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Notes to Chapter 10 589

8. As two market observers would later write, “Starting in 2004, CDOs and CDO investors became the
dominant class of agents pricing credit risk on sub-prime mortgage loans. . . . In the absence of restraints,
lenders started originating unreasonably risky loans in late 2005 and continued to do so into 2007.” Mark
Adelson and David Jacob, “The Sub-prime Problem: Causes and Lessons,” January 8, 2008, p. 1.
9. Scott Simon, quoted in Allison Pyburn, “CDO Investors Debate Morality of Spread Environment,”
Asset Securitization Report, May 9, 2005, p. 1.
10. Armand Pastine, quoted in ibid. According to the FCIC database, PIMCO did manage one more
new CDO, Costa Bella CDO, which was issued in December 2006.
11. Source on downgrades: Bloomberg. Source on events on default: Moody’s Investors Service,
“Moody’s downgrades ratings of Notes issued by Maxim High Grade CDO I, Ltd.,” April 18, 2008, and
“Moody’s downgrades ratings of Notes issued by Maxim High Grade CDO II, Ltd.,” April 18, 2008.
12. ACA Capital, 2006 10-K, p. 12.
13. “ISDA Publishes Template for Credit Default Swaps on Asset-Backed Securities with Pay As You
Go Settlement,” International Swaps and Derivatives Association press release, June 21, 2005
(www.isda.org/press/press062105.html). Under the terms of the pay-as-you-go swap, if the referenced
mortgage-backed security does not receive the full interest and principal payments, the pay-as-you-go
protection seller is required to pay the buyer the amount of the shortfall. For long investors—the protec-
tion provider under the swap—the advantage was the leverage embedded in the trade: they did not have
to come up with the cash up front for the principal amount of the bond; they simply agreed to receive
quarterly swap fees in return for accepting the risk of loss if the securities experienced a shortfall.
14. Laura Schwartz, interview by FCIC, May 10, 2010.
15. Laurie S. Goodman, Shumin Li, Douglas J. Lucas, Thomas A. Zimmerman, and Frank J. Fabozzi,
Subprime Mortgage Credit Derivatives (Frank J. Fabozzi Series) (Hoboken, NJ: John Wiley, 2008), p. 176.
16. Greg Lippmann, interview by FCIC, May 20, 2010.
17. FCIC staff estimates based on analysis of Moody’s CDO EMS database.
18. FCIC Hedge Fund Survey. From July through December 2006, several hedge funds with average
assets under management of $4–$8 billion accumulated positions totaling more than $1.4 billion in
mortgage-related CDO equity tranches and almost $3 billion of short positions in mortgage-related
CDO mezzanine tranches. FCIC staff used a Moody’s proprietary CDO database to estimate the total
mortgage-related CDO equity tranche issuance. Please see FCIC website for more information about the
hedge fund survey. Note: the FCIC did not survey hedge funds that fully liquidated or closed. These
funds may have purchased substantial “long only” positions in mortgage-related securities.
19. FCIC Hedge Fund Survey. See FCIC website for details.
20. Rabobank’s counsel, letter to Judge Fried of the Supreme Court of NY, May 11, 2010.
21. Norma Flow of Funds, information provided by Merrill Lynch.
22. Steven Ross, email to FCIC, December 21, 2010.
23. See letter from Rabobank’s counsel, letter to Judge Fried, May 11, 2010; the letter was never filed
with the court because the case was settled.
24. Document of Magnetar Investments in Norma, Attachment G-13 (showing Magnetar purchases
of equity tranche in Norma); provided by Merrill Lynch.
25. Information provided by Merrill Lynch, December 22, 2010.
26. Complaint, SEC v. Goldman Sachs & Co. and Fabrice Tourre.
27. Ira Wagner, interview by FCIC, April 20, 2010.
28. Alan Roseman, interview by FCIC, May 17, 2010.
29. Schwartz, interview.
30. John Paulson, interview by FCIC, October 28, 2010.
31. “Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage
CDO,” SEC press release, July 15, 2010.
32. Jamie Mai and Ben Hockett, interview by FCIC, April 22, 2010.
33. Sihan Shu, interview by FCIC, September 27, 2010.
34. Steven Eisman, interview by FCIC, April 22, 2010.
35. James Grant, “Inside the Mortgage Machine,” in Mr. Market Miscalculates: The Bubble Years and
Beyond (Mount Jackson, VA: Axios, 2008), pp. 180–81, 182–83.
36. Eisman, interview.