Davis Square III’s 209-page prospectus spelled out the risks for potential investors. “Characteristics” of replacement collateral wouldn’t necessarily be the same as those of existing assets, it said.
So not only is my investment shit, but I will not select the particular garbage I wish to own?
It also spelled out Goldman Sachs’s investment guidelines, which allowed as much as half of Davis Square III to be bonds backed by subprime mortgages, given to people with bad or limited credit histories. Among other constraints, TCW needed to meet collateral ratings requirements and maintain a mix of lenders and types of debt....
By December 2008, more than 170 AIG-insured pieces of CDOs, including parts of Davis Square III, had been taken over by a U.S. taxpayer-funded asset pool called Maiden Lane III after the street where the Federal Reserve Bank of New York is located.
Goldman Sachs and TCW’s parent, Paris-based Societe Generale SA, were paid the most before and after the New York Fed reimbursed AIG’s customers in full. Societe Generale got $16.5 billion, more than any other firm. Goldman Sachs was second with $14 billion. Together they accounted for almost half of the payouts.
New York-based Goldman Sachs was the biggest underwriter of CDOs taken over by Maiden Lane III. TCW managed about twice as many CDO assets that ended up in Maiden Lane III as anyone else, according to the AIG list and data compiled by Bloomberg....
Among other overseers of AIG-guaranteed CDOs were Ellington Management Group LLC’s Michael Vranos, a former teen Mr. Connecticut bodybuilder who ran the top-ranked mortgage-bond underwriter in the early 1990s, and Michael Barnes, whose Tricadia Capital Management LLC is so secretive that, when asked to discuss CDO reinvestment, said, “We as a policy do not comment on anything.”...
CDOs are investment pools made up of anything that provides a flow of cash. They can contain loans to companies used in leveraged buyouts or securities backed by commercial and residential mortgages, auto loans, credit-card receivables, even pieces of other CDOs.
Underwriters such as Goldman Sachs split CDOs into classes, or tranches, categorizing them by how likely they were to continue paying. The biggest group, called the senior classes, accounted for 93 percent of Davis Square III and got top ratings from Moody’s, according to a September 2004 Fitch Ratings analysis. In exchange for being first under the waterfall of payments, senior-class investors received less interest...
One of Lucido’s earliest purchases for Davis Square III was a $12 million slice of Abacus 2004-1, a CDO created by Goldman Sachs in July 2004 and filled with credit-default swaps, according to the prospectus.
By 2007, Goldman Sachs had moved so many securities into Abacus 2004-1 that much of the collateral didn’t exist when the CDO was created, according to data compiled by Moody’s. While AIG insured parts of Abacus deals, Goldman Sachs didn’t change the collateral in the pieces AIG insured, DuVally said.
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