Selected writings by David Fiderer
For more than three years, AIG’s Joe Cassano has insisted that his firm was careful only to assume the credit risk on the “super-senior” tranches of a CDO, only the most senior of tranches rated triple-A.
A document released by the FCIC shows that AIG also among the largest investors in some of the most deeply subordinated tranches of the CDOs that it insured. According to a schedule of trades prepared by Goldman Sachs detailing trades on its notorious ABACUS synthetic CDOs, AIG bought subordinate tranches of ABACUS 2005-3, ABACUS 2005-CB1, and ABACUS 2005-2. . The other big “investor” in the subordinated tranches was Goldman’s own CDO desk. This new information demonstrates, once again, that the CDO market was more of an orchestrated illusion than it was a reality, and that almost everything is kept secret in order to protect the guilty.
One of the many things that are kept from public view is the capital structure of these deals. Unlike other synthetic deals, such as ABACUS 2007-AC1, the most senior slice of the CDO, the unfunded “super-senior” part that is insured by AIG, is not publicly rated. So the public has no way of discerning the overall size of the deal. That information was discerned from the trade confirmations between AIG and Goldman. The sizes of the subordinate tranches for ABACUS 2005-3 were not readily available from public sources. This new information suggests that AIG may have purchased pieces of other subordinate tranches in other CDOs that it insured, and that the people at AIG were even more cavalier, and less forthcoming, in their risk management than had been previously suspected.