The SEC's civil case against Goldman Sachs may be hitting a few speed bumps. One of the main tenants of the SEC's case is that ACA was duped into believing that Paulson and Co, was making a long bet on the pool of toxic subprime asset CDS used to collateral the CDO known as Abacus. However according to the Wall Street Journal, a Goldman executive told ABA that Paulson was buy protection the Abacus.
The idea that the financial institutions naively assumed that if Goldman and ACA constructed the deal, the collateral was solid and no investigation and modeling of the collateral was needed is ridiculous. The market participants buying Abacus were betting long on subprime for a long time. They had their own modelers, etc. Either this is another example of models being incorrect or management at these firms went long any how.
The bottom line here is that the buyers of abacus were sophisticated and were betting long on subprime already. If Abacus was never created, the institutions in question would have continued to go long subprime any way as their flawed models or greed would have told them that home prices would trend ever higher.
We actually had economic data today. Jobless Claims came in lower than what we observed last week. This was true of both initial and continuing claims. The reduction of jobless claims was attributed to a recovering economy. Last weeks increase in jobless claims was blamed on Easter affecting the models which crunches the jobless claims number. Apparently, when jobless claims rise it is because of anomalies, but when they fall it is based on economic recovery. No matter how you slice it, job growth stinks and that will moderate growth,
PPI was tame, tamer even than PPI. Investors waiting for high inflation and higher long-term rates will be waiting for a while longer. A guest on CNBC made the brilliant observation that preferreds were trading at rich levels and there is little price increase potential. My only question is what took her so long to realize this. Price increases are about done, as is spread tightening. Own a preferred with a coupon below 7.00% and hoping to be called? Sorry folks, but this is not likely to happen. My grand kids will be trading low coupon preferreds, such as JPMprK.
Have a great weekend.
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