Three more thoughts on the Goldman thing

2010 April 20
by Dave

First, after reading lots of different takes on this deal and thinking on it a fair bit, I’ve decided that the best way to think about the deal is as an arbitrage of the knowledge of ratings agencies’ willingness to give AAA ratings to super senior tranches of pretty much anything against many big institutional investors’ willingness to believe those ratings. Having the originator be aware of it rather than acting as a neutral clearing house is the shady bit.

Second comes the question of whether or not insurance on synthetic CDO’s helps the market to find the correct price of the underlying assets in a similar manner to shorting equities. I’ll go with a no. When you short a CDO you are shorting the mortgage, not the asset. Thus the feedback mechanism is to increase the price of home financing. It would be equivalent to being able to go short on the aggregate margin accounts of retail investors in equities indexes(if margin accounts were easier to default on).

So, the big question is, is it more societally useful to mitigate bubble formation and aid price discovery by increasing the cost of leverage or by decreasing the cost of the asset? Since many home owners have floating rate mortgages, increasing the cost of leverage not only makes new home sales more expensive, it makes previous home sales more likely to default. That’s how you cause a collapse, not mitigate a bubble.

The third and final thought I will leave you with is the email from Fabrice Tourre, the VP(even the janitors at banks are vice presidents) at Goldman who structured this deal, that I’m sure you’ve already read or heard. However it is so good that to not include it would unfairly deprive you of another chance to bask in it’s glory.

“The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab…standing in the middle of all these complex, highly leveraged, exotic trades that he created without necessarily understanding all the implications of these monstrosities!!!”

Could someone please make corporate America institute mandatory training of new hires that explains what e-discovery is and why they should write every email from the standpoint of how it would look to the rest of the world, particularly a jury in a civil suit. Also they should maybe have a seminar in not making yourself sound like a supervillain or an air freshener. Idiot.

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