Monday, April 19, 2010

Does the SEC Understand the ABACUS Transaction

ABACUS is the specific CDO bundle purchased by IKB Germany and Royal Bank of Scotland, which is the focus of the SEC's allegation of fraud against Goldman Sachs.

What is remarkable is that the SEC Complaint talks about mortgages contained in the CDO. There are no mortgages in the CDO known as ABACUS. I wonder if the SEC understands the difference.

If there are no mortgages in ABACUS, what is in ABACUS?

ABACUS is a "synthetic CDO." It consists of Credit Default Swaps (CDS's). CDS's are plain and simple insurance contracts, in this case insuring mortgages. Specifically the CDS's in ABACUS insured sub-prime mortgages. If you insure subprime mortgages and they go belly up, you lose. If you buy a bundles of CDS's that insure subprime mortgages and the suprime market gets worse you lose.

That was a bet that both IKB Germany and RBS were willing to take. Paulson's activity is completely irrelevant. ACA did not listen to most of the advice Paulson gave them and they have no obligation to disclose who they talk to regarding their investment advice. At the time, Paulson was considered a crank who thought the whole housing market was going to go under. IKB Germany and RBS did not share Paulson's view. They thought the worst was over. It wasn't. They lost.

Anyone buying a 'synthetic CDO" knows that it is a bet that the underlying CDS's will not have to pay off. IKB Germany and RBS took that risk with their eyes open and Paulson had nothing whatever to do with that. Had Goldman disclosed Paulson's activity, it would not only violate a customer confidence, the information that Paulson is taking the other side would have been totally irrelevant to IKB and RBS. In any event, there no way it is a legally required disclosure for a transaction that Goldman is merely acting as a placement agent.

If you don't like the laws, change the laws. But, don't invent crimes where there are no laws that make such activity a crime.

Goldman is a convenient whipping boy for the guys that really caused this crisis -- Barney Frank and Chris Dodd and Congress over the years. Bernancke and Geithner played an absurd role in the Fall of 2008 and permanently altered capitalism's historic role of letting losers go bankrupt and letting winners win. Now, everyone is too big to fail, soon to be codified in the Financial Reform Legislation that Obama and Dodd are trying to cram down Congress's throat.

The Obama Administration is nothing but political theater. They sit in their offices deciding who to slap down next and who to provide lavish funding to. Picking winners and losers. Capitalism used to pick winners and losers, now Obama does that job.

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