We qualify ‘new’. This paper is a full 30-year history of the special-purpose entity in banking, from Mike Milken to the Abacus CDO, via Bistro — up to the denouement of FAS 167.
Penned by William Bratton and Credit Slips blogger Adam Levitin, it also points out that corporate law continues to lag the accountancy profession in understanding the implications of SPEs. That weakness is important when the original purpose of many SPEs — for banks to replace equity with contracts as a means of controlling assets taken off-balance sheet, in order to gain relief from regulatory capital — is as relevant as ever. Read more
More huge numbers on US dollar asset deleveraging in a French bank’s end-2011 results, on Thursday. Societe Generale got rid of $55bn in funding needs in the six months from June 2011:
Federal prosecutors are to file criminal charges against former Credit Suisse traders alleging they purposefully mis-priced CDOs, which triggered a $2.8bn write-down at the bank, the FT reports. It is the first criminal case to emerge from the wreckage of valuing structured products in the crisis, though the SEC is also likely to press civil charges. Two traders are expected to plead guilty. Prosecutors will argue that the traders inflated CDO prices to protect their bonuses despite knowing that the value of the securities had dropped, the WSJ adds. Credit Suisse in 2008 explained its write-down as the result of “mismarkings” in CDO prices, Bloomberg says. Read more
Two former Credit Suisse traders are to be hit with criminal charges for allegedly mispricing mortgage-related securities that resulted in a $2.8bn writedown by the bank at the height of the financial crisis, the FT says, citing people familiar with the matter. The two men are expected to plead guilty to charges from federal prosecutors alleging that they purposefully mispriced CDOs to avoid taking losses in 2008, a person familiar with the matter said. It would be the first criminal case involving the valuation of structured products during the crisis. The SEC is also expected to file civil charges against the traders. Credit Suisse, which reported the mispriced positions to regulators in the US and UK, is not expected to be charged as a result of the investigation by US federal prosecutors and the Federal Bureau of Investigation. Read more
It’s the middle of 2007. Executives at RBS are joining the dots about how even super senior tranches of CDOs offer scant protection in the face of a tsunami of subprime defaults.
A structure which would become commonly understood by many, had some that should have been in the know scratching their heads. Given that CDO structures seem to be the answer to everything these days, it beggars belief that the captains of the industry had trouble grasping the problem. Read more
The SEC expects to file charges against more Wall Street firms related to the sale of mortgage-linked securities, with hopes of wrapping up probes from the financial crisis in the near term, the FT says, citing a senior enforcement official. The potential charges would follow SEC settlements with three Wall Street banks that allegedly misled investors who bought collateralised debt obligations. The SEC had claimed that the banks failed to tell investors that some assets in the CDOs had been selected by parties who had bet against them. Last month, Citigroup agreed to pay $285m to settle. Goldman and JPMorgan Chase previously paid $550m and $153.6m, respectively, to settle without admitting or denying wrongdoing. Read more
Citigroup will pay $285m to resolve a Securities and Exchange Commission probe alleging the bank misled investors in a 2007 mortgage-related security, the FT reports, adding that people familiar with the matter say the SEC is looking to resolve a half dozen more cases involving Wall Street’s sale of CDOs. The SEC alleged that Citi was negligent in failing to tell investors in a $1bn CDO – known as Class V Funding III – that the bank had helped to select $500m of mortgage assets that went into the security, and was also betting against it. The SEC has previously reached settlements with Goldman Sachs and JPMorgan Chase over their securitisation and sale of CDOs to investors, alleging they did not tell buyers that hedge funds betting against the security helped structure it. Goldman paid $550m to settle while JPMorgan paid $153.6m; as with Wednesday’s Citi settlement, neither bank admitted nor denied wrongdoing. Read more
Some very interesting proposed changes to Standard & Poor’s rating methodology for CDOs made of stuff like ABS, in the following request for comment, we think:
Standard & Poor’s Ratings Services is requesting comments on proposed changes to the methodologies and assumptions it uses to rate collateralized debt obligation (CDO) transactions backed by structured finance (SF) securities… Read more
Credit Suisse have embarked on a more technical approach to our old friend, the eurozone CDO. They’ve used the five-year CDS spreads to organise the “tranches” like this:
US regulators have warned Standard & Poor’s that they may file civil charges against the credit rating firm, the FT reports, alleging that it violated federal securities laws in connection with its rating of one of the structured finance instruments that was at the heart of the financial crisis. McGraw-Hill, which owns S&P, said it had received a so-called Wells notice from the Securities and Exchange Commission on September 22 concerning its rating of a $1.6bn deal known as Delphinus CDO 2007-1. Such a notification allows the company to address regulators’ concerns before the SEC brings formal charges. “S&P has been co-operating with the commission in this matter and intends to continue to do so,” McGraw-Hill said. The SEC may seek monetary penalties. Read more
The Securities and Exchange Commission is further expanding a probe into collateralised debt obligations, including pressing for a $200m settlement with Citigroup, negotiating a settlement with Credit Suisse, the WSJ reports, citing people familiar with the matter. The talks with Citigroup and Credit Suisse concern Class V Funding III, a $1bn CDO. Credit Suisse, which acted as a collateral manager on the CDO, was expected to pay a smaller penalty of less than $5m, the report says. The SEC is said to be also looking at a separate CDO deal involving Mizuho, although this was reportedly months from completion and may not result in charges being laid against the banks. Read more
The Manhattan district attorney’s office has issued subpoenas in recent weeks into the way Goldman Sachs marketed some CDOs before the financial crisis, the WSJ says, citing people familiar with the matter. The probe began after a US Senate subcommittee in April released a report into the causes of the crisis, which claimed Goldman had deceived clients on some CDO sales. Investors with the firm, including some hedge funds, were subpoenaed, the report says. It stressed that subpoenas do not indicate a likelihood of charges being laid. Read more
A lawsuit against Goldman Sachs over its ‘Timberwolf’ CDO has been dismissed, Reuters reports. US District Judge Barbara Jones in Manhattan ruled the legal action by Australian hedge fund Basis Yield Alpha failed to sufficiently show that its Timberwolf 2007-1 investment was a “domestic” transaction, entitling it to sue in a US court. Judge Jones’s ruling follows a decision by the US Supreme Court last year in the Morrison v. National Australia Bank case that US securities laws don’t apply to the claims of foreign buyers of non-US securities on foreign exchanges, Bloomberg says. Basis Alpha Yield, which is no longer in business, could turn to a state court in the US or file a new lawsuit in its home country, says the WSJ. A lawyer representing the Basis said it would continue pursuing legal action. Read more
You know, a certain FT reporter took a lot of shtick for a this article.
The gist — European sovereigns were increasingly turning to the kind of pre-crisis financial engineering to shift them out of crisis. The European Financial Stability Facility, you’ll remember, was often likened in principal to a giant Collateralised Debt Obligation, with its emphasis on credit enhancement. Read more
U.S. securities regulators have broadened their probe of mortgage bonds sold by Stifel Financial to include whether the securities were suitable for five Wisconsin school districts that suffered steep losses on them, the Wall Street Journal reports, citing people familiar. The SEC is trying to determine if the schools should have been sold three different collateralized debt obligations pitched to them by a unit of the St. Louis company, these people said. The Wisconsin schools’ cash investment of $45m was consumed by losses, and a bank that the trusts borrowed money from has demanded that they repay the rest of the money. Read more
JPMorgan Chase has agreed to pay $153.6m to resolve US civil fraud charges that it misled investors in a mortgage-related security created for Magnetar, an Illinois hedge fund that was betting against the deal, reports the FT. The SEC alleged that JPMorgan failed to tell investors Magnetar helped select mortgages included in the collateralised debt obligation, known as Squared, and placed a big bet to profit against its decline. According to the SEC, JPMorgan’s marketing material told investors, including a Minnesota faith organisation and an adviser to General Motors’ pension plan, that the CDO’s mortgage portfolio had been selected by GSC Capital, an independent investment adviser. JPMorgan settled without admitting or denying wrongdoing, and also agreed to reimburse investors in a different CDO called Tachoma. DealJournal meanwhile looks at some “colourful” JPM correspondence over Squared. Read more
The Securities and Exchange Commission is investigating Merrill Lynch’s sale of a CDO it created for Magnetar, an Illinois hedge fund, and the collateral manager involved in the deal, the FT says. The investigation marks a broadening of several CDO probes under way at the SEC into the role of collateral managers, institutions that help select the assets included in the securities. NIR Capital Management, a Roslyn, New York firm run by Corey Ribotsky, served as manager for the security under scrutiny, a $1.5bn CDO known as Norma. Neither Mr Ribotsky nor his attorney returned calls seeking comment. The SEC is also looking at whether Merrill mispriced assets in the CDO, according to people familiar with the matter. Bank of America, which acquired Merrill Lynch, declined to comment. The bank previously said it lost $900m on the Norma CDO. Read more
For the commute home,
- Cisco beats expectations after the bell. Read more
FT Alphaville has explored the financing and bespoke servicing role of ETFs before.
The FT’s Gillian Tett has now openly likened the products to CDOs. Read more
The SEC is preparing to bring civil charges against Wachovia, the once-troubled bank now owned by Wells Fargo, for allegedly overpricing mortgage-bond deals, the Wall Street Journal reports, citing people familiar with the matter. The agency has focused on the amounts Wachovia charged investors for CDOs, and SEC officials believe the Charlotte-based bank applied excessive markups that didn’t reflect the diminishing value of the underlying loans, the people said. The Wachovia inquiry is part of a broader probe by the SEC into Wall Street’s sales of about $1,000bn worth of CDOs. Read more
Behold a central pricing solution for illiquid assets… stuff like TruPS CDOs or, err, Irish bank loans.
Citigroup has come under attack from a prominent analyst and accountancy experts for failing to disclose regulatory criticism of the bank’s valuation of troubled securities during the financial crisis, the FT reports. Newly released documents show that on February 14 2008, the Office of the Comptroller of the Currency, one of Citi’s main regulators, expressed concerns about the way Citi valued mortgage-backed securities. In a letter sent by John Lyons, a senior OCC official, to Vikram Pandit, Citigroup’s chief executive, the regulator said it had found “several deficiencies that need to be addressed” in the way Citi valued illiquid collateralised debt obligations. Citi suffered more than $50bn in losses during the crisis, largely due to writedowns on CDOs, prompting the US government to launch a $45bn bail-out of the bank. For more see FT Alphaville. Read more
Klaus Regling, the chief executive of the European Financial Stability Facility, strives to argue in a recent letter to the FT that he is not in charge of a massive collateralised debt obligation.
For argument’s sake, never mind that the FT noted the EFSF is not technically a CDO in any case. (And cast aside thoughts that Regling doth protest too much, perhaps.) Read more
That’s an old Valentine’s day letter — sent on February 14, 2008 — from John Lyons at the Office of the Comptroller (OCC) to Citigroup CEO Vikram Pandit. We bring it up because it’s the subject of a new column by Bloomberg’s Jonathan Weil, provocatively titled; “What Vikram Pandit Knew, and When He Knew it.” The document itself was released recently by the the Financial Crisis Inquiry Commission. Read more
It has long been known that consulting firm Oliver Wyman crowned Anglo Irish the world’s best bank in 2006 — just when Anglo was actually… well, you know the story.
Sadly, the report that bestowed this fateful distinction has (quite unaccountably!) vanished from the Oliver Wyman corporate site. Read more
One way to think about EFSF-financed Greek bond buybacks is as an informal exercise in a collateralisation and tranching of sovereign debt.
An exercise, in short, in converting a country into a collateralised debt obligation. Read more