A Few Brief (But Hopefully Deep) Thoughts

John Authers at the Financial Times has an excellent article out about synthetic CDOs.  I’ve been discussing this with some folks, and we seem to be on the same page.  I think there’s a serious question about the behavior of the parties involved on all sides of these transactions.  While I think ultimate culpability lies beyond the agents involved, I think it’s safe to say we have to have better, clearer lines of demarcation about what’s acceptable and what isn’t.  I won’t get into more depth here, that’s what a book is for.

About the Goldman emails: that seems like there’s a lot more smoke than fire.  I don’t begrudge Goldman for making the trades they did, when they reached that point of recognition in December ’06.  In fact, if anyone bothered to ask me while I was at Wachovia in their corporate treasury, I would’ve begged to offer that we needed to take many of the same actions.  Would I have recommended going the same size as Goldman did?  Probably not, but it would’ve helped the bank avoid being embroiled in this with Citi and Wells Fargo later:

But alas, I was already gone from the bank and they decided to purchase Golden West.  Or as I refer to it: Money Store, Part Deux.  Kind of like “Hot Shots Part Deux!” except much more overvalued…

When is a hedge not a hedge?  When it becomes a directional trade, of course.  And the only difference between the two at that point is the size of the exposure.  Would I have advocated legging into a long position on ABX and CMBX protection?  Absolutely.  Would I have also advocated winding down and selling the loans we had, in spite of the losses on the balance sheet?  Yes, because it’s like dealing with Band-Aids.  Do you try to p e e l it off s  l  o  w  l  y or just rip it off?  Rip it off, of course.

That is all…

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