It’s been just two business days since the SEC announced that it was investigating a single CDO transaction arranged by Goldman Sachs
By my count we’ve already identified at least three hedge funds, one financial insurer, two asset-backed commercial paper vehicles, two major European banks, and two major European countries all tied to the transaction. And those are just the “direct” participants. (See also Goldman Lawsuit Tip of the Iceberg?
Let’s also consider the indirect participants for a second. On the one side you have the thousands of homeowners whose mortgages were originated by hundreds of banks and mortgage banks, pooled together by a smaller group of investment banks to create hundreds of mortgage-backed securities, which were in turn re-cut to form the CDO itself.
On the other side you have the pension plans and other institutional investors of the hedge funds, the creditors of the financial guarantor (not to mention other policy holders) along with the depositors and shareholders of the foreign banks, together with the taxpayers of England and Germany.
As ridiculous as this may sound, I don’t think that I’m exaggerating when I say that there were over 50 million people directly or indirectly involved or affected by this single transaction.
One deal -- 50 million people.
Over the past two years, I’ve come to refer to this as the “Hourglass” in which -- thanks to securitization and the “origination for resale” business model utilized by many financial institutions -- diversified (or at least thought to be diversified) pools of financial assets were pulled together and funneled through the world’s largest financial institutions.
Thanks to underwriting syndicates, the proliferation of derivatives, and the liberalization of the capital markets -- the risks associated with those assets were scattered and spread back out across the globe. (See also Goldman Sachs: The Poster Child for Class Warfare
During the 2008 crisis, the markets got an early preview of this as investors and global regulators scurried to figure out who the creditors and counterparties of Bear Stearns
(JPM), Lehman Brothers, Fannie
(FRE), and so forth were. Unfortunately, at least from my perspective, once the banks were “stabilized” most people thought the Hourglass had been adequately addressed (particularly with the promises of most derivatives transactions being moved to exchanges).
To me, the Hourglass is alive and well. And while the flow of new assets through the funnel has slowed to a trickle, the risk associated with the trillions of dollars of assets that flowed through the Hourglass are still out there somewhere in the system.
Last Friday, we had transparency on one deal out of the thousands, if not tens of thousands, of deals done. And from my perspective it felt like 2008 all over again as the markets tried to determine who had what risk.
As I’ve written before, I wouldn’t underestimate the inverse correlation between prosperity and scrutiny. And, I think it’s very safe to assume that every “hand off” in the Hourglass, from loan origination to the ultimate placement of risk, is going to be analyzed for fraud and malfeasance. (See Five Suggestions for Banking Reform
But the consequence will look and feel like someone has turned the Hourglass over, as end investors seek to recover from someone further up the origination chain. And with governments currently serving as both regulator and end investor, I wouldn’t underestimate the consequences.
But with one deal touching 50 million people, I think it’s way too soon to suggest clear winners and losers.
As Sir Walter Scott said, “Oh what a tangled web we weave, when first we practice to deceive!”
If Abacus is any indication, I wouldn’t underestimate just how tangled that web really is.
Position in SPY, SH, SRS, and JPM.
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