How Australia was fed a dose of toxic debt

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This was published 12 years ago

How Australia was fed a dose of toxic debt

By Eric Johnston

AUSTRALIAN investors could not escape the wheeling and dealing of Wall Street that led to the global financial crisis, with promoters looking for fresh ways to offload toxic securities.

A 650-page US Senate report, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, revealed some of the behind-the-scenes moves that caught big names, including National Australia Bank, in the financial mess.

In 2007, NAB bought $US80 million of AAA-rated collateralised debt obligations, a structured asset-backed security, known as Hudson.

NAB lost on the investment, but it got off lightly compared with Wall Street bank Morgan Stanley, which made the largest investment, taking $US1.2 billion of the super senior portion of the CDO.

Also in 2007, Goldman Sachs sold $US100 million worth of Timberwolf securities to Australian hedge fund Basis Capital. A little over two weeks after the sale, Goldman informed Basis Capital that the securities had lost value, and that it had to post additional cash collateral to secure its assets. Shortly after that Goldman told Basis Capital the value had dropped again, and that still more collateral needed to be posted. In less than a month, Timberwolf's value had fallen by $US37.5 million.

The US Senate report reveals that two weeks before the Timberwolf CDO was valued, Goldman's Australian sales representative, George Maltezos, told his bosses in New York he had found a potential Australian buyer for a Goldman CDO that was under construction.

"I think I found white elephant, flying pig and unicorn all at once,'' the report quoted an email written by Mr Maltezos as saying.

On the same day that Basis Capital was identified as a primary target for CDO sales, May 11, 2007, Mr Maltezos sent an email to senior Goldman traders in the US saying he would contact the Basis principals as soon as they returned from a business trip the following day.

Basis Capital is pushing ahead with a $US1 billion legal action against Goldman, which it blames for the collapse of one of its investment funds.

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