And TCW kept shuffling junk into the CDO even as it became apparent that the whole subprime edifice was collapsing. This was apparent even to TCW, as Bloomberg makes clear:
While TCW was adding bonds made up of risky loans, its biggest mutual fund took a more ambivalent approach. TCW Total Return Bond Fund shrank its mortgage holdings not guaranteed by government-sponsored firms to 15.9 percent in July 2007 from 18.8 percent three months earlier, according to company filings.
Reporters Bob Ivry (a friend) and Jody Shenn also break some news here (UPDATE: I’m told the late Mark Pittman got a tagline that doesn’t show up on the Web. He was involved in starting the project):
The U.S. Securities and Exchange Commission is investigating how Wall Street banks bet against mortgage-linked securities to profit as their clients took losses, according to people familiar with the matter. As part of its examination of the market, the agency is looking at collateral replacement, said an SEC official with knowledge of the probe who asked not to be identified because he wasn’t authorized to comment.
Surely the bad guys are trembling now that the SEC is on the prowl!
Stories like this ought to stiffen what spine the SEC has left.
What can you do but sigh when you read these stories (unless you have a violent streak)? I have worked at two institutions (AIG and Soc Gen) that had obsessive corporate concern over risk. At both institutions I've seen profitable, safe investments turned down time and again by overly anal risk assessors. And meanwhile this stuff goes on.
Theoretically the rating agencies should have verified any asset swaps but we've seen how effective they were. The basic problem is that the people at risk for the loss - investors, employees, shareholders - are far removed from those making the investment decisions. All the government regulations in the world won't improve things, as the regulators don't have a stake in the outcome either (how many heads actually rolled at the SEC?).
It makes one admire how the Chinese handled the melamine milk scandal; a quick trial, followed by a summary execution.
#1 Posted by JLD, CJR on Fri 2 Apr 2010 at 05:14 AM
My favorite quote from the Bloomberg piece:
Among other overseers of AIG-guaranteed CDOs w[as] ... Michael Barnes, whose Tricadia Capital Management LLC is so secretive that, when asked to discuss CDO reinvestment, said, “We as a policy do not comment on anything.”
#2 Posted by murph, CJR on Mon 5 Apr 2010 at 10:33 AM
Indeed, Murph. That quote is awesome.
#3 Posted by Ryan Chittum, CJR on Mon 5 Apr 2010 at 03:34 PM