Sunday, April 18, 2010

Empty Suits of the Week: ACA

One interesting thing in the Goldman suit is how manager ACA was totally oblivious to Paulson's intentions. Paulson & Co. were well-known shorts in this space at the time of their deal (first quarter 2007). For ACA to think Paulson was a long investor in this stuff, even if Goldman ever said this (remains in dispute) implies these people were insanely clueless about their industry. What proportion of executives are mindlessly going through the motions, getting paid to show up, and presenting themselves to family and friends as financial gurus in the arcane field of structured finance? There may not be a law against being clueless, but these are the true frauds in the Goldman/SEC lawsuit.

They suggested they looked at 'credit fundamentals', and then using their 30 professional dedicated to the CDO asset management business utilized 'proprietary models to stress and confirm the adequacy of cash flows'. This appears to have been looking at collateral credit ratings, and applying historical default rates.

Anyone working for this bunch of boobs should have a huge black mark. In any large failure executives all blame someone else and usually end up unscathed, but this deal highlights they were not doing what they advertized, assessing the collateral's credit quality. If they did, they would have noted that a high profile short gave them a bunch of credits that had an adverse sample of low FICO, adjustable rate mortgages. They clearly didn't do the most basic analysis of the portfolio they were managing, nothing.

ACA was a big player, and their business strategy was purportedly to 'assume, manage and trade credit risk'. Their action on this deal highlights their credit risk assessment appears to have merely been checking the agency ratings. That's understandable if you are a retail investor, not an institutional investor managing a $1B transaction. ACA probably was rubber stamping its portfolio collateral since inception, a strategy that worked until it didn't. These are the guys who should be inducted into the 'Empty Suit Hall of Fame':

Alan Roseman, CEO
Edward Gilpin, EVP and CFO
James Rothman, Senior MD and Head of Structured Credit
Peter Hill, EVP and Head of Public Finance
Joseph Pimbley, EVP and Head of Institutional Risk Management
Laura Schwartz, Senior MD and Head of CDO Asset Management
Hao Wu, Managing Director
Dennis Kraft, Managing Director
Kieth Gorman, Director
Ava Regal, Director
Shelby Carvalho, Director

I was talking to a risk manager recently, and he excitedly mentioned they just hired a PhD in physics from CountryWide to model RMBS--sort of like saying we just got the Madoff's operational risk manager. When investors lose money individual managers are pretty effective at avoiding blame, consequences are mainly apportioned to firms via their assets under management and share price, and then indirectly to individuals. I'm sure not everyone at ACA is a clueless hack, but the key players were, and its good to remember that more bad things happen because of ignorant bureaucrats like the people at ACA, as opposed to schemers like Fab Tourre and Goldman. After all, the world is full of sharks wanting to take your money, so a money manager susceptible to these pitches is a time bomb waiting to go off; if it wasn't Fab & Goldman, it would have been someone else.


Kid Dynamite said...

excellent post. I agree 100% and have been trying to make the exact same point repeatedly in my posts.

if you don't remove these guys who were recklessly piloting their fiscal ships, you're doomed to repeat the same scenario.

Anonymous said...

News flash - ACA went under in 2007. No bailout, no TARP, no interest free borrowing, no bonuses. Most probably still unemployed.

Anonymous said...

First point:
CDO portfolios were supposed to be chosen and diversified to reduce the risk of loss relative to holding any particular one of its constituents, and senior tranches were protected by over collateralization and priority. Most of a CDO’s structure was AAA debt, generally viewed as a means of earning low-risk yield, not as a vehicle for speculation. Except ACA didn’t know, because it wasn’t told that the securities presented to it by Paulson were specifically chosen to be the ones most likely to default.
Second point:
Goldman Sachs, itself, lost more than $90 million. Our fee was $15 million. We were subject to losses and we did not structure a portfolio that was designed to lose money. But they are know to be net short CDO/ housing markets starting in late '06 and '07. They did quite well on that bet. Few billion minus 90 mil is still a great proposition and the world might feel Golden Slacks pain.
Last point/question:
Why did Goldman need ACA, to me it smells like a another AIG pansy to offload risk and maximize return with minimum transparency. Why have an extra middleman when structuring synthetic Abacus for Paulson, why not take the other side like a true MM???

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