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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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