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Scandal

Scandal

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Published by: Foreclosure Fraud on Feb 20, 2013
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01/07/2014

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Recall that the “super senior” tranche of the CDO created a
sticking point when Morgan constructed Bistro. No super senior credit-
linked notes could be sold out of the SPE, for the arithmetic did not work
out. The yields on any super senior notes just would not have been
competitive. To get the Fed to sign off on the deal, Morgan had to find
an investment grade CDS counterparty to sell unfunded protection on the
super senior credit risk of the reference portfolio and found that
counterparty in AIG.

When we fast-forward to synthetic CDOs, we find that a super
senior CDS also has become strictly optional. As no one is looking to
the synthetic structure for regulatory capital relief,257

super senior comes
into the deal only because someone wants to make a super senior bet. As
it happened, Paulson did. Thus Goldman entered into a CDS with
Paulson covering losses on the Abacus reference portfolio across the loss
range from 21% to 100%. Goldman’s swap with the Abacus SPE
covered 21% to 45% of the range. That left the remaining 45%-100% of
exposure—the super senior—to be shifted away from Goldman via a
matched swap with a third-party. ACA proved willing to be the
counterparty on the reference portfolio range from 50% to 100%—a $1
billion super senior commitment.258

As with Bistro, this super senior
CDS was entered into on the side, directly between the parties directly
rather than with the SPE. Note that the swap with ACA didn’t quite go
the distance, covering 50%-100% but leaving Goldman an unhedged
long on the 45%-49% band, a $100 million exposure.259

The foregoing left Goldman relying on ACA’s creditworthiness
as a counterparty to the tune of $1 billion. Goldman was not comfortable
with ACA and so recruited the Dutch bank ABN Amro to serve as a
swap intermediary.260

ABN Amro entered the swap on the 50%-100%
slice of the reference portfolio with Goldman and into a matched set of

256

The CDO’s operations—namely providing investors with reporting and collecting and
disbursing funds, were handled by LaSalle Bank, NA, in its capacities as indenture trustee, note
calculation agent, and payment agent. Id. at 19.

257

IKB, the German bank that purchased the CLNs, was looking for
low-risk weighted assets with high returns.

258

Goldman SEC Submission, supra note 242, at 14.

259

Id.

260

Id.

12/10/2012]

BRATTON & LEVITIN

68

swaps with ACA on which it took a spread for intermediating.261

If ABN
Amro had to pay out on the swap it would turn around and look to be
made whole by ACA, which economically was the ultimate long on the
senior half of the reference portfolio risk. ABN Amro also seems to have
had some concerns about ACA, for it followed up the matched swaps by
taking out $27 million in corporate CDS protection on ACA from
Goldman.262

Figure 6 summarizes the critical parts of the Abacus 2007-

AC1 transactions.

Figure 6. Complete Abacus 2007-AC1 Transaction (elements not
disclosed in dashes)

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