In light of recent developments involving SEC and Goldman Sachs, I reckon it might he extremely helpful for my readers to witness the entire structuring process involving a High Grade Asset-Backed Securities Collateralized Debt Obligations (HG ABS CDO) deal. For the sake of simplicity, let’s assume that our CDO transaction is labeled “Pyramid”, and the three stakeholders involved in this deal are: an investment bank – the “Arranger”, a portfolio manager – the “Collateral Manager” and a series of investors. To make things easier, I would replicate the same numbers from the previous two articles on structuring and securitization. The CDO liability bonds – the “Notes” will be issued by a newly formed Special Purpose Vehicle (SPV) – the “Issuer”, called Pyramid Limited and incorporated in Cayman Islands for tax purpose. Continue reading ‘Weapons Of Mass Destruction (III)’
Tag Archive for 'CDS'
Goldman Sachs [GS] is to Wall Street what Ferrari is to Formula One. Last Friday, the investment bank powerhouse was accused of securities fraud in a civil lawsuit filed by the Securities and Exchange Commission (SEC). According to the complaint, in February 2007, Goldman created a Collateralized Debt Obligation (CDO) labeled Abacus 2007-AC1, at the request of John Paulson, a hedge fund manager who earned an estimated $3.7 billion in 2007 by betting against the housing bubble. As per the official statement “Goldman wrongly permitted a client to heavily influence which mortgage securities to include in an investment portfolio”. The SEC also sued Fabrice Tourre, a Goldman Sachs VP who was principally responsible for structuring the CDO transaction and for marketing the deal across the investors. Continue reading ‘SEC vs. Goldman Sachs’
Credit Default Swaps (CDS) are plain-vanilla financial contracts that allow hedging a credit exposure or betting on whether or not an underlying credit instrument (e.g., a bond, a loan) does experience a specified credit event (typically a default) within a given period of time. In plain English, the CDS buyers make money if the underlying credit name does default, whereas the CDS sellers pocket the profit otherwise. With a total notional amount exceeding $60 trillion, the credit derivatives market has gained notoriety over the last ten years but it quickly became the scapegoat for the subprime debacle, Lehman Brothers bankruptcy and the collapse of the insurance giant AIG. Nevertheless, the CDS market is back on top again, sending shockwaves in the credit world and making it harder for troubled companies or debt-strapped countries to borrow money. Continue reading ‘CDS – The Usual Suspect’
Believe It Or Not
Tuesday, Goldman Sachs [GS] reported the first quarter results, with net revenues of $12.8 billion, net earnings of $3.5 billion and earnings per share (EPS) at $5.59. Investment banking produced net revenues of $1.2 billion, while the trading business recorded stellar results with net revenues of $10.3 billion. Commenting on the recent SEC lawsuit, Lloyd Blankfein – Goldman Sachs CEO, claimed that the most profitable investment bank in Wall Street history had no economic incentives for the Abacus 2007 CDO deal to fail, since GS lost more than $100 million on the transaction. Moreover, we have learned that SEC decision was a 3-2 split along the party line: 3 Democrats against 2 Republicans. Unfortunately, there is nothing new under the sun in Washington. Continue reading ‘Believe It Or Not’