Wednesday, April 28, 2010

Michael Lewis says "JUMP", the SEC says "how high?" (GS)

Now it's clear. You can tell what the SEC is up to, based upon how far into Michael Lewis' book "The Big Short" they are.

Goldman Sachs? Check. They're a big piece of Lewis' book, along with Deutsche bank, for their role in the securitization process. They are now the subject of a ridiculous (ridiculous in how LAZY it is) lawsuit alleging that a major institutional investor that calls itself a "a leading investor in CDOs" was duped by those evil folks at Goldman Sachs.

Smaller, but a major character in the book, is Michael Burry, a (former) hedge fund manager in San Jose, California. He had amassed a portfolio of credit default swaps(CDS) that would pay off once the mortgage market cratered, and the true value of what he owned was recognized (insurance against that fall). Problem was, his investors had had enough, and wanted their money back. Burry was able to defy his investors - to their own benefit, as his bet worked out and the fund made well over 100% - by putting his CDS in a "side pocket." That meant that he deemed there was no market for selling them, so he would put them off to the side until a market developed. Legally, he was on thin ice, as there were offers for these CDS, just not offers that reflected what they were worth.

So it seems the SEC has gotten about two thirds of the way through Lewis' book, judging by the news that they are now conducting an investigation into "side pockets." I'm not saying they're unworthy of scrutiny, but just keep in mind that the SEC's method of investigation is to sit around watching porn, until the whole financial world blows up and they can retroactively waste everyone's time.

Golly, you wonder what Lewis will write about next that the SEC would chase. Maybe a book about the Gramm-Leach-Bliley Act signed in November 1999, which allowed commercial banks that take deposits and loan against homes to basically turn themselves into investment banks. Carl Levin, the belligerent-without-a-clue Senator, signed that one, and still had the gall to ask Goldman execs why they caused the housing meltdown.

From the WSJ:

Federal regulators are examining whether hedge-fund managers abused tools known as "side pockets" that helped prevent clients from withdrawing billions of dollars of assets during the financial crisis.

The issue is one of several investigative priorities recently set by a newly organized Securities and Exchange Commission enforcement unit focused on ferreting out misbehavior by private-equity funds, hedge funds and other asset managers.

The group, run by co-chiefs Rob Kaplan and Bruce Karpati, held its first full staff meeting this week. Some 60 attorneys are assigned to the unit across nine offices, said people familiar with the matter.
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