4 ms·

In these kinds of instruments, though, the short isn't always clear. Paulson himself was never short on the instrument directly - it's not like a stock where y

by jfager 16y ago

In these kinds of instruments, though, the short isn't always clear. Paulson himself was never short on the instrument directly - it's not like a stock where you can borrow shares. To be short, he had to go and buy a CDS on it (and one of the quirks of this setup is that there can effectively be a lot more short money than long on the instrument - lots of people can buy the insurance, but the underlying instrument is only held once). The direct shorts that everyone knew about were the people selling the underlying mortgages up the chain, and the reasons they were short were well understood by everyone involved (cash now vs. over 30 years, etc.).

yummyfajitas 16y ago
In this case, the existence of the short side is completely clear. The only thing unknown is their identity. ABACUS was a synthetic CDO. The short side wanted to buy CDS on a set of underlying bonds. The long side wanted to issue the CDS. The only relation it has to bonds is that ACA structured the transaction to behave similarly to a set of bonds. The synthetic CDO could not have existed if someone was not explicitly trying to short the underlying bonds.
- jfager 16y ago
  The existence of the short is always clear. Who that short is, and why they're short, is not. In this case, ACA worked with Paulson to pick the reference portfolio of RMBS under the belief that we was long the equity tranche.
  - yummyfajitas 16y ago
    In the case of a synthetic CDO, there are only two reasons for a short side to be short: they want to hedge or speculate. As for ACA working with Paulson, yet somehow not knowing they were short, I'm having a hard time believing it. If it is true, how come the SEC isn't charging Paulson with fraud? Regarding the mechanics of it, it also seems extremely unlikely. The purpose of their meeting is to negotiate with Paulson - to build the best CDO possible (to increase the changes of finding buyers) while still allowing Paulson to get the short they desire. I find it extremely unlikely that somehow, they didn't figure out that Paulson was short during this process.
    - jfager 16y ago
      What percent of all trades in anything don't fall under the umbrellas of hedging or speculating? I assume Paulson's not being charged because it wasn't Paulson who told ACA he was long, it was Goldman. As for why ACA couldn't figure out he was short on their own, I don't know. Maybe they'd already had a lot of experience with people doing this kind of thing and walking out the other end okay? Maybe they thought Paulson was smarter than they were, and if he were long on these things, than there must be something to it? Maybe they're just happy to keep cashing the 'trusted independent 3rd party' checks Goldman keeps sending their way?
      - yummyfajitas 16y ago
        What percent of all trades in anything don't fall under the umbrellas of hedging or speculating? In synthetic CDO's, precisely zero. Consumption goods are purchased for other reasons, however. I assume Paulson's not being charged because it wasn't Paulson who told ACA he was long, it was Goldman. As for why ACA couldn't figure out he was short on their own, I don't know. Paulson and ACA were in direct collaboration on the creation of the CDO. They talked to each other directly on many occasions. If Paulson deliberately pretended to be the long side, when they were really the short side, that sounds like clear cut fraud on their part. So why isn't the SEC going after Paulson?
        jfager 16y ago
        Do you have any evidence that in collaborating on the portfolio, Paulson ever said or represented that he was on the long side? Or that ACA that ever asked? Maybe the SEC doesn't, either, but they do have Goldman's emails on the matter.
        yummyfajitas 16y ago
        If the SEC believed Paulson lied, then Paulson would be on the dock with Goldman. In any case, I obviously don't have the ability to prove Paulson never said they were the long side. On the other hand, it's the job of the SEC to prove that a) ACA asked who the longside was and b) Goldman/Paulson lied about it. I see virtually no evidence of this.
  - silverlake 16y ago
    ACA rejected over half of Paulson's suggestions. To bring the long & short to the deal, you have to construct a CDO that both agree to. In fact, I believe ACA was long on the deal, so there's no way their going to load it with junk. And the identity of the short is irrelevant. At the time, Paulson was just another hedge fund manager. He became famous well after with the book "The Greatest Trade Ever".
    - jfager 16y ago
      The identity of the short wasn't relevant because it was "the famous John Paulson", it was relevant because it was the person in the room negotiating the reference portfolio with them. They want to put together the best possible portfolio, yes, but don't forget they're getting paid to do this. They're going to put together the best portfolio that still brings in the check. And the ACA that ended up long was the parent company, "ACA Capital Holdings, Inc", not the management company, "ACA Management LLC", that worked with Paulson to put together the portfolio. I won't claim to know what the exact relationship between the two companies was, but the former didn't actually enter it's long position until 3 months after the latter signed off on the portfolio.

by jfager 16y ago

yummyfajitas 16y ago

In this case, the existence of the short side is completely clear. The only thing unknown is their identity. ABACUS was a synthetic CDO. The short side wanted to buy CDS on a set of underlying bonds. The long side wanted to issue the CDS. The only relation it has to bonds is that ACA structured the transaction to behave similarly to a set of bonds. The synthetic CDO could not have existed if someone was not explicitly trying to short the underlying bonds.

jfager 16y ago
The existence of the short is always clear. Who that short is, and why they're short, is not. In this case, ACA worked with Paulson to pick the reference portfolio of RMBS under the belief that we was long the equity tranche.
- yummyfajitas 16y ago
  In the case of a synthetic CDO, there are only two reasons for a short side to be short: they want to hedge or speculate. As for ACA working with Paulson, yet somehow not knowing they were short, I'm having a hard time believing it. If it is true, how come the SEC isn't charging Paulson with fraud? Regarding the mechanics of it, it also seems extremely unlikely. The purpose of their meeting is to negotiate with Paulson - to build the best CDO possible (to increase the changes of finding buyers) while still allowing Paulson to get the short they desire. I find it extremely unlikely that somehow, they didn't figure out that Paulson was short during this process.
  - jfager 16y ago
    What percent of all trades in anything don't fall under the umbrellas of hedging or speculating? I assume Paulson's not being charged because it wasn't Paulson who told ACA he was long, it was Goldman. As for why ACA couldn't figure out he was short on their own, I don't know. Maybe they'd already had a lot of experience with people doing this kind of thing and walking out the other end okay? Maybe they thought Paulson was smarter than they were, and if he were long on these things, than there must be something to it? Maybe they're just happy to keep cashing the 'trusted independent 3rd party' checks Goldman keeps sending their way?
    - yummyfajitas 16y ago
      What percent of all trades in anything don't fall under the umbrellas of hedging or speculating? In synthetic CDO's, precisely zero. Consumption goods are purchased for other reasons, however. I assume Paulson's not being charged because it wasn't Paulson who told ACA he was long, it was Goldman. As for why ACA couldn't figure out he was short on their own, I don't know. Paulson and ACA were in direct collaboration on the creation of the CDO. They talked to each other directly on many occasions. If Paulson deliberately pretended to be the long side, when they were really the short side, that sounds like clear cut fraud on their part. So why isn't the SEC going after Paulson?
      - jfager 16y ago
        Do you have any evidence that in collaborating on the portfolio, Paulson ever said or represented that he was on the long side? Or that ACA that ever asked? Maybe the SEC doesn't, either, but they do have Goldman's emails on the matter.
        yummyfajitas 16y ago
        If the SEC believed Paulson lied, then Paulson would be on the dock with Goldman. In any case, I obviously don't have the ability to prove Paulson never said they were the long side. On the other hand, it's the job of the SEC to prove that a) ACA asked who the longside was and b) Goldman/Paulson lied about it. I see virtually no evidence of this.
- silverlake 16y ago
  ACA rejected over half of Paulson's suggestions. To bring the long & short to the deal, you have to construct a CDO that both agree to. In fact, I believe ACA was long on the deal, so there's no way their going to load it with junk. And the identity of the short is irrelevant. At the time, Paulson was just another hedge fund manager. He became famous well after with the book "The Greatest Trade Ever".
  - jfager 16y ago
    The identity of the short wasn't relevant because it was "the famous John Paulson", it was relevant because it was the person in the room negotiating the reference portfolio with them. They want to put together the best possible portfolio, yes, but don't forget they're getting paid to do this. They're going to put together the best portfolio that still brings in the check. And the ACA that ended up long was the parent company, "ACA Capital Holdings, Inc", not the management company, "ACA Management LLC", that worked with Paulson to put together the portfolio. I won't claim to know what the exact relationship between the two companies was, but the former didn't actually enter it's long position until 3 months after the latter signed off on the portfolio.