Friday, March 27, 2009

Blinded by Rage

What do you get when you combine insecurity, a massive inferiority complex, and unbridled populist rage? Matt Taibbi. Taibbi, whose recent Rolling Stone piece is one of the most unintentionally hilarious articles I've ever read, now unleashes a semi-coherent attack on Jake DeSantis, the former AIGFP executive whose resignation letter appeared on the NYT's op-ed page this week. Taibbi spends a majority of the article calling DeSantis is a liar because he undoubtedly knew about the credit default swaps that Joe Cassano was writing. Except that DeSantis never claimed that he didn't know about the CDS deals. The rest of the article is similarly ridiculous, and possibly rivals his Rolling Stone piece for the Unintentional Comedy crown. Apparently Taibbi was too busy making sure that he included the word "fuck" in every sentence to put together a coherent argument. Ah, youth...

7 comments:

Rhodo Zeb said...

Hello:

I have been reading you for awhile now, and wonder if you would care to weigh in on an interesting comment over at Michael Froomkin's blog (his post with mad max in the title) I exerpt:

My understanding is that most of the "toxic waste" securities that the banks retained were the socalled "super-senior tranches"...

Since they're not contructed to be exactly like any real tranche, you can't use documents of mortgages supporting some real tranche to value them. More, since there's no contractual chain tying these securities to any underlying mortgages, the holders have no claim to inspect any mortgage documents, even those that might be relevant in valuing them, because such documents are, after all, confidential...

Is that correct in your estimation?

Economics of Contempt said...

Well, it's not entirely clear what the commenter is claiming, but my sense is that he's wrong. He seems to be saying that all super-seniors are synthetic (i.e., created out CDS rather than cash bonds), and that since CDS sellers don't have the same rights as bondholders, they have no right to inspect the underlying loans. That's not right. Super-senior tranches don't have to be synthetic.

Whether the owner of a super-senior tranche has the right to inspect the underlying mortgages depends on a variety of factors, including whether there has been an initial "event of default," whether the CDO collateral is dynamic rather than static, etc. Remember, the owner of a super-senior tranche has only purchased a bond issued by an SPV, which may or may not own the collateral underlying its bonds.

For CDOs backed by mortgaged-backed securities (MBS), the real question is whether the documentation of the underlying mortgages even exists anymore. A lot of these mortgages were originated by fly-by-night mortgage servicers, most of whom have gone belly-up and long ago filed for Chapter 7 liquidation. If they were the ones ultimately responsible for maintaining records on the underlying mortgages, it's 6-to-5 in pick 'em whether the underlying mortgage documentation actually exists anymore.

Anonymous said...

It is not necessarily that the mortgages don't exist. It's more that processing deals is a cost center, not a profit center. Therefore, in the "legit" banks & mortgage processing companies there are broom closets filled with boxes of mortgage paperwork that "we'll get to someday".

In the meantime some claim a 1 out of 5 success rate in contesting foreclosures by demanding proof of title.

Rhodo Zeb said...

Thanks for your reply, which I reposted on my blog.

I don't have much that I can say. Thanks for weighing in.

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