What’s the proper way to disclose that someone going short on a CDO is also selecting its assets?

The SEC seems to have had some idea.

In Part II of its defence documents, Goldman talks of the following suggestion made by SEC staff at a September 2009 meeting — before the regulator filed its CDO fraud suit against the bank:

At our meeting, the Staff suggested that at least some market participants disclosed the involvement in the portfolio selection process of third parties that took short positions with respect to the CDO’s portfolio and referenced as examples the Auriga, Norma and Sorrento transactions.

Auriga and Norma are two CDOs which have been identified by ProPublica as some of Chicago-based hedge fund Magnetar’s subprime deals. They are probably the only deals which could rival Goldman’s Abacus — the CDO deal at the centre of the SEC suit — in terms of controversy at the moment.

In particular, ProPublica says some people have alleged that Magnetar helped stuff the CDOs with riskier mortgages — an allegation Magnetar strenuously denies. The hedge fund says it was arbitraging between the different layers of securities and was “net long”, rather than engineering a short.

In any case — the SEC reference to Auriga and Norma throws up some interesting thoughts. It looks like the SEC was fine with such deals as long as the agency thought the role was properly disclosed.

(If you read Goldman’s defence document there seems to be some disagreement about whether that actually happened in Auriga and Norma, and whether the deals can be compared to Abacus).

As for Sorrento — the third CDO held out as an example of disclosure by the SEC — no one seems to know much about it, or who was behind the short. Goldman says it can’t find the offering document, and notes only that it was a $67m bespoke transaction — tiny in the pre-crisis structured finance world.

This 2006 CDO update has it as a static deal of ABS led by Credit Suisse.

How very mysterious.

This entry was posted by Tracy Alloway on Wednesday, April 21st, 2010 at 8:35 and is filed under Capital markets, Hedge funds. Tagged with Abacus, CDOs, credit suisse, goldman sachs, Magnetar, sec. Edit this entry.