How I caused credit crunch - Goldman CDO man

The writer of a book entitled "How I caused the credit crunch" worked for the unit of Goldman Sachs that sold the financial product at the heart of U.S. fraud allegations against the bank.

Tetsuya Ishikawa's name appears on the preliminary term sheet for the Abacus 2007-AC1 deal, a collateralized debt obligation (CDO) the U.S. Securities and Exchange Commission accuses the bank of using to commit fraud.

"Tets" Ishikawa, who is Japanese by birth but grew up in London, was educated at the elite British school of Eton and at Oxford University, according to a short biography in his 2009 novel. He left Goldman in 2007 and then worked for Morgan Stanley, structuring, syndicating and selling credit derivatives to investors.

His name and London phone number are on the Abacus term sheet as one of six people in the "Global Syndicate" group, part of a wider contact list that also includes Fabrice Tourre, the 31-year old Frenchman who has been charged with fraud by the SEC.

Goldman is vigorously defending itself against the U.S. accusations, contesting the idea that it was selling the CDO in the knowledge it would collapse so as to allow hedge fund manager John Paulson to bet against it.

Ishikawa's novel, about a fictitious Oxford graduate, "tells how a novice to the mysteries of hedge funds, subprime mortgages and CDOs can fix complex deals worth billions in the exclusive bars, brothels and trading floors of London, New York, Frankfurt and Tokyo," a blurb on the back of the book says.

The idea for the novel was born when Ishikawa was telling his friends "about the cliched high life I had been living while creating and selling billions upon billions of these securitization and credit derivative products, now better known as 'toxic assets'," the preface of his book says.

Ishikawa was made redundant by Morgan Stanley in May 2008. He now works for fixed income house Amias Berman & Co in London. He could not be reached for comment through his current employer. A spokeswoman for his publisher, Icon Book Ltd., said he did not talk to the press.

The book -- which contains a financial glossary -- uses no real names and says "any resemblance to actual firms of persons in this book is entirely and genuinely coincidental."


Based on an article that appeared in http://thewallstreetchallenger.com the use of Synthetic CDOs after 2005 would have been very risky. Since home prices grew at a high rate till almost the end of 2007 and peaking in 2005, CDOs backed by MSS were an ideal high return investment till approximately November 2005.

Using home prices forecast it is hard to believe that the financial institutions and credit rating agencies involved in the CDO business had sophisticated risk analysis simulations, but did not forecast price movements of the underlying collateral.

CDOs played a notable role in the financial markets. Did the CDO cause the financial crisis or was it blindness, greed and the need for riskier assets? The constructors of the CDOs may not bear direct responsibility. Rather their reckless use, misunderstanding and ignorance of key warning signs likely contributed to the magnitude of the financial crisis. You can observe the financial landscape today and recognize from the survivors, walking wounded and the absentees those who knew and those who had not understood the use of these tools.

Future of Swaps??

A proposal to rein in derivatives trading could translate to billions of dollars of lost annual revenue for banks including JPMorgan Chase & Co (JPM.N) and Goldman Sachs Group (GS.N).

Senate Agriculture Chairman Blanche Lincoln is expected to unveil a financial reform bill on Friday that would prevent banks with deposit insurance from also trading derivatives known as swaps.

Banks would have to find a way to separate their swaps trading operations from the rest of their business, although the mechanism for doing so is not spelled out. Under Lincoln's plan, over-the-counter derivatives -- those with common terms and wide sales -- would move onto regulated exchanges in many cases.

Globally, the $450 trillion over-the-counter derivatives market is big business for the banks. Scaling back these operations, or forcing high-volume contracts to move to exchanges, could make trading much less profitable for dealers. Customized contracts would continue but face higher costs.

Lawmakers have sought ways to rein in the opaque world of over-the-counter derivatives after the financial instruments were blamed for exacerbating the financial crisis and prompting the U.S. government bailout of companies such as American International Group (AIG.N).

Jamie Dimon, chief executive of JPMorgan Chase & Co (JPM.N), told bank analysts on Wednesday that forcing dealers to trade derivatives on exchanges could cost his firm up to a couple of billion dollars in revenue annually.

"It will be a negative," he said. JPMorgan has the largest derivatives exposure of the U.S. banks.

Just five banks account for 97 percent of the total $212.8 trillion worth of derivatives contracts held by U.S. commercial banks, according to a fourth-quarter survey by the Office of the Comptroller of the Currency.

Lincoln's effort will join proposals already on the table from the Obama administration and Senate Banking Committee chairman Chris Dodd and is be the most aggressive package.

Her proposal would prohibit any bailout of dealers, buyers or "swap entities." Derivatives like swaps take their value from underlying assets such as bonds, currencies or commodities, or can be tied to changes in interest rates.

But it is unclear how big banks like JPMorgan would shed their "swap entities." These companies could not likely exist as standalone entities, because they would lack both the funds and the trust to buy and sell swaps.

"Today, because of credit concerns, you would find it very hard to unbundle this market," said Christopher Whalen, co-founder of Institutional Risk Analytics.

If banks shed their swaps desks, they would essentially be getting out of the trading business, and focusing on areas like lending, said Kevin McPartland, senior analyst at research firm TABB Group.

"This is a back-door way to reinstate Glass-Steagall without actually doing so," McPartland said.

"For the swap desk to be successful and continue providing the service they do, it's important that they have bank capital behind them," McPartland added.

JPMorgan, Bank of America (BAC.N), Goldman, Morgan Stanley (MS.N) and Citigroup (C.N) had the largest derivative exposures of all holding companies in the fourth quarter at $78.66 trillion, $72.53 trillion, $48.85 trillion, $41.51 trillion and $39.35 trillion, respectively, according to the OCC survey.

SURVIVAL CHANCES

But Lincoln's proposals still have to withstand hearings, lobbying, and Republican opposition before becoming law.

Some Senate staff workers believe banks enjoy the cushion of Federal Reserve backing that other market participants do not have, a potentially unfair advantage.

If approved by the Agriculture Committee, the package would be wrapped into an omnibus regulatory reform bill approved by the Banking Committee and awaiting Senate debate.

Treasury Secretary Timothy Geithner praised Lincoln's plan. "Based on what she's laid out in public it looks like a very strong bill," he said at the White House on Wednesday.

Lawmakers are under pressure to address voters' outcry over the billions of taxpayer dollars spent to prop up financial institutions during the crisis.

"There's a kind of ill-defined feeling on the part of both parties that they have to do something, because when they go home people yell at them," said Whalen.

Lincoln's proposals, as outlined by committee staff, are the most aggressive on the table, according to McPartland, and that could make it less likely for them to survive to the final legislation.

"We don't need to kill the existing model, we just need to figure out how to have better oversight and reduce systemic risk," McPartland said.

Lehman may act against Goldman

LEHMAN Brothers Holdings may have grounds to sue Goldman Sachs Group and Barclays after they demanded $1.2 billion in additional margin to assume trading positions auctioned by a Chicago exchange,bankruptcy examiner Anton Valukas said.
Goldman Sachs was the high bidder for Lehmans equity derivatives at options and futures exchange CME Group Inc., and took $445 million of those assets at a private auction in September 2008,according to previously censored details of Valukass March 11 report.Barclays was the high bidder for Lehmans energy derivatives and took $707 million in assets from CME.
DRW Trading was the highest bidder for Lehmans foreign exchange,agricultural and interestrate derivatives,Valukas said.The transfer of $2 billion in Lehman deposits for its proprietary trades at the CME cost the defunct investment bank $1.2 billion,Valukas said,adding that CME also may be sued.
The examiner concludes that an argument can be made that the transfers at issue were fraudulent transfers, Valukas said in the report,released in its form yesterday.Under bankruptcy law,Lehman may be able to undo the auction,he said.
Part of Valukass job was to explore Lehmans grounds for suing companies that contributed to,or benefited unfairly from,the demise of the investment bank and its affiliates including the brokerage Lehman Brothers Inc., and to say which kinds of lawsuits are most likely to succeed and what the possible defenses are.
Thus,LBI may have a colorable claim against CME,or any of the firms that bought LBIs positions at a steep discount during the liquidation ordered by the CME,for the losses that LBI sustained as a result of the forced sale of house positions held for the benefit of LBI and its affiliates. Bloomberg

AIG unit, Goldman unwind CDS positions: source

NEW YORK - American International Group Inc (AIG.N) realized a loss of up to $2 billion last year as its Financial Products unit ended most of its remaining trades with Goldman Sachs Group Inc (GS.N), a source familiar with the matter said on Sunday.

AIG realized a loss of $1.5 billion to $2 billion as it ended credit default swaps, or insurance like guarantees, with Goldman on about $3 billion of mortgage collateralized debt obligations, according to the source.

That leaves the unit's swaps with Goldman on $1.3 billion in CDOs, called Abacus, according to the Wall Street Journal, which first reported the news.

It added that AIG officials felt these assets could do better than what their prices would show.

AIG and Goldman declined to comment.

AIG Financial Products, the unit behind AIG's near-collapse in September 2008, has been unwinding its businesses.

Last year, it reduced the notional amount of its derivative portfolio by 41 percent to $940.7 billion at December 31 from $1.6 trillion a year earlier. It reduced the number of its outstanding trade positions by about 18,900, to about 16,100.

AIG has said it would keep derivatives with $300 billion to $500 billion in notional value as it unwinds positions. AIG Financial Products will cease to exist, and either AIG or an external party may manage the positions that remain.

The unit, which operated separately from the insurance operations that AIG was best known for, sold credit default swaps and other hedging and investment products covering currencies, energy, equities and interest rates to clients around the globe.

Once the world's largest insurer, AIG almost collapsed because of these bets, as it was left on the hook for tens of billions of dollars in collateral payouts to some of the biggest U.S. and European financial institutions.

AIG Financial Products has also been a cause for public outrage against AIG, as it made large retention payments to its employees.