Imagine taking over the payments of a life insurance policy from a senior and also making yourself the beneficiary in the process. After all, your elderly friend doesn't need the policy anymore and he certainly doesn't need the monthly bill.
The benefit to you is that when he dies, and you're sort of betting that he will sooner rather than later, you will collect on his/her policy. This practice is called "life settlements" and is illegal in almost every state in the county. However, the practice is strikingly similar to the kind of betting practiced on Wall Street called "shorting".
Shorting is when an investor's interest in a particular security instrument is in the short term rather than in the long haul. If in the above example, you knew the old guy would live for decades after taking over his policy, you probably would be less attracted to the investment. However, if you had a strong expectation that his time is limited, the promise of that lump sum policy pay-out would perhaps interest you to take a short position on the investment. When he dies, you get paid.
Derivatives as we've heard them called in the news or Credit Default Swaps (CDS) are essentially short positions like in the above example. Derivatives insure questionable securities against default. Typically if a security has an excellent rating, such as AAA+ the expectation that it will perform well into maturity is assumed and the need for the pricey default insurance is not desired. When mortgage-backed securities fail and foreclosure ensues, the investor holding the insuring swap on that risky grade security is made wealthy.
In the recent Securities Exchange Commission (S.E.C.) fraud case against Goldman Sachs, a "short" investor helped select a pool of mortgage-backed-securities that he eyed to fail because he was a beneficiary of sort. Except the S.E.C. argues Goldman didn't tell their investors that this background individual was betting that the pool would fail.
It raises a legal and ethical question about what disclosures should be made to an investor making a securities transaction. Do you as an investor have the right to know that someone is betting against the portfolio being offered to you? In this case, the S.E.C only alleges the proper disclosure information was not made on "marketing material", which seems like a weak case.
What is strikingly odd about the Goldman case, is that their investors who were allegedly fooled, were sophisticated bankers who understood the type of low grade securities they purchased. They also have had to know that those low grade bonds are routinely "shorted" because of their high risk and low expectation of performance.
In fact, the junk bond market, according to the Wall Street Journal the Junk-Bond market is a 30+ billion dollar a month industry. Derivatives are routinely tied to junk bonds more so than the agency conforming paper that performs quite well most of the times.
The ratings on the fund-pool offered to Goldman's investors was BBB which spells "imminent disaster". Goldman's investors obviously gambled on that catastrophic disaster arriving later rather than sooner and the short investor obviously hoped the securities would fail much sooner rather than later. There was no question as to failier, the gamble was on the when.
Conventional wisdom would tell you the opposite of a short position is a long position. But in the Goldman case, it seems every one's expectation was in the short term. No one expected hat these doomed mortgages would perform for their 30 year term. What investors seeking high risk typically do on the so-called "long" side, is that they hold the mortgages for a short period of time and sell them for a profit to another investor willing to take the risk.
A 30+ billion dollar a month junk bond industry strongly suggests that there is no shortage of risk takers and casino-like gambling on Wall Street.
Sunday, May 9, 2010
Saturday, May 8, 2010
Thursday, April 22, 2010
WALL STREET BETTING: IN SHORT & LONG
The Goldman Sachs so called fraud case filed by the S.E.C. helped bring a very thin layer of understanding to what goes on behind the scenes on Wall Street. It's called betting. At least the average person calls it so, but if your bets are made within Wall Street, the word is hedging.
Hedge funds take high roll casino like chances with billions of dollars that straddle both sides of financial risk taking. If a catastrophe is avoided, money is made and if a catastrophe occurs, money is made. Covering both sides has another word we're coming to hear more of. It's called leveraging.
We've heard words like derivatives and credit default swaps (CDS), which are pseudo-insurance policies that pay billions when borrowers stop paying their mortgage. When the mortgages default, derivatives kick in and someone becomes astronomically wealthy...once again.
Other words like collateralized debt obligations (CDO's), mortgage-backed securities (MBS), and triple-B or triple-A rated bonds are now much more familiar concepts making us even more conversant about these mortgage and financial times.
But perhaps at the core of these casino-like bets is the "short & long" position of risk taking. We know what "long" means. If you ever sat with a financial planner, those mutual bonds they sold you were long because they had the expectation of maturing and performing over the long haul.
But wait a minute. What if you are on the traditional long side and your financial planner still has a reasonable expectation that an adverse event will diminish your investments?
If your financial planner told you, "these bond funds are not the greatest so we have to sell them before they begin to tank". What would you do? Some may say, hold them just long enough to make money but sell them before it's too late. That's exactly what investors do with the less desirables.
This short term expectation changes things. Goldman is more loosely accused of not telling their investors that someone in the background had a more rigidly "short" expectation.
Clearly defining short & long may not be the focus behind Obama's reform push. It's certainly the main ingredient behind the Goldman Sachs controversy.
Goldman's investors had no expectation that they would hold those triple-B (low-grade) securities until maturity. It simply defies logic. The triple-B fund pool was on its face too risky for any appreciable expectation of longevity. The investors knew that it would simply be a matter of time before those triple-B tranches begin to cascade.
In fact, those risky type of securities get sold and resold multiple times and within a relatively short period of time. They're sold on the long side, with the anticipation that there is a not so long window for performance.
It's a game within a game. A game of hot potato within the game of hedging and ultimately someone is caught holding the proverbial bag. There comes a point when those triple-B's can't be sold anymore because the default curve is either too high or simply catastrophic.
If safety and longevity is what those Goldman investors desired, triple-A bonds would be more fitting. But they specifically chose triple-B securities which supports the idea that they also had short expectations.
I doubt we'll even hear the resolution of this case. The SEC's filing of the lawsuit is dramatically symbolic on its own. It resonates with what people perceive and that is that something needs to be done about Wall Street. Exactly what should be done is another question. A dissertation of what's in the SEC lawsuit may not have the populists attention right now.
Both the right and left side of the political spectrum have little sympathy for Wall Street. In fact, House and Senate republicans have recently quailed their health care reform-like opposition to the financial reform push, because of overwhelming public opinion sustained against Wall Street.
Hedge funds take high roll casino like chances with billions of dollars that straddle both sides of financial risk taking. If a catastrophe is avoided, money is made and if a catastrophe occurs, money is made. Covering both sides has another word we're coming to hear more of. It's called leveraging.
We've heard words like derivatives and credit default swaps (CDS), which are pseudo-insurance policies that pay billions when borrowers stop paying their mortgage. When the mortgages default, derivatives kick in and someone becomes astronomically wealthy...once again.
Other words like collateralized debt obligations (CDO's), mortgage-backed securities (MBS), and triple-B or triple-A rated bonds are now much more familiar concepts making us even more conversant about these mortgage and financial times.
But perhaps at the core of these casino-like bets is the "short & long" position of risk taking. We know what "long" means. If you ever sat with a financial planner, those mutual bonds they sold you were long because they had the expectation of maturing and performing over the long haul.
But wait a minute. What if you are on the traditional long side and your financial planner still has a reasonable expectation that an adverse event will diminish your investments?
If your financial planner told you, "these bond funds are not the greatest so we have to sell them before they begin to tank". What would you do? Some may say, hold them just long enough to make money but sell them before it's too late. That's exactly what investors do with the less desirables.
This short term expectation changes things. Goldman is more loosely accused of not telling their investors that someone in the background had a more rigidly "short" expectation.
Clearly defining short & long may not be the focus behind Obama's reform push. It's certainly the main ingredient behind the Goldman Sachs controversy.
Goldman's investors had no expectation that they would hold those triple-B (low-grade) securities until maturity. It simply defies logic. The triple-B fund pool was on its face too risky for any appreciable expectation of longevity. The investors knew that it would simply be a matter of time before those triple-B tranches begin to cascade.
In fact, those risky type of securities get sold and resold multiple times and within a relatively short period of time. They're sold on the long side, with the anticipation that there is a not so long window for performance.
It's a game within a game. A game of hot potato within the game of hedging and ultimately someone is caught holding the proverbial bag. There comes a point when those triple-B's can't be sold anymore because the default curve is either too high or simply catastrophic.
If safety and longevity is what those Goldman investors desired, triple-A bonds would be more fitting. But they specifically chose triple-B securities which supports the idea that they also had short expectations.
I doubt we'll even hear the resolution of this case. The SEC's filing of the lawsuit is dramatically symbolic on its own. It resonates with what people perceive and that is that something needs to be done about Wall Street. Exactly what should be done is another question. A dissertation of what's in the SEC lawsuit may not have the populists attention right now.
Both the right and left side of the political spectrum have little sympathy for Wall Street. In fact, House and Senate republicans have recently quailed their health care reform-like opposition to the financial reform push, because of overwhelming public opinion sustained against Wall Street.
Monday, April 19, 2010
WHERE IS THE SEC's CASE AGAINST GOLDMAN SACHS?
Should Goldman Sachs Really Be Worried? (Find the Link to the SEC's Full Complaint Below!)
The SEC's case against the financial giant Goldman, Sachs & Co. is questionable at best. The SEC complaint does not have the prosecutorial teeth you would come to expect from the U.S Gov't.
The Gov't's case: Goldman failed to disclose that a hedge fund manager, Paulson & Co., bet against the same mortgage securities Goldman had offered to its own investors. It's also alleged that Goldman conceiled that these highly risky securities were essentially cherry-picked for Paulson specifically for their promise to fail.
Failed mortgage securities that are insured by derivatives or (Credit-default swaps) pay highly speculative big money. In this case, Paulson's share was $1 billion.
The problem with the Gov't's case seems two-fold. The securites in question were Triple-B rated, which is the lowest-riskiest-junkiest type of security bond available on Wall Street. There's no controversy over the low-grade nature of the bonds. There's no allegation regarding the performing expectations of these highly risky mortgage securites.
The complaint does not specifically allege that investors should have had better disclosure about the risky nature of the securities themselves. The very triple-B nature of the securities was apparently "buyer beware" enough.
The second problem with the SEC's case is that although the Gov't alleges to have jurisdiction, the dispute solely hinges upon representations Goldman made on "marketing material". Really? Marketing material? Highly skilled and knowledgeable portfolio managers were fooled by brochures?
The SEC does not regulate "marketing material" do they? They regulate the exchange of securities hence their title, and no said securities exchange is expressly alleged in the complaint to have been illegally conceived. Instead the Gov't's emphasis is mainly on the obscurity of this Paulson fellow during the structuring of this massive deal.
Paulson, who purchased the derivative insurance against the fund's default, was not identified to investors as a participant in the fund's selection process. The SEC alludes to the notion that investors may not have participated with the highly risky fund if they knew Paulson had a contradictory short position.
That is highly speculative since investors take short positions on risky mortgage-backed securities all the time. It wouldn't make much sence to short a triple-A security because the derivative profit is in its failure. Agency conforming borrowers have good credit and plenty equity, they fully income qualify for their home loan and their paper performs well most of the times.
There's a much greater probability that the junkiest triple-B securities will fail so it makes more sence to short those. The probability of the AAA good stuff failing, not so much.
http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf
The SEC's case against the financial giant Goldman, Sachs & Co. is questionable at best. The SEC complaint does not have the prosecutorial teeth you would come to expect from the U.S Gov't.
The Gov't's case: Goldman failed to disclose that a hedge fund manager, Paulson & Co., bet against the same mortgage securities Goldman had offered to its own investors. It's also alleged that Goldman conceiled that these highly risky securities were essentially cherry-picked for Paulson specifically for their promise to fail.
Failed mortgage securities that are insured by derivatives or (Credit-default swaps) pay highly speculative big money. In this case, Paulson's share was $1 billion.
The problem with the Gov't's case seems two-fold. The securites in question were Triple-B rated, which is the lowest-riskiest-junkiest type of security bond available on Wall Street. There's no controversy over the low-grade nature of the bonds. There's no allegation regarding the performing expectations of these highly risky mortgage securites.
The complaint does not specifically allege that investors should have had better disclosure about the risky nature of the securities themselves. The very triple-B nature of the securities was apparently "buyer beware" enough.
The second problem with the SEC's case is that although the Gov't alleges to have jurisdiction, the dispute solely hinges upon representations Goldman made on "marketing material". Really? Marketing material? Highly skilled and knowledgeable portfolio managers were fooled by brochures?
The SEC does not regulate "marketing material" do they? They regulate the exchange of securities hence their title, and no said securities exchange is expressly alleged in the complaint to have been illegally conceived. Instead the Gov't's emphasis is mainly on the obscurity of this Paulson fellow during the structuring of this massive deal.
Paulson, who purchased the derivative insurance against the fund's default, was not identified to investors as a participant in the fund's selection process. The SEC alludes to the notion that investors may not have participated with the highly risky fund if they knew Paulson had a contradictory short position.
That is highly speculative since investors take short positions on risky mortgage-backed securities all the time. It wouldn't make much sence to short a triple-A security because the derivative profit is in its failure. Agency conforming borrowers have good credit and plenty equity, they fully income qualify for their home loan and their paper performs well most of the times.
There's a much greater probability that the junkiest triple-B securities will fail so it makes more sence to short those. The probability of the AAA good stuff failing, not so much.
http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf
Sunday, March 14, 2010
Sunday, January 31, 2010
DO I NEED AN ATTORNEY TO MODIFY MY LOAN?
You absolutely do not need an attorney to request a loan modification. In fact you lender would prefer that you don't have one. Why? Your lender is the only party that can voluntarily modify your loan. An attorney can send a modification request to your lender just like you can, except the attorney will charge you a lot of money for doing so.
It may be helpful to hire a document preparation service that can draft the correspondence for you if you have difficulty with the necessary language. A document preparation service (www.DocsToWork.com) will only charge a small fraction of what an attorney will charge to help you. You can expect to pay about $100 dollars for document preparation services in connection with a loan modification request.
The lender does not shake when they see a modification request prepared by an attorney and many lawfirms or "loan modification companies" market their services as an assured bridge between you and a much lower payment. The lender is not going to say "let's settle this one" like the old Jacoby & Meyers commercials that dramatized the moment the insurance company receives a demand letter from the world renown law firm. You lender will honor a scensible request prepared by you, their customer, as long as it is written, well thought out, and demonstrates good faith on your part.
It may be helpful to hire a document preparation service that can draft the correspondence for you if you have difficulty with the necessary language. A document preparation service (www.DocsToWork.com) will only charge a small fraction of what an attorney will charge to help you. You can expect to pay about $100 dollars for document preparation services in connection with a loan modification request.
The lender does not shake when they see a modification request prepared by an attorney and many lawfirms or "loan modification companies" market their services as an assured bridge between you and a much lower payment. The lender is not going to say "let's settle this one" like the old Jacoby & Meyers commercials that dramatized the moment the insurance company receives a demand letter from the world renown law firm. You lender will honor a scensible request prepared by you, their customer, as long as it is written, well thought out, and demonstrates good faith on your part.
Wednesday, January 27, 2010
CHAPTER 13/ Federal Debt Consolidation: Out of Reach by Attorney Fees?
Chapter 13 is the Federal Government's version of debt consolidation. It's filed in Bankruptcy Court and it works by shrinking all your bills into one payment (not just credit cards). Many that need debt relief under Chapter 13 and have discussed their case with an attorney, realize that although federal debt consolidation is widely available, the "up-front" cash needed for attorney fees to prepare and file the plan in Court may not be.
Attorneys can charge an average of $4500 to file a Chpater 13 debt consolidation plan, which raises the question: Do attorneys make Chapter 13 Debt Consolidation out of reach? An inexpensive but yet effective alternative to hiring an attorney, is using a non-attorney bankruptcy preparation service, www.DocsToWork.com.
What an attorney will not confess is that Bankruptcy Court does not require an attorney to approve your new monthly payment plan. Bankruptcy Court will accept your petition made on your own behalf, so long as it is compliant.
Attorneys can charge an average of $4500 to file a Chpater 13 debt consolidation plan, which raises the question: Do attorneys make Chapter 13 Debt Consolidation out of reach? An inexpensive but yet effective alternative to hiring an attorney, is using a non-attorney bankruptcy preparation service, www.DocsToWork.com.
What an attorney will not confess is that Bankruptcy Court does not require an attorney to approve your new monthly payment plan. Bankruptcy Court will accept your petition made on your own behalf, so long as it is compliant.
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