Monday, April 19, 2010

The Greatest Trade Ever: Bear Stearns Refused to Do the Paulson CDO Deal Because it Was Neither Ethic Not Moral

From Wall Street Manna: Gregory Zuckerman's book, The Greatest Trade Ever describes on Page 179 Paulson's extensive meetings with banks including Goldman, Bear Stearns, and Deutsche Bank to "ask if they could create CDOs that Paulson & Co. could essentially bet against.

"Ironically, it was Bear Stearns that rejected the offer: "[Bear Stearns trader Scott Eichel] worried that Paulson would want especially ugly mortgages for the CDOs, like a bettor asking a football owner to bench a star quarterback to improve the odds of his wager against the team ... he felt it would be improper." Eichel told Zuckerman, " 'It didn't pass our ethics standards; it was a reputation issue, and it didn't pass our moral compass.' "

"How about Paulson's moral compass? Paulson felt unburdened by any moral compass. (Of course not. He aleady fixed the odds. He wasn't gambling!) Though he had made clear that the CDOs should be stuffed with only risky slices of debt, Paulson accepted no personal responsibility, claiming “it was a negotiation; we threw out some names, they threw out some names, but the bankers ultimately picked the collateral. We didn’t create the securities, we never sold the securities to investors…”

But here's the real blockbuster. Abacus wasn't just any old mortgage-backed security. It was one of a toxic group that nearly brought down insurance giant AIG, as the New York Times pointed out last December. Goldman Sachs sold credit-default swaps to Paulson, according to the SEC. That left Goldman holding the risk on Abacus. According to a nice breakdown by the Wall Street Journal this week, here's how Goldman handled it: "Goldman bought credit-default swaps from AIG to hedge the securities firm's positions in some of the [Abacus] pools. When many subprime borrowers began defaulting on their loans in 2007 and 2008, the Abacus CDOs dropped in value, and AIG had to post billions of dollars in cash collateral to Goldman."

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