Monthly Archives: February 2015
The SEC’s , accusing the firm of fraud in structuring certain mortgage backed CDOs (ABACUS 2007-AC1), has been the financial story of the day.
According to the SEC complaint, Goldman let a large hedge fund (Paulson & Co.) influence its structuring of synthetic CDOs, which were subsequently sold on to bullish clients (buyers such as pension funds and other large investors) under the premise of their being assembled by an independent party.
has the details:
“According to the SEC, Goldman structured and marketed a synthetic collateralized-debt obligation, or CDO, that hinged on the performance of subprime residential-mortgage-backed securities. The CDO was created in early 2007 when the U.S. housing market and related securities were beginning to show signs of distress, the SEC complaint said.
“Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc., with economic interests directly adverse to investors in the [CDO], played a significant role in the portfolio selection process,” the complaint said.
The complaint said Paulson had an incentive to stuff the CDO with mortgage-backed securities that were likely to get into trouble. SEC enforcement chief Robert Khuzami alleged that Goldman misled investors by telling them that the securities “were selected by an independent, objective third party…”
The SEC’s suit against Goldman Sachs has been the buzz of the day. Everyone is talking about it in the
, the business , and on Twitter and .
People want to discuss the political implications of the story, as well as forecast what is likely to happen to the principal parties involved: will there be a large fine/settlement, who will be thrown under the bus, why did this news just happen to come out on an option expiration Friday, and so on. Business Insider has even
to the Goldman Sachs story.
Meanwhile, it’s interesting to note that the details of Goldman’s CDO deals with Paulson & Co. were openly detailed in chapter 9 of Greg Zuckerman’s book,
. John Paulson and his team met with various Wall Street firms (Deutsche Bank, Goldman Sachs, Bear Stearns) to discuss and negotiate the creation of new CDOs from pools of risky mortgages.
Paulson & Co. were open about their desire to short most tranches of the CDOs through the purchase of credit default swaps (CDS) on these CDO instruments. Some bankers (Scott Eichel at Bear Stearns, among others) turned down Paulson’s proposed deals, while others (like Goldman) gladly accepted and negotiated with Paulson on the collateral backing the deals.
According to “some investors were even consulted as the mortgage debt was picked for the CDOs to make sure it would appeal to them.” (Zuckerman, page 181).
and Paulson’s quotes, the bankers were ultimately responsible for what went into the CD0s that were sold to investors. It’s worth pointing out that all those who took the bullish side of the trade did so of their own accord, and that
Having said that, Goldman probably should have been more forthright in dealing with its clients, instead of telling them (as the SEC complaint alleges) that the mortgage-backed CDOs they were buying were structured with the help of an “independent, third party”.
Update: NPR to get his thoughts on the Goldman Sachs charges and John Paulson’s role in the CDO deals. Do check this out, as he quickly fills us in on some main points that people were guessing about (or just wildly wrong about) on Friday.
Related articles and posts:
– Finance Trends.
– Finance Trends.
– Finance Trends.
Time magazine has seen fit to honor Fed Chairman Ben Bernanke as its .
Rather than waste my time (and yours) regurgitating their nonsense, I thought we’d take a quick look at some of the more interesting reactions to, and accurate appraisals of, this news. A short linkfest of Bernanke & Fed realism follows:
1.– Tech Ticker.
2.– Wall St. Cheat Sheet.
5.– Jesse’s Cafe.
6.– Mises Blog.
We should note that the Senate Banking Committee isas Federal Reserve Chairman, with the debate over his renomination heading to the full senate in January.
What do you think? Should Bernanke stick around for a second term? Ponder that, and enjoy your weekend
More on the Massachusetts special election from the FT, :
“Democrats were dealt a blow on Tuesday night when Republican won the Senate seat controlled by the Kennedy family for 56 years in an electrifying special election.
Mr Brown’s victory in one of the US’s most liberal states will deprive President Barack Obama’s party of its 60-seat “super majority” in the Senate and make it much more difficult for Democrats to pass .
Analysts said it would inflict a heavy psychological blow as Mr Obama marked his first anniversary in office, and highlighted the extent to which the gloss had come off his presidency. The loss in the party stronghold also raised concerns for Democrats seeking re-election in more moderate states later this year...”
I know some people were keeping a real close eye on this special election tonight. Maybe some of you have some insights on the implications of this win for Brown and the Republicans?
FT notes that Dem candidate Martha Coakley was expected to “coast” to victory just a few weeks ago. Looks like voters in Massachusetts decided otherwise tonight.
Marc Faber was by the Financial Times for their video series, “View From the Markets”. Here’s a quick overview of some of the topics and themes covered in this 4 part discussion:
- Marc warns of a partial US debt default, in which the government denies payment to foreign bond holders due to the overwhelming burden of future interest payments on the debt. Usually, governments faced with this situation will “monetize” the debt and print money to inflate away the real debt burden.
- Irrational monetary policies and artificially low interest rates have fueled recent asset bubbles and laid the foundation of the global financial crisis. We continue to see these artificially low rates globally, which leads to misallocation of capital, as in the case of China currently.
- Faber does not agree with targeted “excess profit” taxes on industries such as banks or oil companies. Instead, he points out that simply having high real interest rates would encourage savings and discourage speculation and the formation of bubbles.
- Stocks (particularly US shares) may continue to go up in terms of local currencies, but are unlikely to make new highs in terms of gold over the longer term. Marc is far more optimistic about the outlook for Asian shares and emerging markets. He feels that returns from emerging markets will outpace those of Western developed markets over the coming years.
Tune into the full video interview linked above for more. Enjoy your weekend, and thanks for reading!
An inauspicious start to earnings season for the technology sector.
A profit decline vs. last year’s (INTC) was followed today by a surprise (prematurely leaked) report from Google (GOOG). The early, and disappointing, 3Q report sent , down 9% before trading in the stock was halted.
John Carney has some unconventional advice for students who are looking to follow the conventional college-career path: don’t do it.
Here’s an excerpt from Carney’s reimagined version of President Obama’s:
“For most of you, college is an expensive waste of time. At some of our elite schools, you would form connections that are invaluable. It’s one of the things our elite colleges do best—putting the highly intelligent in the same place as the well-off and well-connected. Going to these schools serves as heuristic for employers—your admission to the school is short hand for intelligence and diligence.
But this kind of education—the standard college education
—is really only suitable for somewhere around 15% of the population. Unfortunately, we now send a much higher proportion of our students to college, which amounts to a terrific economic waste.
Much of this waste—let’s call it the college education bubble—is due to distorted economics, bad government policy and misplaced social pressures. Government subsidized loans have made college attainable for many—but the ultimate debt burden can be untenable for many.
The economic rewards of attending college can make it attractive—but most of those are concentrated in the extremely smart and capable. Perhaps most damaging of all, we have a create a culture of collegiate achievement that discourages you from pursuing your education and careers in ways best suited to your abilities.
There’s a serious danger that the college education bubble may burst. As more and more people get college degrees, which inevitably have to become easier to get in order to increase the amount of graduates beyond its realistic levels, the market will eventually figure out that the degree doesn’t mean what it used to. It will become less useful as a heuristic for intelligence and achievement. And college graduates will find themselves with an asset—a degree—whose value is dropping while their debt remains high…”
Check out the full piece (and ensuing comment thread debate) at the link above. You’ll find more on this theme in our related posts section.
Related articles and posts:
1.– John Carney.
2.– The American.
3.– Controlled Greed.
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Sell in May and go away? Let’s take a quick look at the figures behind this well-known market adage. Charting the market’s seasonal returns below.
Here’s a look at the S&P 500 and its seasonal returns, November – April vs. May – October, from 1950 to 2014. This chart comes to us via .
As you can see, the bulk of the market’s gains since 1950 came during the “good period” of November through April. The seasonal period covered in the “sell in May” mantra is not nearly as strong. Returns in this summer period have been subpar, as Chart of the Day points out.
Here’s a look at the seasonal period in the SPY (S&P 500 ETF) from the financial crisis of 2008 to today.
Since 2008, we find an even mix of upward moves and market corrections in this May – October period. The initial “sell in May” period shown here coincides with the selling panic of 2008. The bull market of 2009 – 2014 has been far more supportive of the seasonal pattern. However, the nasty correction of 2011 began with 8 consecutive down weeks in May – June.
We don’t know what the 2014 May – October period holds, but we’re not off to a very strong start given the recent divergence between the major indices and the weakness in growth and momentum stocks. Some traders have noted that recent upward moves in the Dow and S&P, weighted towards large cap names, are masking a breakdown in the broader market.
In Joe Fahmy’s latest video update, he says to digest its recent moves. Fahmy feels the market is healthy and supportive of long trades 2-3 times a year. When it’s not as supportive, you lighten up your positions or go to cash and take a break. You’ll note that this is his last scheduled video until the fall, so at least one trader I follow is taking some time out for travel during this “sell in May” period.
There’s a lot of truth to this . , in which Sick Boy explains his unifying theory of life to his friend, Mark
It’s a very universal phenomenon: you get a bit of success (or maybe a lot of it) and then, as you get older and more comfortable, you tend to become complacent and less aware.
Maybe you don’t push the envelope as much as you did before, or maybe you just get to a point where you’re more easily satisfied and content to rest on your laurels. It doesn’t have to be an age-specific thing either, it may just be a lack of enthusiasm or vitality. That old hunger you once felt is nearly gone.
Be cognizant of this reality and its tendency to creep up on your life. Don’t become complacent.
Or asonce said:
“Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.”
Related articles and posts:
1.– First Adopter.
2.– Finance Trends.