After the SEC filed suit against Goldman Sachs for massive fraud in the subprime mortgage market, Yves Smith of Naked Capitalism posted this:
Oooh, things are starting to get interesting.
A number of journalists and commentators (yours truly included) have
taken issue with the fact that some dealers (most notably Goldman and
DeutscheBank) had programs of heavily subprime synthetic collateralized
debt obligations which they used to take short positions. Needless to
say, the firms have been presumed to have designed these CDOs so that
their short would pay off, meaning that they designed the CDOs to fail.
The reason this is problematic is that most investors would assume that
a dealer selling a product it had underwritte was acting as a
middleman, intermediating between the views of short and long
investors. Having the firm act to design the deal to serve its own
interests doesn’t pass the smell test (one benchmark: Bear Stearns
refused to sell synthetic CDOs on behalf of John Paulson, who similarly
wanted to use them to establish a short position. How often does
trading oriented firm turn down a potentially profitable trade because
they don’t like the ethics?)
And the investigative journalism site ProPublica writes about how Deutsche Bank wanted to maintain its top position in the CDO market, teaming up with the hedge fund Magnetar in a spectacular deal:
Among the other banks that Magnetar approached during that time was
Deutsche Bank, with whom it had teamed up to do its first deal months
earlier. Deutsche Bank was anxious for business in order to maintain
its standing as one of the top CDO banks, according to one of its
bankers. Deutsche recommended CDO manager State Street Global Advisors.[…]Deutsche, Magnetar and State Street called the $1.6 billion CDO they
created Carina, a constellation whose name in Latin means a ship's
keel. In November 2007, Carina had the distinction of being the first
subprime CDO of its kind to be forced into liquidation.
So when will the US file fraud charges against Deutsche Bank? The Street is already placing odds. Pass the popcorn.
