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53 Ibid.

Chapter 6: Shell Games (Beware of Geeks Bearing Grifts)

1 Matthew Goldstein, “Bear Stearns Shakes the CDO Honey Pot,” TheStreet .com, 5 August 2005.

2 Ibid.

3 Elizabeth MacDonald, “Did the SEC Miss Warning Signs at Bear Stearns?” FoxBusiness.com, 23 June 2008.

4 Floyd Norris, “A Lesson in Fraud for Chris Cox,” New York Times, 29 July 2005.

5 Ibid.

6 Ibid.

7 Aaron Johnson, “TABS CDO Auction Recoups Just 3% of Total Debt,” Securitization News, 4 April 2008.

8 Michael Mackenzie, “Credit Vehicle Defaults Reach $170 billion,” Financial Times, 24 April 2008.

9 Jody Shenn, “State Street, BlackRock Manage Some CDOs in Default,” Bloomberg News, January 4, 2008. This is excerpted from the Tavakoli Structured Finance, Inc. client note of December 7, 2007.

Adams Square Funding I had collateral consisting of both cash and synthetic (pay-as-you-go credit default swaps) of ABS CDOs on mezzanine subprime among other items. The conflicts of interest between the collateral manager, Credit Suisse Alternative Capital (CSAC), and other affiliated entities, including the Leveraged Investment Group (LIG) of Credit Suisse Securities (CSS) are [disclosed in the prospectus]. This is the kind of moral hazard from which I stated investors should walk briskly away [See p. 194 Collateralized Debt Obligations (John Wiley & Sons, 2003).] Rating agencies models do not capture the risks of moral hazard, and the rating agencies even failed to capture the obvious magnitude of the collateral risks. . . . Monolines rated “AAA” are not laughing, however, nor are the lower rated monolines. Writing guarantees on super-senior tranches seemed fine according to generic models, but many of these tranches have substantial principal risk. . . . [and] would require substantial capital increases.

10 Prospectus for Adams Square Funding I, Ltd. CreditSuisse offering memorandum, January 22, 2007, 34, 35.

11 Carrick Mollenkamp and Serena Ng, “Wall Street Wizardry Amplified the Credit Crisis,” Wall Street Journal, 27 December 2007.

12 Ibid.

13 Janet Tavakoli, “Dead Calm: No One Trusts You: A Letter to Certain Banks and CDO Managers,”Tavakoli Structured Finance, Inc. 30 July 2008.The following is an excerpt:

Some market pundits say that ‘disclosure’ is the answer to the “dead calm” of a securitization market adrift in the doldrums.That is not it guys. It is one thing to have documents that disclose risks—many of the documents of death spiral collateralized debt obligations (CDOs backed by private-label residential mortgage backed securities) in 2007 disclosed eye-popping risks—it is quite another to bring deals to market that you knew or should have known were overrated and deeply troubled the day the deal closed.

The real issue is timely, complete and continuing disclosure. If you knew or should have known your “triple-A” tranches deserved a junk rating on the day the deal closed, that should have been specifically disclosed, no matter what the rating agencies, or your attorneys, said. As the investment bank securitizing the deal and selling the securities, it was down to you. You thought the disclaimers in the documents protected you—well how is that working out? You are now suffering some of the consequences.The SEC may say you were within the “rules” (let’s see what happens), but the market is holding you responsible. Investors shun you.

The reason no one trusts securitizations is not “disclosure” of loan data.The reason is that you, the securitization departments of several investment banks and the “friendly” CDO “managers,” that “managed” their death spiral CDOs, have no credibility. If securitization professionals failed to perform appropriate due diligence, they have a problem. If they performed due diligence, but suppressed the reports, they also have a problem. Going forward, investors may not even trust “disclosures” of due diligence, because loan data can be manipulated. Your current lack of credibility means your former customers will be reluctant to believe your data and your documents in future.