The collateralized debt obligation probe widens. From the Wall Street Journal:
The banks under early-stage criminal scrutiny—J.P. Morgan Chase & Co., Citigroup Inc., Deutsche Bank AG and UBS AG—have also received civil subpoenas from the Securities and Exchange Commission as part of a sweeping investigation of banks’ selling and trading of mortgage-related deals, the person says. Under similar preliminary criminal scrutiny are Goldman Sachs Group Inc. and Morgan Stanley, as previously reported by The Wall Street Journal.
The Manhattan U.S. Attorney’s office and SEC are working hand-in-hand. At issue is whether the Wall Street firms made proper representations to investors in marketing, selling and trading pools of mortgage bonds called collateralized debt obligations, or CDOs….
It isn’t known which specific deals investigators are focusing on. Nearly every major Wall Street bank created and traded CDOs, with different twists.
The article mentions Magnetar’s deals, although there is no indication that any are yet the focus of these probes. It does offer more detail about Morgan Stanley deals that may be under investigation:
In the few years before the housing downturn, Morgan Stanley designed, created and sold CDOs that its own traders sometimes bet against, traders say.
Among CDOs the firm created and bet against were deals called ABSpoke in 2005 and 2006, according to traders. Morgan Stanley sold about a dozen of these deals in that time, according to Thomson Reuters.
Another such deal Morgan Stanley marketed to investors in mid-2006 and also bet against was called Baldwin 2006-I, according to people familiar with the matter.
People familiar with Morgan Stanley say the firm’s roles on Baldwin and ABSpoke were “fully disclosed’ to investors who were betting on mortgage assets holding up.
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Partnoy’s complaint in the Financial Times yesterday and this piece in the WSJ suggest that the former was written in anticipation of the latter. It was merely the first shot in the campaign to rehabilitate GS in particular and Wall Street in general. Nothing more nothing less. It’s also difficult to see how the investigation could not “spread” to the big banks controlling the financial system. Are the two articles a coincidence? Since “they” were all doing it, singling out GS does seem a bit “punitive”. At least that’s the spin being spun.
But that would then mask the larger fact that the “rot” is pervasive… infecting not only Wall Street, major banks in the US, Europe, and Japan, hedge funds, ratings agencies, accountant firms, mortgage brokers, real estate agents, homebuilders/construction firms, and government agencies from the SEC, the FANNIES, the FED, Congress and on and on down to Joe Sixpack who became a house flipper when his/her factory job disappeared. Did I miss anyone? And it didn’t happen overnight but took decades to emerge, develop into what it became, and implode as Yves’ ECONNED aptly summarizes.
But let’s not kill the Goldman goose leading the geese that lay the golden eggs. Yes mistakes were made. But the lessons have been learned, mechanisms installed to prevent it from happening again, and values instilled in the participants that make additional financial regulation – government intervention – unnecessary and unwarranted. Let us assure you. Trust us…
The “campaign” is so well rehearsed, coordinated, and documented that we should know the players and, more importantly, the outcome by heart. Beyond Petroleum in the gulf spill is illustrative. There was an accident and the damage is minimized. Everything is under control. Uh, the well is actually leaking – gushing – a bit more than we thought. But we have a plan… a “containment” dome. Isn’t the very terminology Orwellian – doublespeak? It didn’t work as planned. Congressional investigations into whom, what, and how such an accident occurred will follow with measures devised to prevent such an accident from ever occurring again. But we plan to drill in 10,000 feet of water next time… and if you rebuke us with punitive liabilities/damages for the cleanup we won’t have sufficient resources to drill. Might as well declare bankruptcy and tie it up in Federal court for years. Meanwhile, it’s the OIL stupid. We still need to drill for it! Trust us… there are always risks in such endeavors.
The result is that the costs and consequences are socialized whereas the profits remain privatized. Finance, energy… globalization [unemployment/social dislocation/community disinvestment] … Social Security and Medicare, you name it, the looting will continue but it will not be televised! That much is certain. All pieces in a puzzle in which, by now, the big picture should be obvious.
When reform no longer seems viable and revolution without realistic alternatives invites REACTION is total collapse to be feared or welcomed? Is it possible to create parallel structures within this Leviathan that will serve as the foundation on which to build something different over time that will supplant it? My “optimism” and reading of history say “yes”. Christianity is just one example. Initially a small sect, despised and punished for its beliefs, it became the dominant force in the Empire and outlived it. Admittedly, it became every bit as oppressive as the Empire, perhaps even more so in its monotheistic intolerance for “paganism”. But hopefully we and our childrens’ children can do better. This is a historical process and larger than each and every one of us that will extend beyond our lifetimes. That in itself is reason enough for doing it and hope. Try to remember this when that foreboding despair begins to overwhelm… or poison your psyche. Too many of us have already fallen into this psychological black hole on our way to singularity.
Superb commentary. Christianity is indeed a mysterious, radical promise that may find a reawakening as crisis burns away our fatih-based materialism. Sincere thanks for your sober optimism.
P.S. This was intended as a reply to Mickey Marzick. The bewildering strangeness of this crisis, and the evident irrationality of all controlling players, does indeed portend some cataclysmic change on the horizon—and it could be breathtakingly wonderful and joyous.
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