According to a Goldman derivatives trader, Goldman would buy the triple-A tranche of some CDO, pair it off with the credit default swaps AIG sold Goldman that insured the tranche (at a cost well below the yield of the tranche), declare the entire package risk-free, and hold it off its balance sheet. Of course, the whole thing wasn’t risk-free: If AIG went bust, the insurance was worthless, and Goldman could lose everything. Today Goldman Sachs is, to put it mildly, unhelpful when asked to explain exactly what it did, and this lack of transparency extends to its own shareholders. “If a team of forensic accountants went over Goldman’s books, they’d be shocked at just how good Goldman is at hiding things,” says one former AIG FP employee, who helped to unravel the mess, and who was intimate with his Goldman counterparts.
Sunday, April 11, 2010
The Magnetar trade has received a lot of scrutiny—and has been linked here—justly so. Magnetar was able to buy crummy CDOs, use the cash flow from that to pay for the CDS premiums, and profit. As it happened, they created more and more CDOs to bet against, further inflating the subprime market, which is their chief offense. But, nevertheless, I found this section of The Big Short very interesting (pg. 77):