Regulators Inch Forward on Investigations, Settlements of Dubious CDO Dealings
Regulators and prosecutors have been notoriously slow at taking action against the dubious dealings during the financial crisis, but it seems they’ve inching forward on investigations of certain mortgage-backed securities deals bundled, packaged, and sold by major financial firms.
As Bloomberg has reported, JPMorgan said in regulatory filings that it is in “advanced” talks with regulators to resolve investigations of its CDO deals. And Goldman Sachs—which paid $550 million last year to settle a Securities and Exchange Commission lawsuit over a CDO deal called Abacus—also said in filings that it’s still being scrutinized for that deal as well as others.
Which other Goldman CDOs have caught the attention of regulators? The language in the filing is pretty vague:
Group Inc. and certain of its affiliates have received subpoenas and requests for information from other regulators, regarding CDO offerings, including the ABACUS 2007-AC1 transaction, and related matters.
It’s worth noting that Goldman has been publicly criticized for some of its other CDO deals aside from Abacus. One such deal is Timberwolf, which a senior Goldman executive once referred to in an email as a “shitty deal”—a phrase that was repeatedly quoted by Sen. Carl Levin in a Senate hearing last April.
In our story last summer about banks’ self-dealing in the run-up to the crisis, we also detailed a less-noticed aspect of the Timberwolf deal: A November 2006 internal memo stated that "Goldman is approving every asset" that will end up in Timberwolf. An independent manager was supposed to be selecting assets for the deal, and the memo raised questions whether about Goldman fully disclosed its involvement to the other investors in the deal. Goldman told us at the time: "The securities included in Timberwolf were fully disclosed to the professional investors who invested in the transaction."
In its regulatory filing, JPMorgan Chase disclosed that it “is currently in advanced” negotiations with regulators, but the bank didn’t specify which deals were the subject of these talks.
What we do know and have reported is that the SEC is taking a hard look at a JPMorgan CDO deal called “Squared.” The SEC formally warned executives involved in the deal that it may sue them over Squared.
They have been focusing on whether the bank adequately disclosed to investors that a third-party hedge fund, Magnetar, had a role in the selection of assets for the CDO.
As we reported, Magnetar often bought up the hardest-to-sell slices in CDOs, pushed for riskier assets to be included, and placed bets that would yield millions when the products failed. Its strategy with Squared, as with its other deals, paid off:
Magnetar earned about $290 millionoff its bet on Squared. The firm does not appear to be a target of the SEC's investigation and declined to comment to Bloomberg. It previously told us it “did not choose the assets in any CDO,” though emails recently published by the Financial Crisis Inquiry Commission suggest otherwise.
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10 comments
Chris Lindsay
May 11, 2011, 3:39 p.m.
Is there a link or reference you can direct me to that explains how a company like Magnetar could make money by betting against financial products? What’s the process and mechanism of how this is done?
Larry Crawford
May 11, 2011, 3:57 p.m.
http://www.nakedcapitalism.com/2010/04/rahm-emanuel-and-magnetar-capital-the-definition-of-compromised.html
Pretty good story and discussion
Terry Shea
May 11, 2011, 4:19 p.m.
It will never end…the wall street crooks pay their lawyers a lot more than the SEC lawyers get paid…
Stephanie Palmer
May 11, 2011, 4:50 p.m.
I’m tired of hearing that the investigations are slow - or nonexistent - these companies didn’t just put their companies at risk, they put the US and the world at risk - aren’t they to be punished? Gee, a local guy who was just convicted of being a burglar here just got 17 years. What’s the story here?
Carol Guerieri
May 11, 2011, 6:06 p.m.
Coming from the regulatory and compliance side of oversight .... it is more smoke and mirrors. It is quite remarkable that not a single individual has been made accountable at any broker dealer/financial instituion/bank or insurance carrier for gross lack of oversight, deceptive practices, non-disclosure and conflict of interest.
Without tough and real individual accountability, and without exception of any single individual’s accountability, nothing will ever change. It will just appear to change.
A colleage of mine recently said “Well, Madoff was caught.” I responded ... “No he wasn’t, he surrendered!”
Trubee
May 11, 2011, 7:31 p.m.
Question-
WHY IS BERNIE MADOFF IN JAIL?
so some
May 12, 2011, 12:34 a.m.
http://www2.isda.org/ (International Swaps and Derivatives Association)
You might try looking around that site, Chris Lindsay…and find that there is a whole industry based in defaults/bankruptcy/market play/insurance, the industry players make money on loss of nearly any investment. And because of such legal provisions (like bankruptcy protection), it is not uncommon to see the rise of players with major money, in the face of the 2008 bust.
Becky
May 12, 2011, 3:38 a.m.
I hope they nail these SOBs: the worst of the worst in American corporate greed.
Ron
May 12, 2011, 8:46 a.m.
Stephanie: in re: to the burglar getting 17 yrs, For one he didn’t have the bevy of legal magicians the corporate thieves do nor is he sending in his bribe money to the crooks in DC to look the other way.
If any of these fraud thieves get fined it’ll be some paltry figure that amounts to the money I got selling some of my extra stuff at a yard sale. Enough to buy me some hot dogs & beans. Took me 10 hours, about the same amount of time it’ll take them to make the fine.
One solution I see is about as fast as the gov. is to pay off our debt to them and not do business with them, yeah I know easier said than done but is possible. How about if we had a massive phone demonstration and tied up their phones as well as our corporate overseers in DC. Oh wait, I’m sure there are plenty of Federal rules and regs against the phone thing and wouldn’t take no time at all to be arrested and jailed or fined. We just vote the politicians in, we don’t pay for their protection. I say seize the lobby money to pay off the debt and not let it go directly to the campaign funds either directly nor thru PACs and full disclosure of it.
Didi Paano
May 12, 2011, 10:53 a.m.
Ron: What a fantastic idea….too bad we can’t do it (we, the people, have absolutely NO say in the “hiring” of our politicians). I say we need to outlaw lobbyists and outlaw campaign contributions from corporations. But, apparently, our GOP-leaning Supreme Court doesn’t quite agree (naturally)! Oh well, so much for government by the people, for the people, and of the people…..we have NO say in what goes on in D.C…..we don’t have the money that big business has to pay off the politicians….and this includes BOTH parties.