How about this - a synthetic CDO that allowed one to go long or short the U.S. Senate Permanent Subcommittee on Investigations hearings today into Goldman Sachs and its role in the subprime mortgage meltdown. Something tells me there would be more people looking for the short position than the long position.
This subcommittee has spent 18 months looking into Goldman and its mortgage operations. A good six hours into the hearings, and in this blogger’s view, there have been no smoking guns. In fact, if anything, you come away with the feeling that these senators don’t understand what they are looking into.
For example, Chairman Carl Levin repeatedly asks the executives of Goldman if the firm had a significant short position. And they keep saying, yes we did, to offset a long position (something called hedging, Mr. Levin). And Levin replies that’s not what he asked (the long position answer).
Brazen. That’s the word that comes to mind when you read the complaint filed today by the Securities and Exchange Commission against three former officers of one-time mortgage giant New Century Financial Corp.
According to regulators, these three not only failed to disclose to investors that their business was cratering, but they failed to do so while they were desperately trying to raise much needed capital to replace capital that had been flying out the door because the business was blowing up.
The net-net: they cost investors millions of dollars while continuing to pay themselves handsomely for running what regulators say was a fraud.
The complaint is also a stark reminder of how little regulation there was (and is) of the mortgage business. Another thought that comes to mind is you really wonder how regulators exercising even an ounce of common sense didn’t see this train wreck coming. New Century’s problems began with something called the 80-20 loan. It was essentially two loans that allowed a borrower to buy a property without putting up a dime out of his/her own pocket. Loan number one was worth 80% of the purchase price and loan number two the remaining 20%. The above chart shows how dependent New Century was on this product.