WSJ’s Good Idea on Abacus Needed More Context

I like that The Wall Street Journal zeroes in on the specific homeowners at the core of the Abacus bet. As it says:

It was a dizzyingly complex transaction, involving 90 bonds and a 65-page deal sheet. But it all boiled down to whether people like Stella Onyeukwu, Gheorghe Bledea and Jack Booket could pay their mortgages.

They couldn’t, and Mr. Paulson made $1 billion as a result.

It’s an excellent idea to focus on the real people behind the machinations on Wall Street—to continue to put faces to the crisis. Here’s some predatory lending, for instance:

In May of 2006, a broker had approached Mr. Bledea, a Romanian immigrant, to pitch him a deal on a loan to refinance the existing mortgage on his Folsom, Calif., home.

Mr. Bledea, who is suing his lender in Superior Court of California in Sacramento on allegations that he was defrauded, wanted a 30-year fixed-rate loan, according to his complaint. His broker told him the only one available was an adjustable-rate mortgage carrying an 8% interest rate, according his court filing.

Mr. Bledea, who says he has limited English-speaking skills, was told that he’d be able to exit the risky loan in six months and refinance into yet another one carrying a lower 1% rate. Mr. Bledea agreed to take out the $531,000 loan on July 21, 2006.

But I can’t help but think this story would have been better if it had some additional context. The piece doesn’t tell us how or whether Goldman Sachs and John Paulson’s doings affected the actual housing market.

Abacus was a synthetic CDO, meaning it was made up of credit-default swaps, which are basically unregulated insurance contracts. In other words, there were no actual mortgages in Abacus—it was purely a speculative vehicle on whether the mortgages would go bad. The WSJ explains this in the story, but its graphic is misleading and it errs when it writes this:

The home mortgage of Gheorghe Bledea was among those that wound up in the Abacus portfolio.

Which helps add to the confusion here: How did Abacus affect subprime lending if at all?

Felix Salmon argues that “in some ways the Magnetar-driven boom in synthetic CDOs was actually preferable to the boom in RMBS-based non-synthetic CDOs which preceded it,” because it didn’t cause the creation of actual home loans.

On the other hand, we know that Magnetar’s activities in the CDO market helped fuel the housing securitization market long after it should have petered out. ProPublica showed that in its investigation and Salmon himself explored it further here.

The Journal doesn’t explain this at all with Abacus here. It should have.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.