Insider's Game

Thomas C. Priore had a very impressive resume. Harvard B.A., Columbia M.B.A., fourteen years of structured credit investment and origination experience, and a 76% ownership stake in Institutional Credit Partners LLC, better known as ICP. Priore was also the President and CEO of ICP, which arranged and structured about $11 billion worth of CDOs. A big chunk of that risk, about$4.3 billion, was insured by AIG, and later acquired by the New York Federal Reserve as part of Maiden Lane III.

Priore’s accomplishments were truly extraordinary. He helped found ICP in August 2004 as an affiliate of The Bank of New York, which sold off a majority ownership stake in May 2006, when he was 37. In September 2006, Priore launched a $2.5 billion deal, CDO Triaxx Prime CDO 2006-1, which was jointly arranged with Canadian Imperial Bank of Commerce. AIG insured about 2/3 of that deal, or $1.8 billion, for the benefit of UBS.

Later, ICP Securities acted as the sole arranger for a $5 billion deal called Triaxx Prime CDO 2006-2. About half of that deal, $2.5 billion, was insured by AIG for the benefit of Goldman Sachs. AIG and Goldman must have been dazzled by Priore. I can’t think of any other instance when a big institution bought a billion-plus piece of a deal that wasn’t structured and arranged by a large bank or brokerage firm. Other banks take comfort from knowing that the entity behind a deal has a big capital cushion and is subject to regulatory oversight. ICP was a three-year-old company owned by one guy who lived in Chappaqua.

Many CDOs are structured in ways that offer opportunities for abusive self-dealing, and the Triaxx deals were no exception. Investors in these deals did not acquire static portfolios; they were either actively managed deals, and/or deals that enabled the asset manager, ICP, to pick and choose which investments were added to the CDO portfolio during the ramp up period. The investments were subject to certain eligibility criteria, most notably that they had to be rated triple-A and they had to be residential mortgage backed securities. The senior tranches of the CDOs of were entitled to a fixed rate of return, and any excess profits, above and beyond that fixed return, went directly to ICP, which held the equity in the deals.

A month ago, the S.E.C. alleged in a complaint that Priore’s firm made all sorts of fraudulent transfers for the benefit of himself and ICP, at the expense of investors in the Triaxx CDOs. The most notorious transfer, according to the S.E.C.’s complaint, was Priore’s fast-and-loose acquisition of a $1.3 billion of Bear Stearns bonds initiated in late June 2007, when Bear was seeking to raise cash to bail out two failing hedge funds. Priore had agreed to purchase the bonds for the Triaxx CDOs, but later decided assign the purchased assets to a different investment account managed by ICP. Shortly thereafter, Standard & Poor’s and Moody’s, within a few hours of each other, announced a series of downgrades on a relative handful of subprime bond issues. Those downgrades spooked the market, and sent prices of the mortgage bonds downward. So in August 2007, Priore arranged a series of unauthorized forward sales of the Bear mortgage bonds to the Triaxx CDOs, which acquired the assets at higher-than-current-market prices.

The S.E.C.’s case does not address the more questionable attributes of the deal. What were Goldman, or UBS, or AIG thinking when they signed on for billions in credit risk on transactions sponsored by a fledgling operation? Why did AIG, the rating agencies, and the U.S. government feel the need to transfer the Triaxx deals into Maiden Lane III? At the time of the transfer, they were still rated Aaa by Moody’s, which downgraded the Triaxx deals to Caa levels on January 30, 2009. Ostensibly, these CDOs did not invest in subprime mortgages. But we have no way of finding out what went on, because the government still refuses to lift the veil of secrecy surrounding all CDOs, not only those acquired by the Federal Reserve. Until the government voids the nondisclosure agreements that limit public disclosure of CDO performance reports, persons far more culpable than Thomas Priore remain insulated from accountability.