onyx1

This is the single biggest misunderstanding about the entire sad episode. The structure was never guaranteed to crash. It was not engineered to fail. The game was far from fixed. The reference pool was populated with run of the mill Baa's that at the time were quoted upon request from 10-15 different dealers. At the time, virtually the entire market (GS included) thought Paulson was wrong. Ask yourself how could Paulson pull off the single most profitable trade in history? Because he was alone against the entire market!! Paulson spent month after frustrating month trying to get investors to agree with his theory. Many dismissed him, others mocked and riduculed him. Paulson was simply so far ahead of everyone that the market had not recognized his brilliant conclusion yet. The SEC won't be able to show any evidence that GS knew what the outcome would be, because there is no way of knowing the future. What I believe that GS will easily be able to demonstrate is that at the time, the overwelming consensus (including GS) in the market was that sub-prime RMBS were still legitimate securities for investment.

Agreed. I doubt there would be as much indignation if people understood the nature of a synthetic CDO. In every synthetic, someone (or sometimes many) must be short. In the institutional arena, this is an accepted fact and it is not required information for disclosure. If it were required, where would it end? Did Prem's motivation get disclosed when his handpicked CDS contracts were placed in corporate synthetic CDO's? Did WEB's motivation get disclosed to the sellers when he bought back his customized put options on the S&P? How about PIMCO selling Treasuries they think will underperform to mutual funds, would that need to be disclosed too? How about any institution that had input into the construction of a specialized ETF that intended to short it, should that be disclosed also? The answer is no because the counterparties are institutional investors with research capabilities, not babes in the woods. The institutional investors involved in the ABACUS deal were experienced, savvy, and had executed billions of these types of trades for years. The SEC claim of their victimhood doesn’t pass the laugh test. The refence pool was not a blind pool. GS made a line-by-line disclosure of every item in the reference pool so that all investors could perform the necessary credit work. This is full and complete disclosure when dealing on an institutional level. Sadly for ACA and IKB, their credit work was not as good as Paulsons. But that is not GS fault, and I suspect ACA and IKB know this too. If ACA and IKB felt defrauded, you have to ask why have they not brought suit on their own by now? Disclosure : Long GS

OK fair. Lets change the scenario slightly. Now what if you approached Vanguard without stating your position one way or the other, but Vanguard simply assumed you are a long investor (because of the overwelming bullish consensus in the market). If you make no effort to clarify your intentions, are you subject to prosecution?

The best analogy I can think of is this: It's late 2006 and you see a big imbalance in home supply in CA, AZ, NV, and FL. You are an institution and want to make a bet that the housing market will crumble (against prevailing opinion). You approach Vanguard (or any other similar institution) and say you would have interest in shorting an institutional ETF populated with home builders, mortgage originators, developers, REITs, building suppliers, etc. who do a lot of business in these states. Vanguard responds that due the recent bull market they have also recieved interest in a housing ETF from other institutions who think the boom will continue. Vanguard says they will create a housing ETF but they want a set of nationwide companies. You say your interest is primarily these states. You negotiate back and forth and agree on a regional housing ETF that includes CA, NV, AZ, & FL, plus TX, NM, LA, MS & GA. All ETF holdings are fully disclosed in a prospectus and the deal closes. You make your bet and within the next year make you a lot of money. Are you a candidate for prosecution by the SEC?

"Their recorded policy liabilities are now 90% of what they were 5 years ago." Subtract the reinsurance receivables from the asset side of the BS from your calculated policy liabilities. It will show that net loss reserves & LAE have increased over the last five years.

Insurers Say Airlines Not Covered For Volcano Disruption http://online.wsj.com/article/BT-CO-20100416-709857.html?mod=WSJ_World_MIDDLEHeadlinesEurope

It certainly seems foolish now, but at the beginning of 2007 the RMBS industry (investors, rating agencies, banks, originators, etc.) were enjoying the fourth-year of a housing-based party where everyone one was getting rich. There were strong signals that the system was cracking, but the industry consensus maintained (wrongly, of course) that Baa2's backed by sub-prime mortgages were still good investments. (Without this broad consensus, Paulson would never had the opportunity to make so much money.) In this transaction, the risk wasn't just on ACA. What is not clear to many is that at closing GS retained the risk of $1.65bln of the $2.0bln reference pool of Baa2 subprime mortgages. Their motivation was a fee and the belief they could lay off the risk. Would GS have taken this risk if not for the belief that the pool would maintain its credit health? As it turned out, GS laid off some risk to IKB who took comfort from the Aaa rating and the reputation of ACA. GS laid off the super senior to ACA who took comfort in their own ability to select good credits and that fact that their attachment point was 45% (ACA's first $ of loss would not happen unless 45% of the pool defaulted with no recovery). GS wasn't able to transfer the remaining risk and ended up loosing millions on the risk they retained. I see no conspiracy here. The SEC assumes that because GS is "smart" they could predict the future and must have known these were bad assets, and in order to get their $15mm fee and get the deal done they had to defraud ACA. The SEC gives too much credit to GS. GS was just enjoying the party. Disclosure: Went long GS due to percieved market overreaction.

I agree this will most likely end in a settlement for expedition, but IMO the SEC's case depends way too much on 20/20 hindsight. In early 2007, Paulson was far from the visionary he is often credited today. If fact, we was often mocked and riduculed as a reckless newcomer by those who had been operating in the structured RMBS for two decades. ACA prided themselves on their expertise and reputation. Having dealt first hand with the decision makers at ACA, I strongly believe they would not have been scared away from what they considered their circle of competence by a macro hedge fund "outsider". ACA reviewed line-by-line and put their reputation behind the reference pool and their capital behind the $909mm super-senior tranche because of their own research, not whether Paulson was net long or net short.

Something that strikes me is that despite the 6-year soft pricing market, there are a heck of alot of CR's less than 100%. Premiums growth is flat/down in most cases so underwriting disipline may have something to do with it. But my personal suspicion is that Berkley may very well be on to something when he says underwriting results are too good to be true. When the industry runs out of prior year development to assist current calander year results, a hard market must follow. If I recall correctly, he claims the we are already at that point.

The attached spreadsheet might save you some time in your search. It's an insurance screen I run that covers 5 year stats for a number of insurance/reinsurance companies. Included is P/BV growth vs share price growth, current P/BV vs average P/BV, level of insider ownership, and GAAP combined ratios and net written premiums for the last 5 years. I think 5 years is a good time frame since it includes stressors 2005 Katrina, 2008 Gustav/Ike, the 2008 market meltdown, soft premium pricing market, and very low investment rates. I wouldn't take every bit of data as gospel since it is pulled from a general data source, but rather use it as a starting point for your research.

Incorrect. That number is only correct if you ignore local and state income taxes, medicare, social security, etc. http://www.nytimes.com/2010/04/14/business/economy/14leonhardt.html A tortured 1200-page essay from the NY Times, (or any other elitist dismissal for that matter), doesn’t change the basic fact that 47% of American taxpayers receive all the benefits of the federal government without paying a dime. Anything you get for free is not properly valued and waste is guaranteed. Our government is no exception. Without simple incentives we sink deeper into an already unhealthy culture of entitlement.

I found one. Its called America. In 2009, 47% of Americans paid no income taxes whatsoever. Whats more, the bottom 40% recieve cash & benefits (EETC, unemployment benefits, S-CHIP, Medicaid, housing subsidies, food stamps, welfare, etc.) paid from reciepts of those who paid their share of this 'social contract'. What kind of perverted theory justifies a system where half the nation are freeloaders?

Here is a basic primer on P/C Accounting & Taxation (free download): http://www.iii.org/assets/docs/pdf/AccountingBook.pdf Here is a good starter on the Reinsurance business: http://www.amazon.com/Reinsurance-Fundamentals-Challenges-Ruth-Gastel/dp/0932387500 I found both helpful in deciphering the maze of insurance jargon.

If you pay $100k from outside the account, then in case #1 the amount you can draw down without any tax penalty is $980k (200k at 8% for 20 years), not $440k. If one doesn't have $100k lying around, the economics are compelling enough that you should take out a short term loan to pay the tax obligation to maintain the $200k balance in the ROTH.

Thanks for posting! I didn't realize until reading your post that one can pay the IRA taxes with money outside the account. (I had wrongly assumed that the account assets would need to be liquidated to pay the tax). Doubling the terminal value of this account makes the conversion a slam dunk decision. The fact that you can defer the tax for a few years...even better!

http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldocumentfile&blobtable=SPComSecureDocument&blobheadervalue2=inline%3B+filename%3Ddownload.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1245205418835&blobheadervalue3=abinary%3B+charset%3DUTF-8&blobnocache=true

I'd like to see this loophole closed too, but by lowering the 35% to 15%.

OK, I'll try. Every time I order a burger, I'm given a double! It looks so good I don't want to take it back for a single. ;)

The backlog of homes is not a myth. The Mortgage Bankers Association reports that 13.5% of existing homes are 30 or more days deliquient. With about 55mm homes, 7.5mm are in various degrees of distress. Once deliquent 60 or more days, almost all loans default; and once 30 days about 75% eventually default. This suggests that about 7mm of the 7.5mm will eventually enter foreclosure. That will add 12 months to the 7 months of current inventory supply leaving 19 months of supply, and that assume no additional defaults in the future! We are currently at the end of the subprime tsunami, but the next wave of option arem and alt-a mortgages wont begin until mid-2010 and will peak in 2011. This wave is bigger that subprime, will overrun the rate of houshold creation, and will likely add years of additional inventory to the pipeline. What may appear as housing stabilization is far removed from equilbrium because of a of several factors (all of which are unsustainable): 1) Very low rates, 2) $8000 tax credit, 3) pause between subprime and option arm/alt-a reset tsunamis, and 4) massive support to the housing market from the FHA where they are lending out more in 2009 than in all of 2005-2007, with terrible underwriting standards. (18% of FHA's loans are 30+ days deliquent)

Rumors circulating that Obama is a finalist for the Cy Young award for his throwing out the first pitch on Opening Day! ;D

What an amazing accomplishment considering Obama took office less than two weeks before the February 1st deadline for nominations. To earn this valuable prize, he did in two weeks what others worked an entire lifetime to "earn"!