AIB “too smart to buy this junk”

The AIB Chairman apologised today at the bank’s AGM for the self-inflicted problems caused by excessive lending to the property and construction sectors. At least, AIB avoided major losses in the US toxic securities sector  – as revealed in the Congressional hearings on Goldman Sachs, the GS view was that AIB was “too smart to buy this junk”.

See this report on the hearings and this extract featruing the committee chair Senator Carl Levin:

Levin chides Sparks for selling “junk”: In his second jousting session with Sparks, Sen. Levin questioned the former executive about the bank’s Hudson Mezzanine deal, reading an email from a Goldman salesperson in which she said that the client, Allied Irish Bank, was “too smart to buy this junk.”

“I didn’t believe it was junk. We didn’t believe it was a junk. A sales person said that,” Sparks said.

“Yes, if a sales person believed it was junk, you were selling junk,” Levin replied.

17 thoughts on “AIB “too smart to buy this junk””

  1. It can basically be summarized as follows

    Goldmann : We were market makers.
    Senate Committee : You bet against clients!
    Goldmann: Exactly, we were markets makers.

    It got a bit farcical after a while, the committee members seemed to think that goldmanns traders’ job was to behave as investment advisors.

    I did smile at the AIB mention, although if goldmann are calling aib smart does that say more about goldmann…

  2. The most entertaining commentator on Goldman has to be Max Keiser on the Keiser Report at Russia Today (RT). They are not in the dock for the use of their high frequency trading algorithm but Keiser calaims they can manipulate the markets and that it makes them about a $100m a day by a kind of automated insider trading, Ironically the algorith is a variant of a similar similar algorithm patented by Max himself and later sold and modified.
    The algorithm process is described here:
    http://www.huffingtonpost.com/ellen-brown/computerized-front-runnin_b_548148.html

  3. Apparently “Fabulous Fab” Tourre admitted during questioning that the short sellers e.g. GS, were directly involved in the creation of the synthetic CDOs, thus rigging the game. Hard to see how they can wriggle out of this one.
    http://www.huffingtonpost.com/martin-luz/blankfein-plays-dumb-but_b_554633.html

    “Tourre admitted it: the short seller has to pick the portfolio or there is no deal.
    Short sellers are too smart (and too greedy) to bet against something that they have not designed to fail. So the higher the demand by shorts, the more synthetic CDOs are created… and who takes the long side of those deals?

    Institutional investors lured in by the fraudulently high ratings.”

    Of course as pointed out – only the exceptionally stupid ones of course

  4. Well. We all ediccated now? OPM a bit of a surprize for you rubes?
    Read elsewhere on the web for more truth. And do not think for a minute that the USC and Senate did not already know about all of this. Spitzer tried to stop GWB from allowing sub-prime into NY. So he got outed. That is what the surveillance society is all about: compromise and kill if need be, those who might oppose those who make money, out of OPM.

  5. @ AMcG

    I think thats a slightly one sided argument being made there about the rigging of the game. IKB, for instance, had 25 analysts looking purely at sub-prime ABS and were practically begging people to create synthetic CDO’s for them. They weren’t dragged kicking and screaming into these purchases, in fact quite the opposite, generally they were incredibly eager to get more exposure to them. As you noted at the end, there is more failings on the part of the ratings agencies than there is on the part of the short seller or GS.

  6. @Eoin
    Actually that note about the raings agencies was not mine but a quote from the linked article – but of course it is correct. The ratings agencies seem to have been hand-in-glove with the Investment Banks and giving triple A ratings on demand. It looks on the face of it that the guys from S&P and Moodys should also be facing the Senate and the SEC. Whay are they not?
    But on your other point why would anybody actually want to buy this CDO “crap” (exscuse the language but I am quoting Carl Levin there).

  7. @Eoin
    Ok – I get your point sorry – it goes back to the ratings agencies. But it is a bit circular in that you say they begged GS etc to creae them, but the ratings would come after creation not before.

  8. @ AMcG

    you should read The Big Short by Michael Lewis, it does into a lot of detail how this all evolved.

    Essentially what happened is that the investment banks realised (unconciously at first, im sure conciously at the end) a disconnect (or possibly an arbitrage) in the credit ratings agencies rating models on these bonds. This allowed them to package CDO’s knowing that around 80% of them would be rated AAA, even though the underlying loans were either obviously individually average or just plain bad.

    So they package them up knowing that a triple A rating was highly likely, and then found investors to buy them, knowing that the investors would look almost exclusively at the ratings on them (or used similar models). So they didnt “rig” the game, but simply knew that it was rigged in one particular direction due to the ratings agencies mistakes.

    I suppose an analogy could be a glitch on Paddy Powers website, and you stick on a few hundred quid on a red hot favourite, knowing that its odds should be evens rather than 15/1? Or better yet, saying to a guy you know, “Paddy Power are offering 15/1, will you give me odds of 10/1 and ill stick a tenner on it”?

  9. @Eoin
    I plan to read Michael Lewis OK. In the meantime Max Keiser’s Keiser Report Episode 38 is out today
    http://rt.com/About_Us/Programmes/Keiser_Report/2010-04-29/567001.html
    and as usual well worth watching – there are some gems which you might have missed unless you wtched the entire eleven hours of the Senate hearings about Tourres email comments like ” ran into some widows and orphans at the airport and managed to sell them some abacus bonds ..”
    Also just under 8 mins in they discuss how GS etc can manipulate the ratings by knowing the algorithm (is nothing done by humans any more?) used by the agencies and tweaking the CDOs accordingly so that triple As are likely.
    Of course Keiser is completely over the top, but that is what makes the show compulsive. After a week I am now an addict.

  10. @Eoin
    The NYT article on the ratings agencies quoted in the Keiser report says:
    “The rating agencies made public computer models that were used to devise ratings to make the process less secretive. That way, banks and others issuing bonds — companies and states, for instance — wouldn’t be surprised by a weak rating that could make it harder to sell the bonds or that would require them to offer a higher interest rate.

    But by routinely sharing their models, the agencies in effect gave bankers the tools to tinker with their complicated mortgage deals until the models produced the desired ratings”

    http://www.nytimes.com/2010/04/24/business/24rating.html?scp=1&sq=Ratings%20agencies&st=cse

    Given their power – it’s amazing they are so badly regulated themselves – just look at Greece and Spain in the lst few days.

  11. @Eoin
    I read a few more articles on this and the more I read the more it confirms my original comment that that the CDO markets were rigged. What I hadn’t realised was how much the ratings agencies were directly or indirectly involved in the rigging. Paul Krugman has an op-ed piece about it from this weeks NYT
    http://www.nytimes.com/2010/04/26/opinion/26krugman.html?scp=7&sq=Ratings%20agencies&st=cse

    He describes the ratings procedures as:

    “..a deeply corrupt system. And it’s a system that financial reform, as currently proposed, wouldn’t fix.”

    Of course I hadn’t realised that the agencies have also faced Senate hearings in recent times.

  12. I think the person in AIB who was too smart to buy that junk has more recently being quoted by Mr Krugman for his academic work

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