Goldman CDO: The Loan Data Was There for All to See
May 5, 2010
The Securities and Exchange Commission's (SEC) suit against Goldman Sachs centers on the allegation that the Wall Street firm failed to disclose to investors the role an opportunistic hedge fund, Paulson & Co., played in choosing the assets underlying a CDO, before betting against it.
But detailed and updated data about these assets — mortgage loans populating 90 MBS that made up the $2 billion CDO called ABACUS 2007-ACI — were there for all to analyze, providing they paid for it.
"What's strange about the idea that institutional investors would need to be protected from each other is that there was enormous amount of information available to institutions, even those with modest budgets," says Kenneth Posner, an analyst at Morgan Stanley, who until 2008 covered specialty finance companies including lenders such as subprime mortgage broker Countrywide Financial Corp.
If a SEC proposal to require more detailed information on ABS comes to pass, that loan-level data and more will actually be provided by the issuer on a regular basis - and be downloadable from the Web for electronic analysis. This would make claims against Wall Street firms that they provide inadequate disclosure about a deal's contents all but obsolete.
That data, about the types of loans and their status relative to the value of properties they financed, much less information about the borrowers' credit worthiness, was not disclosed by Goldman in the Abacus prospectus or otherwise. This was common practice at that time.
But Goldman did list the mortgage-backed securities transactions referenced by the synthetic CDO and provided their Cusip numbers, which identify the securities.
"Synthetic" CDOs derive their values by references to a set of securities whose values can rise and fall. The owners of the CDOs might have no ownership stake in any of the referenced securities.
Still, even if a prospectus for a product like Abacus did not include loan-level data and Goldman did not provide current data about the underlying assets, that did not mean the information was unavailable to investors.
Loan-level data about the mortgages pooled in those MBS was available to investors in Abacus and other such deals throughout the frothy heyday of CDOs, before the financial crisis struck full force in September 2008.
And that data would have provided investors with far more substantive information about the deal's health than whether a hedge fund selected some of its loans. At least one technology vendor provided loan-level data for virtually all securitized mortgages. But instead most investors relied almost solely on the now discredited ratings from the ratings agencies, perhaps in part because they were bond investors unaccustomed to the nitty-gritty loan analysis traditionally performed by commercial bankers.
Those investors could have analyzed a wide range of metrics about the financial status of the borrowers and their loans, as well as the performance of the securities comprising those assets. So an investor in Abacus could have analyzed the real estate underlying each of the loans in JPMAC 2006-FRE1 M8 Midprime, a mortgage-backed security referenced by Abacus, as well as the underlying loans of the remaining 99 mortgage-backed securities in the CDO. The JPMAC security was serviced by JPMorgan and rated 'BBB' by Standard & Poor's.
David Hurt, senior vice president of business development at Loan Performance, a unit of CoreLogic, says his firm has provided the relevant loan-level data and many of the tools to analyze it since before the housing bubble.
A CoreLogic database aimed at mortgage servicers accepts information about loans from the servicers without identifying the borrower or the specific property. That prevents customers from using the information opportunistically to solicit competitors' borrowers. But it does show what city and state the loans are based in, the types of loans, whether borrowers are paying off the loans consistently and related data.
CoreLogic then normalizes the servicer-provided data into a standard format, enabling its servicer customers to compare the health of their loan portfolios with the market nationwide or a specific region, or against some other parameter. The data service can also be licensed by investors or other parties.
The servicer database, however, does not provide information about specific mortgage loans in a mortgage-backed security. But investors can retrieve that information by tapping CoreLogic's securities database. There, an investor can analyze the individual loans in each security according to parameters such as the loan-to-value ratio of the mortgage, whether second liens such as home equity loans are also attached, the geographic region of the property, and the borrowers' credit scores. These details can be used and analyzed through digital tools to determine whether a concentration of mortgages is at risk in a given security and ultimately the CDO.