Wolfson Brothers Charged by SEC for naked short selling scheme

[Kraven]

I agree with your logic to an extent, but the SEC should have simply "followed the money" and essentially this security was a tool that stole money from the germans and handed it to Paulson. Paulson was the architect, Paulson knew just as did Goldman what he was doing, and he did not deserve those gains.

I have much respect for paulson, and especially with this CDS Trade, but he does not deserve to get filled more than the market allows just because hes paulson. Synthetic securities should be outlawed.

I think that you're looking at yesterday's situation with today's knowledge.  Abacus was put together prior to the crisis.  Paulson wasn't even Paulson yet.  He was just another hedge fund manager putting on a trade.  Paulson didn't necessarily get anything that anyone else couldn't have gotten.  As evidence of that, Paulson wasn't the only guy doing this - see Magnetar, etc.  At the peak of every bubble there are going to be people who make out better than the rest, whether that's due to luck, skill, or whatever. 

I also disagree that Paulson was the architect.  As I said earlier, Paulson came to Goldman wanting to do something specific, i.e. short certain MBS.  If Goldman had wanted to retain it on their books, Paulson couldn't have cared less.  The response might be that of course they were going to sell it, but as the CDO market got long in the tooth, all of the majors were warehousing this stuff to get trades done.  Because of course any "blip" would be short lived and they would need to hit the ground running when the market got back in gear.

Synthetic serve a purpose.  Don't blame the gun for being shot.

[Hester]

I have much respect for paulson, and especially with this CDS Trade, but he does not deserve to get filled more than the market allows just because hes paulson. Synthetic securities should be outlawed.

If only those on the other side of Paulson's trade were able to actually see the securities and judge the quality for themselves before investing. You know, like financially sophisticated adults. Instead Paulson and his cronies held them at gunpoint and forced them to invest...

[ubuy2wron]

.  Don't blame the gun for being shot.  Had to laugh when I read that one but...... why hand out a bunch of UZI's to a bunch of sociopaths. Wall street has shown itself to be a den of thieves over and over again. I am certain we would have a better world if this stuff was not institutionalized. Dark Pools, HFT, Synthetic securities, naked shorting ,credit default swaps, the list is endless, would the world be any worse off if they all went away?

[Kraven]

.  Don't blame the gun for being shot.  Had to laugh when I read that one but...... why hand out a bunch of UZI's to a bunch of sociopaths. Wall street has shown itself to be a den of thieves over and over again. I am certain we would have a better world if this stuff was not institutionalized. Dark Pools, HFT, Synthetic securities, naked shorting ,credit default swaps, the list is endless, would the world be any worse off if they all went away?

I am not disagreeing that these things aren't used appropriately in many situations, but the same can be said for many things in life.  One of the things we used to say was don't blame the lion for killing it's prey.  It's the lion's nature.  It doesn't make it right, but it is what it is.  Regulators and such are great at regulating and preventing the last crisis.  Get rid of one thing and something else will take it's place.  Wall Street really isn't a den of thieves, it's a misnomer.  There have been dens of thieves of course, but Wall Street itself is simply a bunch of people who are made up of about 99% greed and 1% water.  Greed is as greed does (to adapt Forest Gump's famous line).  Most of these things serve a purpose, not all, but most.  Wall Street would serve itself better if it simply took things to the line instead of always going over the line and causing the rubber band to snap back.  But again, the lion and all that.

[moore_capital54]

.  Don't blame the gun for being shot.  Had to laugh when I read that one but...... why hand out a bunch of UZI's to a bunch of sociopaths. Wall street has shown itself to be a den of thieves over and over again. I am certain we would have a better world if this stuff was not institutionalized. Dark Pools, HFT, Synthetic securities, naked shorting ,credit default swaps, the list is endless, would the world be any worse off if they all went away?

I am not disagreeing that these things aren't used appropriately in many situations, but the same can be said for many things in life.  One of the things we used to say was don't blame the lion for killing it's prey.  It's the lion's nature.  It doesn't make it right, but it is what it is.  Regulators and such are great at regulating and preventing the last crisis.  Get rid of one thing and something else will take it's place.  Wall Street really isn't a den of thieves, it's a misnomer.  There have been dens of thieves of course, but Wall Street itself is simply a bunch of people who are made up of about 99% greed and 1% water.  Greed is as greed does (to adapt Forest Gump's famous line).  Most of these things serve a purpose, not all, but most.  Wall Street would serve itself better if it simply took things to the line instead of always going over the line and causing the rubber band to snap back.  But again, the lion and all that.

Again, as disciples of Graham & Dodd and Buffett, I believe we are all held to a different standard around here. Kraven can it be argued that was Paulson did was on the right side of the law, probably, maybe.

Does it pass the front page of the newspaper test no, not at all.

Relating to synthetics I stick to my  position that they serve no purpose.

An analog would be, say you wanted to buy 50,000,000 shares of BAC right now at 7.39, and yet you can only  buy around 1,000,000 on the ask. Well you call up your prime broker, in my case Scotia, and I ask them to find me some german fund who is willing to take the other side, at 7.39 right this instance, and to sell me 50,000,000. Well they don't own that 50,000,000 so instead they will create a new security that now tracks the price of BAC and take the other side.

Well lets see what happened here, instead of buying those 50,000,000 shares in the market, and getting filled based on the laws of supply and demand, I coerced, or through my fees, convinced my prime broker to convince their clients to take the other side of this "gamble".

That is what Abacus was, Paulson could not get filled on enough mortgage securities, so he decided to create a tracking security, and paid his brokers to coerce idiots into taking the other side.

For this reason it does not pass the front page of the newspaper test, and it should be outlawed.

You can argue otherwise, but I stand firm on this point.

[Kraven]

.  Don't blame the gun for being shot.  Had to laugh when I read that one but...... why hand out a bunch of UZI's to a bunch of sociopaths. Wall street has shown itself to be a den of thieves over and over again. I am certain we would have a better world if this stuff was not institutionalized. Dark Pools, HFT, Synthetic securities, naked shorting ,credit default swaps, the list is endless, would the world be any worse off if they all went away?

I am not disagreeing that these things aren't used appropriately in many situations, but the same can be said for many things in life.  One of the things we used to say was don't blame the lion for killing it's prey.  It's the lion's nature.  It doesn't make it right, but it is what it is.  Regulators and such are great at regulating and preventing the last crisis.  Get rid of one thing and something else will take it's place.  Wall Street really isn't a den of thieves, it's a misnomer.  There have been dens of thieves of course, but Wall Street itself is simply a bunch of people who are made up of about 99% greed and 1% water.  Greed is as greed does (to adapt Forest Gump's famous line).  Most of these things serve a purpose, not all, but most.  Wall Street would serve itself better if it simply took things to the line instead of always going over the line and causing the rubber band to snap back.  But again, the lion and all that.

Again, as disciples of Graham & Dodd and Buffett, I believe we are all held to a different standard around here. Kraven can it be argued that was Paulson did was on the right side of the law, probably, maybe.

Does it pass the front page of the newspaper test no, not at all.

Relating to synthetics I stick to my  position that they serve no purpose.

An analog would be, say you wanted to buy 50,000,000 shares of BAC right now at 7.39, and yet you can only  buy around 1,000,000 on the ask. Well you call up your prime broker, in my case Scotia, and I ask them to find me some german fund who is willing to take the other side, at 7.39 right this instance, and to sell me 50,000,000. Well they don't own that 50,000,000 so instead they will create a new security that now tracks the price of BAC and take the other side.

Well lets see what happened here, instead of buying those 50,000,000 shares in the market, and getting filled based on the laws of supply and demand, I coerced, or through my fees, convinced my prime broker to convince their clients to take the other side of this "gamble".

That is what Abacus was, Paulson could not get filled on enough mortgage securities, so he decided to create a tracking security, and paid his brokers to coerce idiots into taking the other side.

For this reason it does not pass the front page of the newspaper test, and it should be outlawed.

You can argue otherwise, but I stand firm on this point.

Moore, we will have to agree to disagree I guess.  No harm in that.  But just to respond, fwiw.

Paulson didn't do anything illegal as far as I can tell.  He went to to Goldman (actually went around to all the IBs) and proposed a trade.  Everyone could have said no.  You want to say that because of his fees he held them over a barrel, but I can't agree with that.  He wasn't anyone way back in 2007.  The fees he was paying on these things were no more or less than anyone else was paying.  The CDO machine was in full gear.  The banks could have said no.  But they never do.

Your examples use inflammatory images to suit your argument.  You say you could go to Scotia and force them to stuff some German investor.  Why would you care who the investor is in this kind of product?  It would never play out this way.  You'd go to Scotia and say I want to do this BAC trade, find a way to do it.  They either would or wouldn't.  You might not even know until much later who was taking the other side of it.  You wouldn't dictate who the investor is.  Would it be different if Scotia warehoused it?  The thing is that the Scotias of the world generally didn't get in trouble because they were inherently conservative on these things.  Part of it was being last guy at the party and trying to figure out where the beer keg is.  It isn't necessarily that they were teetotalers, but that they were a bit slow on the draw, but that served them well.

I think too you are mixing up synthetics with synthetic ABS CDOs.  What's wrong with going to your IB and saying I want to go long (or short) a particular hard to find bond.  But you don't have to worry on this front.  I suspect we won't see synthetic ABS CDOs for a very long time (essentially never).

Just a different viewpoint than yours.  I don't like the result any more than you do, but it's hard to always judge based on current facts.  I didn't see anyone speaking out about any of this in 2006-2007 (I am not talking about the overheated market generally, but synthetic ABS CDOs).