(c) 2010 F. Bruce Abel
The following is a nice theoretical explanation. What is ignored is that it took people's money to bail out the insurers of these types of transactions. So the effects are far from theoretical. (I think.)
So...Warren talks tough on derivatives and "explains" the Abacus deal, defending Goldman Sachs. Click on enclosure link and enjoy. Does he explain who ultimately was caught holding the bag? I don't think so.
Buffett gave a detailed explanation of the nature of the much discussed ABACUS transaction, for which Goldman has been sued by the SEC.
An excerpt on the Abacus deal, which I will now consider.
The customer was a large bank, ABN Amro, now part of RBS. They guaranteed the credit of ACA, which insured the bonds covered by said instrument, and consequently suffered a large loss. Berkshire itself often engages in similar transactions, and collects a fee for guaranteeing similar credit. Berkshire evaluates bonds and prices them, exactly as ACA did.
In this case, ABN Amro was paid $1.6 million to bear the risk on $900 million worth of bonds, which turned out to be worthless.
Buffett believes many municipal bonds insurers expanded into new business such as structured credits when the margins on their traditional muni bonds business narrowed. But they were much less familiar with the new complicated securities, with unsurprising dreadful results.
Buffett has little sympathy for the bank making dumb credit decisions. ACA has
And then this video of Blankfein explaining that Goldman was just a market maker in the deal -- like the NY Stock Exchange.
http://www.huffingtonpost.com/2010/05/01/goldman-sachs-lloyd-blank_n_559606.html
