JSArbitrage

Well, aside from the fact that of course Paulson is going to defend Paulson in his own book, I do understand that, for the sake of expediency, some things had to get messy and you couldn't haggle contract by contract over a fast enough period. They had to act fast and hind-sight is 20/20. But some stuff just shocks the conscience. For example, bonuses were paid out all around, regardless of the failure of the firms (AIG/C/BoA, etc paid out bonuses with bailout money, ML paid them out AND were told by Paulson to lie about their loses to the ML/BoA deal could go through, Freddie/Fannie are STILL paying million dollar bonuses despite being in receivership, etc.) It's pretty clear that, when Freddie/Fannie are still paying bonuses RIGHT NOW, high-level government officials have an unspoken "blue line" if you will about bonuses. Paulson knew to protect his own. Unless you think it's just a wild coincidence that the bonuses flowed like a river when infinite capital came into play. But I don't think Bernanke really had a big hand in that stuff. I think he took the 40,000 foot view of saving the system and left the rest up to the politicians/on-the-ground regulators. I don't think Bernanke should take too much blame for that.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7T5HaOgYHpE Basically, AIG executives claim they had negotiated the payout down to some of their creditors, which is normal for this kind of settlement (maybe not Goldman; I said that off of the top of my head.) NYFED takes over, pays out 100c on the dollar. Also pays AIG bonuses and Geither later claims that ok because "the US is not Bolivia." (whatever that means) Congress asks for NYFED to send information to investigate. NYFED redacts information about discounts from terms sheets.

I don't think I am being clear: To me, Bernanke's legacy will not be determined by the inflation vs deflation academic arguments that economists and us finance-types like to discuss. It is going to be determined by the Main Street belief that Bernanke saved Wall Street (which he did and that's not really debatable.) Now, the nuanced position is that, by saving Wall Street, Bernanke saved Main Street whether Main Street understands that or not. I think this argument is largely correct myself but I do put some blame on Bernanke (more on Paulson/Geithner though) for doing it in such as way as to allow bankers to take as much as they could without restraint (e.g., AIG had negotiated with Goldman for a partial payout of the CDS's. Geithner came in and literally pushed AIG negotiations aside and chose to pay 100% face value unilaterally.) But Main Street doesn't really believe this nuanced position that Wall Street had get trillions for Main Street to survive and I don't blame them. Whether us technocrats believe Bernanke a hero is irrelevant. I think Main Street will write history on this one.

I think the mistake many are making is that you think the dislike for Bernanke rests on purely economic arguments. It doesn't. I would wager that, among trained, professional economists, Bernanke is quite popular and is seen as having saved the financial system. The dislike from Bernanke is mostly of a populist, moral strain: he basically bailed out the financial and political elite. I don't think he will shake this criticism over time. It's quite easy for an investing board comprised of contributors who are (a) very highly educated, especially in economic and financial matters and (b) probably very wealthy relative to everyone else, to cheer for Bernanke's actions. But the average person who (a) might be unemployed, (b) might have lost their home and/or © is probably financially worse off than before the crisis to appreciate the argument that for Main Street to be saved Wall Street had to be saved too is probably not going to happen no matter the timeline. Most finance-types have a fetish for Bernanke because their portolios are up big and the good days of Wall Street are back again. But they also, for some reason, also fail to consider what a terrible job Bernanke did before the crisis and what a terrible bank supervisor (actually a primary job of the Fed) he continues to be. But that's also because finance-types think the job of the Fed is to keep them rich and not keep them under control too. We also forget that his "Great Moderation" idea was an academic defense of our path right over the cliff pre-crisis. Just remember: it's easy for us investors to loose perspective and become only concerned with policies that make us richer.

This is most likely fake, unless you get paid to stand around the elevators all day doing witty one-liners at Goldman. At my firm, the elevator is the least likely place you'd say anything controversial because you never know if the person in there with you is a client, reporter, from another group, a higher-up without a sense of humor, etc.

Or one could conclude that he wasn't promoted due to the fact that he takes offense to what counts as "top performance" at the firm, which was the entire basis of the article. Maybe he wasn't willing to put "axes" on clients or "rip their faces off." (GS terminology.) Interestingly, dealbook has interviews up from more former GS employees, most of whom confirm this article. The only former GS employee that didn't validate his claims never actually said it wasn't true, he just said the guy was a loser for being VP for 12 years. So you are going to believe that after 12 years of working at GS, making very good money, he simply decided he just couldn't take it anymore? It took 12 years to figure that out? Perhaps one could say better later than never, but isn't it equally plausible that he simply is looking for payback for slow or no promotion? His seniority is incredibly relevant. Again, I don't understand the relevance of this. Even if we assume that his nay-sayers are right, he wasn't good at his job, he wasn't very high on the totem-pole, etc. that isn't relevant. What's relevant is whether what he says is true or not. You can ad hominem him all day long. The facts are these: many former GS employees (not just him) have said and the last decade or so have shown that Goldman screws their clients for their own gain. They literally paid a $550M fine for telling their clients that their interests were aligned on a security sale, and then secret bet against the security they sold. A security that was *designed* to implode. In short, you can say he is a nobody at Goldman; you can say he is upset about slow or no promotion; you can say he was there for more than a decade cashing his paycheck and bonuses when times were good. But what you aren't saying, I've noticed, is that he is wrong. This is nothing against Goldman alone; I think this can be applied to most bulge-bracket investment banks. But this is the result of (a) near zero effective regulation and prosecution of Wall Street over the past 20 years, (b) trading being more profitable than iBanking. So if you lose a iBanking client because you made $500M selling them crappy securities, what do you care? It would take 20 years of iBanking fees from one client to make that kind of money.

Hi Rabbit, do you have a link to those docs released in the suit? http://www.nakedcapitalism.com/2010/04/so-why-isnt-the-doj-after-jp-morgan-and-goldman-for-anti-competitive-behavior-jefferson-county-edition.html

I think it is also wise to stick to basins with the lowest all-in costs (e.g., Marcellus T1, Eagle Ford T1, etc.) Just something else to consider. The basin does matter.

Or one could conclude that he wasn't promoted due to the fact that he takes offense to what counts as "top performance" at the firm, which was the entire basis of the article. Maybe he wasn't willing to put "axes" on clients or "rip their faces off." (GS terminology.) Interestingly, dealbook has interviews up from more former GS employees, most of whom confirm this article. The only former GS employee that didn't validate his claims never actually said it wasn't true, he just said the guy was a loser for being VP for 12 years.

I don't even see why his seniority is relevant. You don't have to be at the top of the pyramid to know if you are fleecing a client. In fact, it'd probably be more likely that the lower you go, the more likely you are to see it. I am sure this kind of thing gets filtered out the higher you go for obvious reasons.

Because it's dumb and hypocritical. I don't support spending as much on the military than the next 6 countries combined. Does that mean I can just tell Christie to write a check out of his account for the next F-16 or nuclear submarine and shut up?

This is just stupid. I blame Wall Street for what happened as much as anyone (I actually think there should be criminal convictions) but this is silly. If you think they committed a crime; then prosecute them criminally. If you think their incentives are skewed or they take excessive risk, then regulate the firms going forward. But don't apply a fine for something from 4-5 years ago that was, in Obama's own stated belief, completely legal. Obama is the kind of person that can fall into a box of boobies and come out sucking his thumb.

I agree but I'll go even further. I think people are allowing their value investing bias to warp their sense of reality. The "rich spoiled kid that does nothing with his life" is the exception. I'd wager anyone here $100USD that if you took a statistical sample of the children of the very wealthy, they'd blow the accomplishments of the middle-class sample away. And I'd take the same wager on a middle-class sample blowing a poverty-class sample away. Unfortunately, that's life. Sick but true. My fiance and I had a discussion similar to this when talking about school for her children. She went to an elite private high school as did her older brother. She went to Yale undergrad, he went to University of Texas Plan II Honors. She is a very successful lawyer now and he is a very successful doctor. I, however, went to a public high-school and did well for myself. However, we couldn't help but notice the difference in our paths. In their school, kids were extremely bright and going Ivy League was almost expected (I think between a third and a half of her school gets Ivy League placement.) In my school, the top 1 or 2 students out of 1000 went Ivy League. It was so fucking hard and it was a good public school. But the odds were WAY, WAY against going Ivy League. You were more likely to drop out altogether than go Ivy League (statistically.) So, the point of my story is this: the children of the rich aren't spoiled brats. In fact, they probably represent the majority of the top-level professionals in the world. That's a fact. Sorry. The idea that keeping your money or your connections from your children to give them some "independence" or sense of personal achievement is more a nice sentiment than a rational plan (rational being defined as doing what gives your child the greatest chance of success.) I feel that my job as a parent is giving my child the best chance to be successful. If that means sending them to the most elite schools or giving them access to any connections I have, I will do it if I can afford to do so. Statistically speaking, I think it'd be a mistake not to do so.

Well not to nit-pick but it's because Paulson never made claims as to the quality of the securities. Goldman didn't get in trouble for creating Abacus (it's not illegal to create crappy investments); they got in trouble because internally they were laughing about how crappy the security was while simultaneously withholding the fact that Paulson designed it to be crappy from their investors. And then Goldman claimed that their incentives were aligned with investors when they were actually shorting it. Why does Paulson get in trouble for claims Goldman was making? But I agree with your sentiment. It also seems like the Wolfsons are getting off easy; I think the most severe punishment the government is going for is being banned from the securities markets. I don't believe incarceration is on the table from what I can tell. There will always be fraud all over Wall Street until prosecutors start throwing the major players in federal PYITA prison. And not just the Indian ones (yea, I don't think it's a coincidence personally.)

I definitely think 2012 is the year SHLD makes a big move. I think it's more likely to be a take-under than a Ch. 11. Most of ESL's portfolio is basically PE with a publicly-traded stub. It think it's more likely he forms a consortium of ESL money, some other firms and takes the remaining SHLD shares out of public hands at dirt cheap prices. We'll see. It's all speculation. If you're a gambler, it'd be interesting to put like half a percent of your portfolio into OTM options. If a big move does happen, I wouldn't be surprised to see a VW/Porsche-like short squeeze.

That kind of stuff is very common in depositions. Depositions are purposefully very long and very contentious. It's an attempt to put the other guy "on tilt" (to use a poker term.) There is a really funny one with Joe Jamail (famous Texas trial lawyer) on youtube where a bunch of 60-70 year old men almost break out into a fist fight during a deposition. Depositions are circuses. There is a big push to reform depositions using principles from other fields in ADR (alternative dispute resolution) but trial lawyers still enjoy the circus aspect of it.

I wholeheartedly agree with this sentiment but, in my view, we did not learn the same lessons from the GR (Great Recession) as we did with the Great Depression (GD.) Following the GD, speculative banking was pretty much busted to dust. Wall Street was opened wide by the Pecora Hearings, securities regulators became the new "Untouchables", FDR made sweeping social reforms, etc. None of that has happened. The best ERICOPOLY can mention is a tweaking of capital ratios which, in the end, are meaningless anyways. Consumers are still addicted to consumption and credit as much as they can be. Wall Street is still operating in the dark (did anyone predict an MF Global this soon after the crisis? I thought we learned. I thought banking was boring now. Lessons learned? I guess former Goldman CEO Corzine just didn't get that memo.) The banking system today has not been reformed. That doesn't mean the banking system isn't healing or the consumer isn't healing. Nothing of the sort. But what it means is that these major bankers are waiting for the music to start again. People hated the music from 1930-1980. But today's banker and consumer can't wait to hit the dance floor again. I am with Klarman on this one. Unlike GD, the GR has not been a good teacher.

In 2007 BAC had a Tier 1 common ratio of 3.5%, under Basel 1. Today it's 9.17% (reported), and it will become 9+% under Basel III rules over the coming years. Going from 3.5% to zero will be like going from 9% to 6.5%. And that 6.5% would still be considered grossly overcapitalized by 2007 standards. You probably need to roughly triple the severity of the crisis to completely wipe out the Tier 1 common. WFC will reportedly be required to hold 8% under Basel III. These crises of the past 30 years simply aren't crises anymore for these banks when they hold that much capital. They're more like minor headaches. Not to sound blunt, but this means nothing. IndyMac had 8.1% Tier 1 the quarter before they failed. How did Lehman's balance sheet look before they failed? Lots of equity there! WaMu had 8.44% the quarter before they failed too. What a cushion! The point being that these banking ratios are the most gamed thing around. There is no way to predict the future but going forward, I think you'll find that any Basel III requirements are going to get (a) watered down, (b) gamed to hell and © pretty much useless. Banks will come up with creative ways to classify non-conforming assets as capital. They'll figure out ways to get the Big 4 to sign off on transactions, swaps and off-balance sheet tricks to inflate assets and hide liabilities. Now, I am not saying that banks will be bad investments, I am just saying that I think they will figure out ways to hide their risks as they always have. Ways that we can't think of in the present because they haven't even been invented yet. They will have entire teams of bankers and accountants whose sole purpose is to figure this stuff out and still take massive risks to goose their compensation.

Banks in a fractional reserve system will never be stable over the long run. Those banks, by definition, are designed to push the envelope of credit expansion. They have ALWAYS gamed every regulation that has been put in front of them. And after reforms, people have always declared that banks will be forever stable and a financial crisis won't happen again. It's the nature of the industry and always has been since someone figured out that they can put more notes into circulation than the amount of gold they had on hand. Even arguably the best bank in the US (WFC) has taken it on the chin twice in 20 years. Almost every major US commercial bank was insolvent during the LDC crisis according to the Federal Reserve. So the evidence is that every 10-20 years, even the best banks are basically blowing up in one way or another. And it has always been that way. The only way to play them seems to be buying the most capitalized banks during a crisis and exiting your investment during peak credit expansion. In short, pessimism is high for the banking system right now and people project that pessimism into the future. But, eventually, people will be optimistic again and project optimism into the future. That includes not only valuation projections but also regulatory perceptions. So everyone can claim all these new regulations are going to make banks ultra-stable, push down valuations, etc. But my view is that's a load of bull. Once the music starts playing again, bankers, regulators and Congress are going to start dancing again. They ALWAYS do. Just be sure to exit before the music stops again.

I am no securities expert by any means but I think it is well understood that trading on non-public, material information (like an analyst downgrade) is illegal. I mean, if that were the case, hedge funds could completely crush the markets just by shorting debt that is going from lowest investment grade to junk. Am I missing something?

Huh? O&G is a hugely subsidized (direct) industry. And I'm not even including the indirect subsidies such as the cost of having to stabilize oil rich nations with our military and foreign aid to keep the price of oil low and stable. The codification of LIFO was largely a result of O&G lobbying. They got their own inventory accounting method for God's sake! C'mon. I hear this argument all the time on Fox News and it really, really annoys me. O&G just might be the most subsidized industry in the history of modern America if you look at it objectively.

Interesting because my reading of the document makes it seem like Walnut Creek has a slam dunk. Basically, CW is arguing that Walnut can't sue them because a violation of reps and warranties doesn't constitute an Event of Default. CW construes that paragraph narrowly to say that you can never sue CW for anything but an EoD. Walnut basically says that untrue and the same court has addressed that same issue in the past. In that case the Court gave a 4 prong test that a plantiff must be in order to sue outside of the Event of Default. Walnut met all 4 prongs. Lastly, I'd like to also note that, if Walnut alleges the violation of reps and warranties was a result of fraud (i.e. they knew it didn't conform when the loans were sold), then CW can't waive suit regardless. But it seems like Walnut hasn't gone that far yet because they haven't had to.

I don't know why people say this is unethical. If anything, I think he is the most ethical actor in this mess. It can't be Countrywide who misrepresented (lied about) the quality of the loans they sold to investors. It can't be the NY Fed/PIMCO/BlackRock, as they have a huge vested interest in pushing the issue under the rug, regardless of whether other investors get made whole. I am not saying Klarman is doing this for altruistic reasons but, let's face it, big settlements between the Big Banks and Government/Cronies are pretty egregious. The SEC just got legally bitchslapped by a judge for preferential treatment of Citi (he even went as far as to imply collusion.) People say these settlements need to happen for the good of the country. I say covering up a massive criminal scheme, which if you've done any background reading on the crisis, you'd know that's exactly what this was, is never in the interest of the country. It might be in the best interests of the majority of wealth-holders of this country but certainly not for the majority of citizens in this country. As for Klarman, I say take your pound of flesh from these criminals. More power to you.

Whoa! This thread really took an interesting turn. Let me say that I said "it seems" that's the play he made. I only gathered this inference from the various articles I've read. He could simply be short BAC and bought a nominal amount of these loans just to have the right to intervene. He could simply be long MBIA. It could be some play that no one knows about. I was just speculating based upon the articles I've read about this story and the fact that Klarman is well-known as a deep value fixed income player. I have no special information regarding this play.

http://www.reuters.com/article/2011/12/09/us-bankofamerica-walnutplace-idUSTRE7B805920111209?feedType=RSS&feedName=businessNews&utm_source=dlvr.it&utm_medium=twitter&dlvrit=56943 It seems like Klarman bought the worst of the worst Countrywide loans for pennies on the dollar knowing he could sue for reps and warranties violations and put the loans back to BAC for a profit. So he created an entity to intervene in the BAC settlement because they were settling for too little money. Reminds me of Andrew Redleaf's old bond strategy. He would buy distressed debt of companies that failed to file timely financial statements because, unbeknownst to most investors, many bonds contained a clause saying a failure to file financial statements constituted a default of the covenants and would therefore force acceleration of the loan. He'd buy, sue the company, settle for a large profit, rinse and repeat with a different company.