One of the most ridiculous parts of this whole Goldman Sachs (GS) case is the fantasy that somehow Goldman’s two major counterparties — ACA and IKB — were these poor little victims, that big bad Goldman came along and swindled out of their lunch money.
Mike O’Rourke of BTIG sheds some more light on what IKB was up, and it will probably make you ill:
In February 2004, Risk magazine published an article by Nicholas Dunbar titled “Conservative Mittelstand lender IKB has transformed itself into Germany’s biggest investor in structured credit – with a taste for riskier deals.”
Apparently, IKB was not a novice in the land of synthetic CDO’s. “In April 2000, for instance, the bank had issued a €500 million balance-sheet synthetic collateralized debt obligation (CDO) arranged by Deutsche Bank, and subsequently two €3 billion synthetic CLOs with KfW.”
They were among the pioneers in using “credit enhancement” by having the bank provide a liquidity backstop to their SIV Conduit dubbed “Rhineland.” Dirk Röthig, who built the business at IKB, explained how advanced they were. “Thus while Rhineland contains CDOs with exposure to Enron, WorldCom and most recently Parmalat, the effect does not constitute a loss,” says Röthig. “We’ve seen a few downgrades. But the structures could cover even these kinds of losses without being really affected in a way that could see losses in the tranches we are holding,” IKB insiders were not the only ones impressed by their acumen. “Since IKB is known to have heavily invested in mezzanine-level CDO tranches, do the bank’s steadily improving investment performance numbers prove that IKB’s risk taking has paid off? The rating agencies think so. ‘It sounds like quite a profitable strategy,’ says Moody’s Lautier. Bankers concur. One Frankfurt-based structured credit salesman at a major bank says, ‘They’re very sophisticated and smart investors. They can price a CDO to the last basis point’.”
Interestingly, a Fortune article from 2007 after IKB imploded notes that Röthig left IKB in early 2006 as he clashed with his superiors, over among other things “his dispute involved a refusal by superiors to allow him to back off his aggressive strategy.”
The level of sympathy being extended to the players who nearly blew up the system is astounding.
And we’re protecting them why?
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