We have yet to see any regulation and/or transparency rules coming from the CFTC.
As David Fiderer in Zero Hedge observes, Goldman Sachs cherishes its secret documents that, it states, will exonerate them from charges of misleading Congress and their clients as related in the Levin report. Fiderer explains in detail how Goldman Sachs uses secrecy to obfuscate its nefarious schemes for getting richer than Croesus.
Guest Post: Goldman's Disinformation Campaign: Drilling Down Into The Documents
Submitted by Tyler Durden - Zero Hedge
Goldman's Disinformation Campaign: Drilling Down Into The Documents
By David Fiderer- Zero Hedge
In his latest Bloomberg column on Goldman Sachs, William Cohan makes an important point:"Goldman hasn't made its internal analysis public, nor does it intend to, but it has showed the documents around town (including to me)."
In other words, the answer shall remain secret. Only those deemed worthy by Goldman may see its data, which purportedly refutes the Levin report. The rest of us are kept in the dark. We cannot challenge Goldman's claims, because we cannot see what they see. They know what they are talking about; we do not. Instead, we must rely on Andrew Ross Sorkin, Holman Jenkins, Dick Bove, and others to reveal the truth.
Except you don't need to read these secret documents to figure out what's going on. You need simply read the publicly disclosed documents to see how Goldman's defense is built on sand. Consider Goldman's accusation, dutifully reported by The Wall Street Journal, that Levin's subcommittee used "sloppy math and incomplete analysis" too determine Goldman's net short positions. That's not really true. Senate staffers used no math and performed no analysis. They simply copied Goldman's numbers.
. . . .
Goldman Invented and Cornered the Market in Housing Shorts
Contrary to the myth prevailing in some circles, the "market" for synthetic mortgage products was not something that predated the real estate bubble. Nor was it ever something that grew organically out the normal dynamics of supply and demand. Goldman invented this market and it cornered this market in order to short triple-B bonds on a massive scale.
As we learned from Michael Lewis's book, hedge fund manager Dr. Michael Burry was the pioneer who bought naked shorts on triple-B subprime bonds in early 2005. At that point, banks were unable to replicate that strategy on a larger scale, because mortgage securities are not like corporate bonds.
If a corporation becomes insolvent, it is forced to declare bankruptcy, at which point all bonds immediately become due and payable, meaning they are in default. But mortgage securitizations do not file for bankruptcy. When it becomes obvious that the mortgage pool will run out of cash before all the investors are repaid, nothing happens. Or at least, nothing happens for a long time. All of these private label deals were set up so that no principal becomes due and payable for at least 30 years. The way their cash waterfalls work, it can take years and years, long past the point when everyone knows that the subordinate tranches will lose every dime of principal, before a subordinate tranche formally defaults on an amount that is due and payable.
Generally, if you buy a naked short on a bond, you don't want to wait years and years to collect on your payout. So Goldman invented a new type of "credit default" swap, one that provided a payout before the mortgage bond actually defaulted. It came to be known as the "pay as you go" or PAUG credit default swap, and the standardized ISDA template was first published on June 21, 2005.
Goldman didn't invent the PAUG all by itself. Thanks to the pioneering reporting of the late great Mark Pittman, we know that in February 2005 Rajiv Kamilla of Goldman Sachs sat down over Chinese food with Greg Lippmann of Deutsche Bank and Todd Kushman of Bear Stearns, along with bankers from Citigroup and JPMorgan, to hammer out the form and structure of the PAUG CDS. Without the PAUG, Goldman's massive trading operation in mortgage synthetics--credit default swaps on individual bonds, plus CDOs comprised of PAUG swaps, plus swaps referencing market indices-- would not have been possible.
Soon after the PAUG template went live, Goldman went into action, selling billions of dollars of PAUG CDS to AIG. The swaps were embedded within synthetic CDOs that insured subprime mortgage bonds and subordinate tranches of CDOs. The first of these deals, Abacus 2004-1, closed on August 8, 2005.
Simultaneously, Greg Lippmann was putting the finishing touches on his famous flipbook presentation, "Shorting Home Equity Mezzanine Tranches," which he proceeded to hand out to a couple of hundred hedge fund managers. And, wouldn't you know, it turns out that the secret schemes designed to enrich hedge funds like Paulson & Co. and Magnetar became the norm in the CDO market. The majority of CDOs issued immediately after the end of the real estate bubble, during the last half of 2006, were arranged so that the hedge fund investing in the tiny equity tranche would also, secretly, take a much larger short on the rated tranches.
The Organizing Principle of Modern Credit Markets Is Secrecy
So let's circle back to William Cohan's column, which makes a passing reference to Goldman's attempt to trash the Levin report by relying on secrecy. This is more than a metaphor. Goldman's business model is designed around the exploitation of secrecy. Secrecy is organizing principle that governs modern credit markets. Credit default swaps, privately placed structured securitizations (e.g. CDOs), and hedge funds have all flourished-- they dominate the debt markets--because they are all designed to exploit secrecy. They all create extraordinary profits by keeping the rest of us in the dark.
So in late 2006, if you wanted to find out what was happening in this newly created synthetic RMBS market, you couldn't find out much of anything. You couldn't find out anything about who bought or sold any CDO, or what was in any CDO, or how any CDO performed, unless Goldman or some other CDO underwriter deemed you sufficiently worthy of their selective disclosures. You couldn't learn anything from the sales or trading activity of mortgage bonds, because the related trading in credit default swaps was kept hidden beneath the surface. You didn't know anything about the trading activity related to the ABX indices, since that, also, was kept secret. And since the privately-held company that owned the ABX, CDS IndexCo LLC, operated in total secrecy, and since the privately-held company that published the price of the ABX, Markit Group Limited , operated in total secrecy, you had no way of knowing the extent to which the price of the ABX was manipulated through round-tripping, side deals with synthetic CDOs, or anything else. The only thing you knew, your only link to the illusory "reality " of market sentiment, was the quoted price of the ABX. And you might happen to know that the Chairman of CDS IndexCo was Brad Levy, a managing director at Goldman, which, along with a handful of other banks, controlled CDS IndexCo and Markit Group.
Both the FCIC and the Levin subcommittee disclosed a wealth of information that others with a more skeptical bent can scrutinize in depth. This information poses a direct challenge to Goldman's dissembling, and to the moral hazard of access journalism, which is no substitute for the full transparency of a free and open marketplace of ideas.
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