If Goldman Sachs had packaged up some swill and sold it to the public they would be in a world of hurt. But that is not what happened. The Abacus deal was sold to sophisticated investors. There were no widows or orphans in this story.

The Subscription Agreement on a deal like this requires the buyer to make a number of representations and warranties. Basically they say that the buyer has the power to do this, that any approvals that may be required have been obtained, that they have received complete copies of the execution document and all other related documents. And most importantly, that they understands the risks that have been identified. There is no defense that says, “Goldman said it was okay”. There is no defense that says, “The rating Agencies said it was okay”.

We have created a big casino with big players who have absolutely monstrous piles of chips in front of them. I have no problem if they battle it out with themselves. To some extent this pool of fast cash equity makes our system work. If anyone thinks that this is not a predatory environment they are just wrong. If you play in this world and you are the “dumb money” you deserve to get knocked out of the tournament.

Christopher Whalen at Institutional Risk Analytics said today that he expected to see some legal action against the sell side player in the Abacus story, John Paulson (“JP”). While I respect Mr. Whalen’s views on most matters I am going to disagree with him on this. JP is going to take a walk on this one. The SEC has said as much already. It is not a crime to be a predator.

But there are rules that should not be broken. Powerful players can’t take their wars and predatory ways out on the little guys. No widows and orphans can get hurt or taken advantage of. And that takes us to JP’s successful buy side investment. He teamed up with a bunch of powerful fat cats and bought a big portfolio of troubled mortgages from the FDIC. The FDIC got the mortgages from the failed IndyMac Bank.

It is safe to assume that early on in the process the SEC must have considered some sort of complaint against JP. The conclusion is that there is nothing wrong with engineering a short position. Those out there that would like to see a ban on naked derivative shorts (i.e. CDS) should take note. The SEC just endorsed this practice.

That said I am sure that there are some in high office who would have liked to knock JP down a few notches. To many eyes this will look like he is the bank robber that got away with a big haul and laughed at the cops. Possibly those that feel this way should look at JP’s big buy side trade.

On 12/17/2008 The FDIC announced that it had reached a definitive agreement with IMB Management Holdings, LP (love the name) to acquire a substantial portion of the Indymac residential loan portfolio. The deal was finalized on March 19, 2009. The final purchaser was OneWest bank. This bank was controlled by the IMB partnership. Some thoughts on this deal:

-At the time it was agreed to the FDIC admitted that there were no other buyers around. So the worst bid (aka “least costly”) was also the best bid.

"The current economic climate is challenging for selling assets, but this agreement achieves the goals that were set out by the Chairman.”

“It was determined that the bid from IMB Management Holdings, LP, was the least costly to the Deposit Insurance Fund.”

-In Schedule 202 of the “Loan Sale Agreement” is the following information regarding the purchase price of the assets from Indymac. Based on these numbers you would have to agree that JP bought low.




-There is evidence that the FDIC has had some “sellers remorse” on the sale of Indymac assets. On 2/21/2010 they did a $2 billion deal where they sold more underwater mortgages. Based on the over collateralization of that transaction it would appear that similar pricing (haircuts) to the OneWest discounts were established. There was a big difference between the OneWest deal and the CMO that was recently done. This time around the FDIC kept the equity. What upside is in the portfolio is theirs to keep. The FDIC kept the equity on a $2b deal but gave it away to One West in a $16b deal. Way to go JP&Co.

-There has been some criticism of the FDIC/OneWest deal. Some have suggested that the new owners of the Indymac mortgages have not been treating the old customers very well. For example:


A judge in Riverhead, N.Y., went so far as to cancel a Long Island couple’s loan obligation in November, saying OneWest, which was the loan servicer, had failed to cooperate in efforts to avoid foreclosure and calling the bank’s actions “harsh, repugnant, shocking and repulsive.”

In December 8, 2009 OneWest worked with the Sheriff’s department to change the locks on a distressed home despite agreeing to work with the borrower just 8 days prior. This was done without any court actions which bypasses acknowledged and mandated Due Process on home foreclosures.

Several judges have issued Temporary Restraining Orders and Preliminary Injunctions against OneWest preventing OneWest from foreclosing on properties where the borrower claims OneWest failed to follow proper procedure in foreclosing on the property or otherwise violated the borrower's rights.


The following story is from an individual who I think got screwed royally by OneWest. This specific example took place after the Letter of Intent between One West and the FDIC were executed.

Borrower Status: Non-performing first mortgage.
Loan Balance as of 3/2009: $292,000
Cost of loan to One West: 55% or $160,600.
All cash settlement offer made to OneWest: $286,000.
Immediate gain to OneWest: $125,400, or a 78% return.
Stated reason why the settlement offer was rejected by One West:
“Only full payment will be accepted by the ‘Investors’.”

The Who’s Who list of Fat Cats who put up the $1.3b to make this magic happen:




In case you can’t read that I’ll recap the players in this Consortium:

Steve Mnunchin – Goldman Alum - Billionaire
John Paulson – Goldman Alum - Billionaire
J. Christopher Flowers - Goldman Alum – Billionaire
Robert Leeds – Goldman Alum – Billionaire
Michael Dell – Dell Computer – Goldman Client – Billionaire
George Soros – Big Goldman Client – Billionaire

That is a team of fat cats. Collectively they probably give a few hundred million a year to important charities. Soros is trying to give it all away. But on every Monday this group goes back to work screwing the little guys in this world who have no chance at all to stand up to them. For the life of me I can’t figure this state of mind out. Who wants to make money squashing bugs? These guys are billionaires yet they are sucking dimes from small fry.

Should some powers to be like to take a shot at JP and some other fat cats for what they have contributed of late to the general welfare they should look at OneWest. If there is any doubt that this is a winner for JP and the “Consortium” consider that the bank earned $1.6B (120% return on the initial investment) in just 12 months. From now on it is just gravy for the rich boys.

Possibly someone should talk to that Judge in Riverhead. I doubt he used the words: “harsh, repugnant, shocking and repulsive”, without some facts behind it. Alternatively they could talk to my friend who got stomped on by the Consortium. He went bankrupt; the house is still for sale. His words to me on this: “I have been screwed over and broken all over $6000.”

I would add another description to OneWest and the big money that owns it. Greedy. The fat cats of this world should take their gains from other sophisticated investors. It’s a low-rent move when they ride herd outside where they should be. That money is tainted, and they know it.