FRM: Goldman Sachs Abacus SCDO

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A review of the Goldman Sachs Abacus SCDO transaction. Study notes:
1. it’s a “synthetic CDO” b/c the SPV writes CDS to Paulson (instead of buying mortgages from an originator, such a “true sale” implies a cash CDO).
2. It is “partially funded” b/c notes were sold to investors for only the 21/45 AAA tranche. That is, the unsold lower tranches provide credit enhancement but nobody win/loses (if only modest defaults on underlying RMBS, then Paulson loses premiums and investors profit by keeping their extra yield); the SS tranches are referenced in a bilateral transaction that is not part of the SPV (and, as i say in the video, this is great illustration of pure derivative: anybody can make a side bet…just happens to be a side bet on the SS)

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11 Responses

  1. Perry Katz says:

    can a normal CDO be partially funded?

  2. I notice you did not name the party engaging in cds with the spy. It could be titled Goldman Sachs, no? Never mind, I see the nuance, Paulson and company. Lol

  3. I think the insurance premium of the credit default swap should go to the insurance company AIG

  4. What is the purpose for the US Treasury to do this? Why can they just speculate on derivatives like this?

  5. Edouard JIN says:

    goldman went long just a little bit portion of it,then well it got the loss ,he could say"hey,i did lose money!!,than how could I knew that it was going to collapse"
    on the other hand,Goldman got most of the profit from the CDS fees.

  6. JK Low says:

    CDOs were "invented" by the Chinese.
    Americans merely wanted to execute the CDOs asap believing the risks were low, and bribed many powerful people in the securities exchange to approve the introduction of this new "gambling game" in the "casino".

  7. eternalko says:

    Great video.

    I think you could potentially answer 2 more questions.

    1) Who was by the end of the day was holding B, C, D tranche?
    2) What was the real cash flow. How much Paulson paid in principal.
    How much Aca paid for an AAA tranche. How much ACA fot the SS 50/100 tranche. And others.

    Great video. Thank you!

  8. @Shebadad Hey, i agree with you, so how can i really explain the behavior? Better ratings for some of the senior tranches are justified by diversification from a DEFAULT perspective, but these ratings are utterly laughable. Again, above the AAA, they had 55% better (!?) than AAA; utterly indefensible….as to why GS "needed" Treasury money, well, I have no plans to cover politics 🙂

  9. yookayman says:

    David – this was interesting. Thanks very much.

  10. cosmosgato says:

    Yeah that sounds fair and clear but was Paulson the guy who constructed inclusion with Goldman the time bomb CDOs?

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