi whose collapse in June 2007 roiled global markets, was among the buyers, purchasing about $300 million, according to the committee.

Sparks, who left the bank in 2008, in one e-mail urged “personnel working on a potential Korean sale to ‘[g]et ‘er done,’ and sent a mass e-mail to the sales force promising ’ginormous credits’ for selling” the debt, according to Levin’s statement. “A congratulatory e-mail was sent to an employee who sold a number of the securities: ‘Great job … trading us out of our entire Timberwolf Single-A position,’ ” the panel said, potentially referring to $36 million of A-rated notes.


The U.S. claims Goldman Sachs misled investors by failing to disclose that hedge fund Paulson & Co. -- which was betting against the U.S. mortgage market -- helped the Abacus CDO manager select securities to include in the portfolio. Goldman Sachs has called the SEC’s lawsuit “completely unfounded.” Paulson wasn’t accused of any wrongdoing.

CDO managers select the collateral going into the vehicles, and sometimes reinvest as the underlying positions pay down and trade in and out of holdings.

In Timberwolf’s case, the manager was Purchase, New York- based Greywolf Capital Management LP. The firm’s partners included the late Greg Mount, who joined in 2005 after nine years at Goldman Sachs, where he helped build its CDOs business, according to the prospectus and the firm’s website.

Greywolf, which focuses on corporate debt and says on its Web site it manages $848 million, planned to buy $41 million of the CDO’s junior-most tranches, according to the prospectus. In January 2007, Goldman Sachs underwrote a $502 million CLO managed by Greywolf tied to high-yield company loans, according to Bloomberg data.

Conflicts Disclosed

The conflicts of interest section of Timberwolf’s prospectus said that Greywolf might “take into consideration research and other brokerage services” from investment banks in its decision-making for the CDO and also make separate investments with “interests different from or adverse to” the CDO’s collateral.

“Under the terms of the Collateral Management Agreement,” Greywolf “will be permitted to take whatever action is in the Collateral Manager’s best interest regardless of the impact on the Collateral Assets,” according to the prospectus.

Mount died last April, the company said in a statement at the time. Shawn Pattison, a spokesman for Greywolf, declined to immediately comment. On Goldman Sachs’s role, the prospectus said the firm would act as the sole counterparty for the bullish derivative bets on CDOs that the vehicle was making through so-called credit- default swaps, “which creates concentration risk and may create certain conflicts of interest.”

The Goldman trader responsible for managing Timberwolf’s issuance later characterized the day that the CDO was created as “a day that will live in infamy,” according to part of an e-mail released by the panel.

2. Buffett tried to cheat again and twist an upcoming new regulation to his personal advantage but since it was too obvious it got rejected.


There is a lot of news this week on financials coming from Washington and the noise level is drowning out some of the detail. So when I heard that Berkshire Hathaway (BRK) CEO Warren Buffet was trying to slip an exception into the substitute legislation offered by Senator Blanche Lincoln (D-AK) to give his OTC derivatives book special treatment, I put aside my book project and picked up the short sword.

The "Buffet Amendment" would have exempted all of the existing OTC derivatives contracts from the new collateral requirements in the financial reform legislation. The fact that such a ruse was even necessary illustrates why we need to drive a wooden stake through the heart of OTC securities and derivatives, namely that some of the biggest corporates in the world are allowed to play at the roulette table without buying chips. The "AAA" rated BRK, Caterpillar (CAT) and the other big corporates can trade OTC without posting any collateral or initial margin.

What's wrong with this picture?

When you trade on a derivatives exchange, all of the customers must post margin. It does not matter whether you are Warren Buffet or Lloyd Blankfein or Joe Sixpack, you must "show us the money." But apparently Warren Buffet, the man who once called OTC derivatives "weapons of mass destruction," now needs to supplement BRK earnings by trading OTC derivatives without any collateral backing up the trades. Hmm.

Now we know why BRK, CAT and the other big corporate came oozing out of the woodwork last year to defend the OTC derivatives market. JPMorgan (JPM), Goldman Sachs (GS) and the other OTC dealers let Warren Buffet and the other "AAA" corporates play at the roulette table w/o any chips. Wouldn't you like to be able to sit at the big table and play poker alongside Mr. Buffet w/o actually putting up any cash to back your bets?

The best part of all is that Mr. Buffet called upon US Senator Ben Nelson (R-NE) to create a derivatives loophole that would benefit his company to the tune of billions, a proposal Senate Democrats quickly quashed. It is my impression from speaking to members of both parties in Congress that Nelson is viewed as a complete idiot by his peers in the Senate. Maybe the Sage of Omaha needs to find a new boy to carry his dirty laundry. Do you think?

In any event, keep an eye on Mr. Buffet and the gang who populate the BRK CSUITE. Despite their protestation of being conservative, "fundamental value" investors, it seem that Buffet and Co. are no different than the OTC derivatives dealer banks which enable his derivatives speculation.

And in case you find this opinion a little harsh, just remember that Mr. Buffet and his colleagues at BRK are the same folks who have been sanctioned by the SEC on several occasions for aiding and abetting the manipulation of corporate earnings using side letters and other canards taken from the insurance markets. The use of side letters in the case of American International Group (AIG) to falsify corporate financial statements is the functional equivalent of using OTC derivatives sans collateral or initial margin to goose BRK earnings. Do we see a pattern forming perhaps?

But of course the Big Media is probably going to ignore this story tomorrow. Other than a mention on WSJ (Damian Paletta who broke the story), CNBC earlier today (kudos to Michelle Caruso-Cabrera for enjoying the moment so) and MarketPlace radio, there has been virtually no press coverage of the Buffet Amendment.

I am attaching the revised OTC derivatives amendment that Chris Dodd (D-CT) and Senator Lincoln hope to put into the financial reform bill this week. One of these days I will tell you how Chris Dodd worked his way through "high" school. Is this a great country or what?

Be well -- Chris

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