Goldman’s Hudson CDO – What lay beneath | FT Alphaville

Goldman’s Hudson CDO – What lay beneath

Savvy readers may have spotted some confusion over Goldman Sachs’ Hudson CDO.

Specifically on the subject of whether the bank used its own assets for the deal.

The FT seems to suggest yes:

The bank created and sold Hudson Mezzanine, which contained residential mortgage-backed securities from its own balance sheet, in late 2006.

While US senator Carl Levin suggests no:

Goldman constructed this $2 billion CDO to reflect the value of subprime mortgage securities similar to those that Goldman held in its own inventory.

The Senate committee investigating the banks is more ambiguous:

This CDO was underwritten and sold by Goldman Sachs in December 2006. Goldman Sachs selected the referenced assets, collaborating with its mortgage traders to identify BBB rated assets on its books.

As mentioned in our primer, Hudson Mezzanine Funding 2006-1 was a $2bn synthetic CDO referencing about $800m in subprime 2005 and 2006 vintage RMBS, selected by Goldman, and $1.2bn in ABX contracts. It’s now coming under the scrutiny of the SEC, and whether or not it actually held stuff from Goldman’s own balance sheet is bound to be a point of interest considering that the bank has been accused of “dumping” its subprime exposure on others.

Goldman’s Hudson sales pitch (available here) specifically trumpets the deal for not being a balance sheet CDO. That would imply Goldman wasn’t placing its own exposure into the deal:

Even if Goldman didn’t actually use RMBS from its own balance sheet for Hudson Mezz (and we can’t say for sure based on current public info) it stood to benefit from the deal. Remember by late 2006, Goldman was already — desperately and presciently — trying to reduce its exposure to subprime. Taking the short position in a subprime CDO would have been one way of doing that.

At the very least it would have acted as a hedge.

And, judging by some of the internal GS emails turned up by the Senate committee, it was a successful one:

Related links:
A Hudson CDO primer – FT Alphaville
Derivatives: A tricky pick – Sam Jones, FT
Dead Presidents in detail – FT Alphaville
FT Alphaville’s Abacus coverage