Who was IKB, the German bank on the losing end of John Paulson’s Abacus bet?
One of the “victims” of this alleged fraud is IKB, a bank. If any institution should know how to analyse credit, it’s a bank. Even worse is that IKB is one of these serial carry-traders who purchased these types of instruments for the Structured Investment Vehicles and floated paper in the Asset Backed Commercial Paper market against them borrowing short and lending long (see chart). Those are the institutions that truly put the system at risk.
Finally, in this scenario, the “independent” third party portfolio selection agent claimed to be unsure of the client’s intentions. It should not matter what the related party’s views or intentions are, whether long or short. The fact is the agent’s very job description is to be unbiased and independent. Instead, just like the ratings agencies, the collateral managers saw the profits that loomed rather than performing the task at hand. If ACA had simply performed its task of comprehensively and independently evaluating the underlying RMBS, the deal would not have happened. It is hard to believe they did not know the intentions for the pool when the higher quality subprime RMBS were replaced. In addition, if AAA ratings were not handed out to everyone who applied, this deal (like so many others) would not have been done.
The chart says it all.
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