Friday, Apr 09, 2010
Did this bet win because G Sachs made the same bet?
Telegraph: Fed boss Greenspan says no-one saw the crisis coming. Really?
Michael Burry was the guy who made billions on CDSs that bet that packaged mortgages would nosedive. But there was no conventional market in CDSs, so for him to win his bet somebody had to decide to mark up their value. The CDSs were designed by Goldman Sachs and they didn't rise in value (as the fundamentals suggested they should) until the Vampire Squid itself found a greater fool that allowed it to make the same bet as Burry. Once the Squid was "on" the same horse as Burry the required upwards revaluation of the CDSs took place.
Posted by icarus @ 10:55 AM (710 views) Add Comment
12 Comments
- If you do not have an admin password leave the password field blank.
- If you would like to request a password allowing you to add comments and blog news articles without needing each one approved manually, send an e-mail to the webmaster.
- Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
- Please note that any viewpoints published here as comments are user's views and not the views of HousePriceCrash.co.uk.
- Please adhere to the Guidelines
1. icarus said...
Burry also foresaw the risk that counterparties to his CDS trades could default, so he avoided dealing with Lehman and other dodgy banks and demanded daily collateral settlement - if a position moved in his favour he wanted cash in his account the next day.
http://www.nytimes.com/2010/04/04/opinion/04burry.html
2. icarus said...
Could it be that the 'greater fool' in question was AIG aka the taxpayer?
3. 51ck-6-51x said...
Icarus, that's a little cynical do't you think? GS does not /actually/ control the value of a security, regardless of if they invented it (which they didn't, it was JP Morgan) they can, as can anyone in an illiquid market, avoid marking their positions down, but when push comes to shove it's the trading that does the valuing. In terms of ROI (and total profit, and timing) John Paulson did better, and then there is Andrew Lahde who wins hands down in terms of ROI (and timing, but not quite on total profit).
4. 51ck-6-51x said...
Icarus - The taxpayer is always going to be the greatest fool in anything they inherently insure, of course - tax is wrong on so many levels :) and certainly AIG were "picking up pennies in the path of an steamroller".
5. 51ck-6-51x said...
an -> a
6. This comment has been removed as it was found to be in breach of our Blog Policies.
7. icarus said...
666 - agreed, derivatives specialists from JPM are credited with persuading AIG to write CDSs on CDOs back in 1998 but there's always a problem deciding who 'invented' anything. Warner implies that the CDSs in his narrative were customised "by the likes of G Sachs", though admittedly that has to be appended by "whatever that means". But that's not the issue........
In the shadowy world of OTC derivatives it's not too unlikely that GS can have a major influence on when, if not whether, these CDSs are marked up. Warner, presumably taking his info from the book 'The Big Short', claims that GS did indeed have such an influence. He claims that GS was able to delay the marking up of the CDSs until they were able to cash in on that revaluation.
As for AIG it's worth remembering that GS's Blankfein was the only Wall St exec in the Fed meeting chaired by Paulson (ex-GS) that ended up bailing out AIG and getting GS paid for its CDS positions with AIG.
8. estrader said...
http://www.youtube.com/user/schiffreport?blend=1&ob=4#p/a/u/0/qRbf_6QKR98
9. maddison said...
Well. Warren Buffet saw it coming with his "financial weapons of mass destruction" quote. Oh and a mate of mine about 10 years ago said "derivatives would be our undoing". The thing about all of this is that people know about crashes and economic cycles but no one wants to leave the party...
10. icarus said...
Which is more dangerous - derivatives themselves or the OTC nature of them? See the last para of the article - the off-market aspect is what makes it easier for a cabal to make and move markets. This is why it's possible for GS and possibly one or two others to mark up or not mark up the valuations, depending on which way they've bet.
11. 51ck-6-51x said...
icarus your last point in your 02:02 is definitely noteworthy. Certainly exchanges are good things in the world of free markets, and the more demand there is for a product the more pressure there is for an exchange (in theory at least), the question is why this hasn't happened for some of these more mature products which are still traded OTC like CDSs. That's where these big players probably use their weight whilst they make good returns.
12. smugdog said...
Only Techie, Flash and S2R1 can respond eloquently to this.
The remainder I fear still swim aimlessly in the gene soup.
I suspect that they are long gone by now.
Shame!