Tuesday, December 23, 2008

Information asymmetry

Let's see what wikipedia has to say:

In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry.

Does that describe synthetic CDO's sold by Investment banks to unsuspecting investors? JPMorgan is already stating that these individuals were "sophisticated." How about Barclay's? Are they sophisticated?

Barclays PLC, stung this summer when two big hedge funds run by Bear Stearns Cos. collapsed, is suing the Wall Street firm and two of its fund managers, claiming among other things that Bear misled it about the performance of the highly leveraged funds.

In a complaint filed in U.S. District Court in Manhattan, Barclays alleges that Bear, its money-management unit Bear Stearns Asset Management and two senior BSAM executives, Ralph Cioffi and Matthew Tannin, defrauded it in borrowing and investing capital....

As the High-Grade funds faltered, the Barclays complaint alleges, their desperate state was concealed from bank officials, whose calls and emails were dodged as they sought performance information. "It is now clear that the BSAM defendants have long known that the Enhanced Fund and its underlying assets were worth far less than their stated values in the early months of 2007," asserts the complaint, referring to Messrs. Cioffi and Tannin, "and were at great risk for further losses."


In the Bear case, Barclays also uses Cioffi's withdrawal of money from the fund to help bolster it's argument. In a synthetic CDO, a bank is just offloading it's risk. It's just a more clever way of withdrawing your investment, without withdrawing it!

In the SEC case against Tannin, Ms. Susan Brune attempts to point out, for the defense, that there isn't any asymmetry:

MS. BRUNE: There is no asymmetry here at all. http://online.wsj.com/public/resources/documents/beartranscript.pdf

If it's good enough for Barclay's, it's good enough for those in the Australian outback!