Piano World Home Page Forums Our Most Popular Forums Piano Forum New Owner of Steinway, John Paulson

Paulson did NOTHING wrong with the credit default swaps. Nothing.



No "homeowners" were harmed. Quite a few debtors and deadbeats, with no equity (so they can't be called "homeowners") may have had to move out of the homes they couldn't afford. And yes, some greedy pension funds that bought very risky investments that were backed by houseflipper's mortgages may have lost money, but that's not Paulson's doing.

This made me think of this thread:

Vintage car mecca draws car enthusiasts from all over to Pierce, Neb., auction,
http://www.omaha.com/article/20130927/NEWS/130928900

and

http://www.usatoday.com/story/driveon/2013/09/30/lambrecht-chevrolet-auction-nebraska/2894401/

Even warehoused under inappropriate conditions, cars seem to have sold well.

All the best -

@peekay & Thrill Science
That would be a bit naive isn't it?

In the first place the securities selection was done by Paulson (several sources confirm this). The instruction for the whole deal was also by Paulson.

Saying that that is not a bad thing is like saying "growing hard drugs is not wrong as long as you don't tell that hard drugs are good for you".

So first he made money on the securitizing of worthless stuff (though maybe not directly but as an architect) and second made a lot of money on the loss by doing a leveraged bet. There was far more "insurance" then there were securities..

Ultimately translated to pianos:

Paulson suggested to GS to sell termite infested Steinways. Paulson created the opportunity to tell ABN AMRO that they were Steinways (And at the time PianoForum wouldn't have been able to tell that there were termite infested Steinways).
At last Paulson betted against the Piano's he selected himself. And not just for the amount that his selection of piano's sold but a far greater amount inflicting SURE damage on the insurer.

When you say it doesn't hit homeowners then they who deserved it:
I agree it did hit them in the first place however, secondary impact was on a lot of people which lost their jobs, no longer being able to pay their mortgage (which they were able to earlier), not being able to sell their houses (no market) and so on.

So maybe legally he is not guilty (because no accurate law was in place, doing what he did is illegal right now). But morally it is below all standards.

+1

Steinways with termites! EEEEEW.
Does that make it a Steinway model T. Would a concert grand so infested become a Steinway T D (STD)? I am sure Mr. Paulson has several STD's. I believe he said you cannot have enough of them?.

Probably only available from NY. Perhaps Hamburg will also feature instruments with Reticulitermes flavipes, which does not migrate further north in the European continent than there and has been found in that city (through migration, not native).

I did quite a while ago view an interesting TV documentary about the NY Steinway rebuilding facility. The manager there stated that one piano was brought in termite infected and immediately ordered off the lot, "The last thing you want in a piano factory is . . .".

Kalle,

Can I get that on a t-shirt?

I wrote a a briefer message bringing up the creation and then shorting of the mortgage backed securities item like Wimpiano above about 1 month ago, but edited out the content. I thought piano and music in general brings together the left and the right, and all the various people, what have you. It seems to me there is some element of passion, a passion we all share, that brought Mr. Paulson to Steinway considering the higher than market price paid and the message of his video. I wish him the best in his stewardship of Steinway, the important instrument maker and music supporter that it is. I hope he continues to have that passion throughout his life. If I lived in NYC, the Hamptons, or Aspen, I would invite him to my PW piano parties as someone who shares the passion; if you live in any of these places, think about it!

best wishes-

Except that's NOT AT ALL what happened. And by your description about "more insurance then there were securities" and about Paulson "inflicting SURE damage on the insurer" suggest that you do not have knowledge about how the particular derivative instrument works.

In the ABACUS transaction, the instrument is a Synthetic CDO. A Synthetic CDO is composed of a series of Credit Default Swaps. ALL of the swaps Paulson selected were considered investment grade (rated BBB or higher by both S&P and Moody's). ALL of the swaps were also considered investment grade by the appraiser ACA.

That is, ACA looked at all the securities Paulson wanted in the CDO and compared them to ACA's own (pre-existing) internal list of securities they had independently considered investment grade. They also suggested adding several other securities to the CDO to which Paulson declined. ACA agreed to proceed with securities they both had in common.

Paulson didn't "inflict SURE damage" on ABN AMRO. They were counterparties on a complex derivative trade. ABN AMRO knew EXACTLY which swaps were in the Synthetic CDO.

No one can predict when the market is going to crash. ABN AMRO (and a second investor) believed in the everlasting bubble and bet on a long position. Paulson believed that BBB mortgage backed securities were overrated and took the short position. And he was right!

ABN AMRO was a Top 10 bank in Europe and should have known what they were doing. If ABN couldn't afford to cover the swaps they should not have entered into the trade. If ABN didn't have the sophistication to assess complex derivatives, they shouldn't have entered into the trade. But they were too greedy to care. They didn't perform their due diligence, they didn't correctly manage their risk, they lost almost $1 billion, and at the end it's their own fault!

Goldman, is another matter. They allegedly lied to ACA and misled the investors. Paulson did not.

Due to civil litigation by the SEC against Goldman, all of this is in the public record.

PK,

That is so self-serving, and an incredibly shallow assessment of those events. Your agenda is clear, and easily dismissed.

That fact is that many people, myself included, could see that a serious correction was coming on the horizon by August of 06, not only in the housing industry but also in derivative instruments held by sovereign entities, which is where we have all the serious problems that continue to plague us. You could have seen it yourself if you had had half an eye open to the inobvious factors. And after posting that little rant, you better not say that you DID see the crash about to happen when you just wrote that nobody could have seen it.

Are you really going to try to say that Paulson, or any of the key players who sold these instruments, also did not know this? (read: moron(s))

Paulson in his litle video PR release sounds just like the Mondavi family trying the establish the primacy of "wine culture" in order to sell more wine, when in fact such thing has never existed anywhere socioculturally. It's just so much marketing hype. Nothing more.

I remain totally unconvinced.

I believe we were talking about the sale of Steinway to a cheap Carpet Bagger from the North, yes? Stop apologizing for the motives and actions of Rightists who all think Art is a commodity to be brokered. S&S is nothing more than a charm to be added to a bracelet Paulson sometimes wears at parties, and sold the moment it becomes bothersome. That mercantilist view is disgusting to any true artist, and is certain to bring about the death of any real artistic inspiration. It simply cannot end well for the pianos produced.

There. I said it. You all heard me.

That you (and everyone else) could see a correction on the horizon in August of '06 is completely irrelevant. No one could predict with certainty when exactly any part of the market is going to crash.

ABACUS CDO did not crash until around October 2007, more than a year later. One year is an ETERNITY in terms of the securities market. In a matter of days a CDO could have been sold and bought and resold multiple times in the secondary market.

I believe the ABACUS deal closed in April. ABN AMRO could have done a stop-loss and dumped the CDO any day in May, in June, in July, in August or in September if they thought they got a raw deal. But they didn't. Are you going to blame Paulson for that?

Did you know that other traders within ABN AMRO bought Credit Default Swaps on their own against the ACA exposure? That's right, even ABN AMRO traders were taking the SAME short position as Paulson, betting against their own company!!! Are you going to blame Paulson for that too?

So you are saying that selecting toxic securities and selling them knowingly (they knew that ACA gave them the high rating and didn't correct them) is a good thing?

I do agree that all participants in the deal were primarily driven by greed. The difference however is that it was a trap, well known (as an exact science) by Paulson, and he was the architect to the trap.

He didn't execute it that's why he's not convicted, he had it executed for him by Fab Fab.. (which is imho even worse).

Look, if I think the market is going to crash, I might call my broker to give me a basket (list) of investment grade stocks to short.

Some of the stocks in that basket might be "too good" in my opinion. Sure they are all rated BBB or above, but I might ask the broker to remove them. After all, I will only make money if the aggregate value of the entire basket goes down.

Do I believe the stocks will tank? OF COURSE. That's the whole point of making a short position! Is there anything wrong with this? NO.

Am I setting a "trap"? NO. In ANY trade, one party thinks the security will go up, while the other thinks it will go down. We are both making our best guesses!! My guess is, based on all I know, the stocks will tank. Whoever I trade with really believes the stocks will go up. That's how any trade works.

Suppose the stocks are not sold on exchanges (they are "over-the-counter" stocks). I might ask the broker to find someone (a counterparty) willing to take the long position for the trade. Is there anything wrong with this? NO.

In this case, a certain Mr. Amro, looks at the same basket of stocks, and thinks that the value will go UP. He runs a business with a sophisticated bunch of traders, and he thinks I'm crazy for shorting the stocks at this time. So Mr. Amro becomes my counterparty to the trade. Nothing wrong with this!

For his work, I might pay the broker a fee for of putting together the basket, and finding the counterparty. And the broker gets a cut from the transaction too. So far, no one did anything wrong!!

The problem occurs when the broker (NOT ME) hides the fact that I helped chose the basket of stocks.

Actually, this information shouldn't even matter! Whether or not I helped select the securities has no bearing on the actual worth of those securities. After all, I could be wrong!

You see, Mr. Amro is no dummy. He has a ton of current and historical market data at his fingertips. He has an entire department full of credit derivatives traders. He has a slew of mathematical wizards called quants at his disposal. He has another entire department of Risk Management specialists, running various "value at risk" simulations. He even has a special Senior Committee that evaluates and approves these kinds of trades on a daily basis!! And they all look at the basket of stocks and think I'm crazy for taking the short position!

So after all that, Mr. Amro agrees to be counterparty to the trade. Is it my duty to tell them that I think the securities will tank? NO! It should be obvious to Mr. Amro that I think the securities will tank, that's the whole reason I'm taking the opposite (short) position than him! A counterparty to any trade, whether it's stocks or Synthetic CDOs or Steinway Pianos, has the opposite interest than the other counterparty.

We sign the contract and six months later, the market collapses. Well, that is too bad for Mr. Amro, but I've done nothing wrong!

Mr. Amro should sack his traders. The head of his Risk Management department should be fired. He should be asking hard questions to his own Special Committee which approved the trade. He should look in the mirror and ask why some of his own traders bet against his own position!!

Listen. When the market crashed, people blamed those holding short positions, like Mr. Paulson, because they made money. But really, it was those holding the long positions, like ABN AMRO, who were enabling, perpetuating and supporting the housing market bubble on the backs of homeowners.

ABN AMRO likes to play victim, but they created their own mess. Do you know how much ABN AMRO stood to gain if the market didn't crash? A measly $7 million. For their own greed and incompetence, they lost a billion. You can't blame Paulson for that.

I don't think short selling in general is bad, so, I agree.

However:

In this particular case, the securities (actually mortgages behind a couple of blinds and curtains) selected by Mr Paulson, were without any exception junk. It was a miracle that the default didn't come earlier. That it took so long was just because the chain was so long.

To demonstrate:

He knew that, and the entire package was subprime..

I suppose everybody agrees that it is quite hard to understand that Mr. Tourre didn't seem to understand at the time that what goes around comes around..


I also agree on that, and they payed for it.



That's were we differ. I think that he was the architect of it all and in this case and it was not about unpredictible market movement.

Everybody with common sense knew it. (When I bought a house in 2007 I had to tell the mortgage salesman that nobody with any common sense would buy a couple of products he was offering, he is now bankrupt).

The market just ignored (since it went well for a long time) it because they were all greedy. Paulson did exploit that on a very large scale.

So imho Paulson was to blame, like Tourre, and also like ABN. It is just that nobody has the balls to prosecute them.

ABN did cost me as a taxpayer in the Netherlands quite a lot.. I have no reason to defend them

Perhaps the real issue can be simplified:

What are the upsides of Paulson's ownership of Steinway?

Mr. Paulson is financially secure. He can treat Steinway as a project for improvement and preservation, not immediate profit.
Mr. Paulson and his senior Steinway management could consult at length with the concert artist community regarding the state of the instruments so essential to piano music. This should be easy enough to arrange. Are these instruments, with the model D in particular, absolutely perfect for the concert artists as is, or can areas for improvement be identified. Address this as a serious matter and put in the effort required to arrive at the correct results. Depending on what is found, ensure the concert grands (and hopefully the other piano's also) remain the best of what a piano can be, fully meeting the needs of the artist. Keep the instruments themselves as the focal point of importance, not profit or marketing hype. Give proper credence to the recent developments by other eminent piano builders. Put money into Steinway to fund such developments that may be required!

The success of Steinway ultimately derives from the success of the instrument with the top artists of the classical piano world. Domestic sales derive from this platform.

Excellent assessment. Especially the last paragraph.

The principal reason why the Steinway family sold the company to begin with was a lack of desire and funds among the many heirs to effect needed capital improvements in order to compete.

And so, we have yet another change in ownership. With such comes new opportunity for investment in capital improvements. Indeed, this is expected. Growing competition in Europe and the Orient - not to mention a few makers in the USA who would love to dethrone the King - can be best met by one who certainly has the ways and means to make a go of it, and a track record that has "success" written all over it.

The only thing that I would add to kaylee21 - and very much in keeping with the closing thought - is: please make no moves of any kind to the Pacific Rim. The temptation will be great. Resist it. You'll be glad that you did. We will too.

I wouldn't have to high hopes on improvement. Nor of his wealth. Nor of his investing capabilities: http://www.bloomberg.com/news/2013-...-27-in-gold-fund-last-month-in-rout.html

He is hedge fund owner. Their specialty: Selling everything in a company which has any value and then earn money on the bankruptcy.

The first step has been made: Steinway hall has been sold.

Steinway hall was sold prior to the sale of SMI and before any negotiations with Kohlberg and/or Samick and/or "Third Party unnamed."

Other than Bloomberg's usual "eye catching" headlines, you might read the entire article.

Since this thread has moved into the different types of "investments" large investors can engage in-what you see is how so much of "investing" has become gambling. The analysis of these Credit Default Swaps includes probability calculations. Otherwise known as "Odds Making".

All of these entities that create these things are doing nothing for establishing an accurate value of a particular business. What they are doing is using the equity markets as a front for pretending to be in the investment business when what they are doing is gambling. There seems to be very little remaining in the valuation of equities regarding making an actual profit from sales of goods and services.

These investment houses have leveraged up their own enterprises through obfuscation of risk. When derivatives were invented I asked several wall street types how they could determine the real risk-and they would respond with some concatenated, contorted logic about bets on the upside and downside etc. When you delve into them the real downside risk of derivatives calculates out as INFINITE.

Also since the money supply is debt created this enables investment bubbles. When a certain class of equities is gaining in value-it can be leveraged and this will expand the money supply which feeds cash back into the inflating equity.

We should return to profit as the driver of equity valuation AND change growth of the money to one based in profit growth. You heard that idea here first. No one else is thinking this way. Yet?

I don't think Paulson would be buying Steinway to loot it. He would loose credibility around NY and not get invited to the right parties.

Sorry Marty, it was indeed a bit to easy.

@Ed, fair point