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How Goldman exploited the information gap

How Goldman exploited the information gap

Richard Field 2010年04月29日

????According to the Wall Street Journal, "Mortgage experts say [Senderra] likely gave Goldman a clearer view of the market as other parts of the company made bets on home loans." The paper also reported that the head of Goldman Sachs' subprime trading operation -- the group that made $4 billion betting against the housing market -- had visited Senderra multiple times to talk with employees there.

????Investors, meanwhile, didn't have direct involvement subprime mortgages. Nor did they have access to a single third party vendor who collected and distributed loan-level data on a daily basis and delivered information to support the analysis and valuation of each asset-backed security. Instead, all investors had besides the credit ratings of the underlying securities was the presumption that their interests were aligned with the collateral manager who created the Abacus CDO.

Another false senses of security

????The collateral manager, ACA Capital Management, selected the portfolio of subprime mortgage backed securities (MBS) that Abacus would contain. The manager presented itself as having a large sophisticated staff with backgrounds ranging from underwriting mortgage loans to analyzing subprime mortgage-backed securities.

????It claimed to have a well refined methodology for doing extensive due diligence on each security including its underlying mortgage loans by accessing a half a dozen sources of information. It also was putting millions of dollars of its own investment at risk in every deal it made. The result was that ACA had a proven track record of selecting subprime mortgage-backed securities.

????Up to the time of the ill-fated securities issuance, none of ACA's deals had lost money. In addition, its interests were theoretically aligned with the investors, since it could lose several hundred million dollars if there were significant losses in Abacus.

????Given the expertise of the manager and the size of their financial exposure, an investor could reason he was unlikely to do a better job of analyzing the risk of the 90 selected securities that went into Abacus.

????According to the SEC lawsuit, ACA was misled by Goldman about the role of John Paulson, a hedge fund manager who was looking to short subprime mortgage-backed securities. ACA selected a significant percentage of the subprime mortgage-backed securities that had been suggested by John Paulson.

????Fixing the data gap in the ABS market may not have prevented the pressure ACA felt from Goldman Sachs to take Paulson's advice, but it would have prevented any careful investor from being hoodwinked into buying into Abacus just because of ACA's track record and Goldman's prestige.

The data gap fix

????Providing investors with daily loan-level information would help restart the still-frozen ABS market, as investors could then analyze risk and value and fact-check the accuracy of the assumptions underlying the pricing of the security, independent of the banks, collateral managers and ratings agencies.

????The market is frozen in part of out fear that what happened in the Goldman case has happened many other times, and investors still do not know exactly what is in the bags they are holding.

????When investors have daily loan-level data, they can make buy, hold, and sell decisions independent of the 'take it or leave it' offers that Goldman Sachs and other firms typically make to them in offering securities for investment.

????Investors' ability to make investing decisions independently of the paltry information the banks deign to give them will unfreeze the structured finance and credit markets without requiring either the billions of dollars in bailout money that helped save the big banks, or the aggressive zero interest rate policy the Fed is currently pursuing, which is propping up the economy while ABS markets remain largely frozen.

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