"The selling of securities to customers and then "shorting' them because they (these companies) believed they (the securities) were going to default is the most cynical (mis)use of credit information that I have ever seen," said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. "When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else's house and then committing arson."
A handful of investors and Wall Street traders clearly anticipated the mortgage crisis. In 2006, Wall Street had introduced a new index, called the ABX, which essentially became a betting parlor in which one could bet on the "direction' mortgage securities were going to go. The index allowed traders to bet on or against pools of mortgages with different risk characteristics, just as stock indexes enable traders to bet on whether the overall stock market, or technology stocks or bank stocks, will go up or down.
Goldman, among others on Wall Street, has admitted that since the collapse it made big money by using the ABX to bet against the housing market. Worried about a housing bubble, top Goldman executives decided in December 2006 to change the firm's overall stance on the mortgage market from positive to negative. However it did not disclose that to their customers. (Why tip off the rubes they were about to fleece?)
Beginning in 2004, with housing prices soaring and the mortgage mania in full swing, Goldman's managing director had begun creating CDO deals within a "betting parlor' known as "Abacus." From 2004 to 2008, Goldman issued 25 Abacus deals, according to Bloomberg, with a total value of $10.9 billion. The Abacus "betting parlor' allowed investors to bet for or against the mortgage securities that were linked to the deal. These CDOs didn't contain actual mortgages. Instead, they consisted of credit-default swaps, a type of insurance that pays out when a borrower defaults. These swaps made it much easier to place large bets on mortgage failures.
Goldman's directors saw the writing on the wall in this market as early as 2005." By creating the Abacus CDOs, they not only helped protect Goldman against losses that others would suffer, they allowed Goldman to profit handsomely on those losses.
Just five months after Goldman had sold off a new Abacus CDO, the ratings on 84% of the mortgages underlying it had been downgraded, indicating growing concerns about borrowers' ability to repay the loans -- this according to research from UBS, the big Swiss bank. Of the more than 500 CDOs analyzed by UBS, only two were worse for gullible investors than the Abacus deals.
Consider also an $800 million CDO betting parlor known as "Hudson Mezzanine." It included credit insurance on mortgage and subprime mortgage bonds that were in the ABX index. Hudson buyers would make money if the housing market stayed healthy -- but lose money if it collapsed. Goldman kept a significant amount of the financial bets against securities in Hudson, so that it (Goldman) would profit if they failed. This according to three of the former Goldman employees involved in this scheme.
A Goldman salesman involved in Hudson said the deal was one of the earliest in which outside investors raised questions about Goldman's unethical strategies. "Here we are selling this stuff, but we think the market is going to go the other way," he said, with no further comment.
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