Confessions of a Derivatives Trader

The most amazing true confession of a derivatives trader, aptly titled Legerdemath, confirms what we know. Banksters pushed their derivatives to make profits for themselves and fooled their customers with some highfalutin' math, three letter mnemonics and outright fraud.

Our clients were non-financial corporations, the Deltas and Verizons of the world, which relied on us for advice and education. Our directive was “to help companies decrease and manage their risks.” Often we did just that. And often we advised clients to execute trades solely because they presented opportunities for us to profit. In either case, whenever possible we used our superior knowledge to manipulate the pricing of the trade in our favor.

The grand prestigious employer? Citigroup. The fictional pricing that anyone with a solid Bachelors in mathematics could figure out? Interest-rate swaps and Treasury-rate locks.

I never heard this arrangement described as a conflict of interest. I learned to think we were simply smarter than the client. For unsophisticated clients, being smarter meant quoting padded rates. For the rest, a bit of “legerdemath” was required. Most brazenly, we taught clients phony math that involved settling Treasury-rate locks by referencing Treasury yields rather than prices.

Goldman CDOs at the Caymans

Did you know CDOs are actually issued by Special Purpose Vehicles, often incorporated in tax havens like the Cayman Islands?

Tax Justice wrote up a great overview post:

In the much-publicised fraud case involving a lawsuit filed by the Securities and Exchange Commission against Goldman Sachs, it is absolutely no surprise to us to find that this deal, known as Abacus 2007-AC1, involves:

Issuer: Abacus 2007-AC1, Ltd., Incorporated with limited liability in the Cayman Islands
Co-Issuer: Abacus 2007-AC1, Ltd., Incorporated with limited liability in Delaware.

Were you aware that special purpose vehicles (SPV) were routinely created in the Caymans?

All Things Magnetar

For those of you who have not picked up Yves Smith's book, ECONned, perhaps you've never heard of the Magnetar Trade.

In the wake of the Goldman Sachs civil fraud charge, Journalists and Bloggers are wondering and hoping where the next investigative shoe will drop. Hence, the Magnetar fund, a hedge fund of synthetic CDOs, where buttloads of CDS bets were placed against them, is being revisited.

Details on Abacus, Synthetic CDOs at the Heart of the Goldman Sachs Fraud Case

Now the world is awash in Goldman Sachs stories. If you have no idea what they are talking about. Credit Slips explains an Abacus CDO in English (semi):

A CDO is more or less a hedge fund. It's an actively managed, unregulated investment fund. The assets can be anything. In the case of the Abacus 2007-ACA deal, the assets were a portfolio of credit default swaps (CDS). The Abacus CDO was the securitization of a bunch of CDS positions (if it has cash flow, it can be securitized).

Goldman Sachs Charged with Fraud!

Finally! The golden boys finally aren't going to get away with something. The actual SEC complaint is online here. First:

The Players are Goldman Sachs, Paulson & Co. (a hedge fund run by John Paulson) and one Goldman Sachs VP, Fabrice Tourre.

The fictional investment vehicle in question is ABACUS 2007-AC1.

The Victims are IKB Deutsche Industriebank, Royal Bank of Scotland.

The Money is $1 billion in rigged profits to Paulson, $1 billion in losses to the victims, $15 million to Goldman Sachs for rigging the CDO.

Here is the entire SEC press release:

SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages

More on New York Fed and AIG

On January 27, Tim Geithner will testify before Congress on the AIG 100% payout scandal. Today the NY Fed was ordered to turn over documents to Congress. (see subpoena).

The New York Fed asked Habayeb to “stand down” from negotiating with counterparties, according to an Oct. 31, 2008, e-mail he wrote to AIG CFO David Herzog. Herzog replied that AIG should “get back with Goldman” about the change in plans.

Before the New York Fed took over the talks, AIG tried to persuade banks to accept so-called haircuts of as much as 40 cents on the dollar, according to people familiar with the matter.

SEC Subpoenas Goldman Sachs, Citigroup over CDOs

I can't find out much more information than this blurb from the Financial times:

Several leading international banks have received subpoenas from US regulators investigating one of the complex securities markets at the heart of the financial crisis, people familiar with the probe say.

The Securities and Exchange Commission sent subpoenas last month to banks including Goldman Sachs, Credit Suisse, Citigroup, Bank of America/Merrill Lynch, Deutsche Bank, UBS, Morgan Stanley and Barclays Capital, these people said. Requests for information were also made by the Financial Industry Regulatory Authority, which oversees broker-dealers.

The Peddling of Toxic Waste, otherwise known as CDOs being investigated

Seems the SEC is just catching up to the finance blogs.

The New York Times article, Banks Bundled Bad Debt, Bet Against it and Won (great title, about sums it all up!) outlines some new investigations.

Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

Wall Street Journal Outlines Goldman Sachs Glorified Ponzi Scheme with AIG

The Wall Street Journal has an investigative piece outlining how Goldman Sachs Fueled AIG Gambles. It appears Goldman Sachs acted as a middleman for even more CDSes from other banks.

Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Société Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman.

In Goldman's biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner—AIG, according to the Journal's analysis and people familiar with the trades.