Fresh out of the SEC on Wednesday morning, a depressing allegation of fraud that hints at the absurdity of the working definition of “fiduciary duty” when it comes to municipalities.
In a complaint filed in federal court in Milwaukee, the SEC alleges that Stifel and Senior Vice President David W. Noack created a proprietary program to help the school districts fund retiree benefits by investing in notes linked to the performance of synthetic collateralized debt obligations (CDOs). The school districts established trusts that invested $200 million in three transactions from June to December 2006, paid for largely with borrowed funds. According to the SEC’s complaint, Stifel and Noack misrepresented the risk of the investments and failed to disclose material facts to the school districts. In the end, the investments were a complete failure, but generated significant fees for Stifel and Noack. Read more
Here’s an interesting Wednesday story from the Financial Times’ Aline van Duyn.
It concerns growing demand for a synthetic product — this time linked to junk, or high-yield, bonds. The market size of the product (which is tranched and linked to Markit’s CDX index) is still relatively small. But demand for actual junk bonds has been strong recently — with average junk prices even hitting par value during 2010. Read more
Bloomberg reports Wednesday on the first day of an Australian trial involving a long-running dispute with potentially interesting consequences for notions of fiduciary duty:
Wingecarribee Shire Council, the City of Swan and Parkes Shire Council claim they were sold improper investments as Lehman pushed synthetic collateralized debt obligations, or SCDOs, to collect fees and commissions that were greater than it would have earned from selling term deposits. 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
There are two nominations that go along with this post. One is for headline of the year; the other is the award for worst (synthetic) CDO ever made, quite possibly.
From Reuters on Tuesday: Read more
The world of credit default swaps = one huge, amorphous, indefinable ocean of trillions worth of contracts, right?
How ’bout a dwindling, drying, puddle, instead? Read more
Goldman Sachs must be getting tired of this.
The bank duly revealed it’s the subject of a(nother) class action lawsuit involving one of its Collateralised Debt Obligations (CDOs) in the 10-Q it filed on Tuesday — only to set-off another wave of reports — even though the court filing is old. Read more
Have you ever heard of Merrill Lynch’s Pyxis CDO/SPV/Insert Structured Finance Acronym?
It’s confusing a lot of people this week, after the NYT’s Louise Story exhumed the deal, which she says was a way for the bank to shift its subprime exposure off-books. Read more
Currently sweeping the blogosphere: 250,000 pages of AIG-related emails. FT Alphaville has skimmed off the most important — revealing a very odd legal waiver on mortgage securities during AIG’s bailout, as well as shedding light on the NY Fed’s relations with banks. Read more
It’s ba-ack. The formula that famously felled Wall Street, the Gaussian copula, is being revamped to deal with its fatal flaw — the fat tail of correlated default risk, FT Alphaville writes. UniCredit’s Martin Krekel has been attempting to tweak the model for pricing distressed CDOs. Which is ambitious. And brave. Read more
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. Read more
Here’s an argument you rarely see ventured forth nowadays:
Synthetic CDOs were good for everybody… Read more