Credit Default Swaps and Goldman Sachs Arise in Credit Suisse – Yellowstone Club Lawsuit
Tim Blixseth suggests that Credit Suisse loaned his Yellowstone Club millions then tried to sell him Credit Default Swaps (CDSs) so he could make money when the loan defaulted.
Palm Coast, FL – April 24, 2010 – GoToby.com is captivated by the $24 Billion Credit Suisse lawsuit, in part because Palm Coast’s Ginn Company is involved, but mostly because it’s so massively incredible. You can’t make these things up. Now, just days after the SEC charges against Goldman Sachs & Co., a court filing in the CS case hints that Goldman Sachs’ Credit Default Swaps (CDSs) strategy was employed by CS. The revelation comes from an Affidavit filed April 20, by Yellowstone Club founder Tim Blixseth.
In the Affidavit, Blixseth states:
"I now realize that in addition to their marketing team, they [Credit Suisse] have a second ‘Team,’ their ‘Risk Management Team,’ that evaluated and approved their lending scheme with a sophisticated plan to maximize their profits if the loans failed; and that they proceeded, unknown to me, to rake off tens of millions in no-risk profit, impose the risk ultimately on the resorts and homeowners; and collectively plan with their bondholders, to in effect, bet against the loans with an anticipation of failure based on their bloated appraisal methods.""One of the schemes they used as part of their bet on the failure of the loans, I now realize, involved something called ‘Credit Default Swaps, ‘ (‘CDSs’). The CSFB [Credit Suisse First Boston] representatives, while acting as trusted lending advisors to me and the YC [Yellowstone Club], its members and homeowners, shortly before the loan closed on September 30, 2005 told me that they wanted the YC to buy the CDSs at a premium of $2 million per year."
Complete Affidavit: 32 Pages>>>>> (contains interesting excerpts from the SEC v. Goldman Sachs complaint)
In other words, Blixseth alleges that Credit Suisse tried to talk him into betting against his own loan by buying CDSs that would pay off when the loan defaulted.
Credit Suisse was not the lender. The money came from private investors. CS simply brokered the loan and administered it, meanwhile making millions in fees. The loans were huge, multiple-hundreds of millions of dollars each. Principals were encouraged to take large "equity distributions" directly from the loan proceeds.
Borrowers included Ginn-LA (Bobby Ginn and his financial partner Lubert Adler, as well as the developers of Lake Las Vegas, Tamarack Resort, Yellowstone Club, Promontory, and Turtle Bay Resort. The Yellowstone Club’s equity distribution" was reportedly $209 million, which went directly to Blixseth and his wife Edra; since divorced. Bobby Ginn and Lubert Adler reportedly shared in a $333 million distribution from their $675 million loan.
Adding the possibility of CDSs to the mix makes the story even more delicious, especially since ALL the loans defaulted. Really, you can’t make these things up.
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Follow up on Credit Suisse and Yellowstone Club Cr
I am trying to understand how this all works – please help if you can.
I belive a Credit Default Swap is basically a bet, an option(insurance) against defaulting credit positions (loans) – is that correct? What is the acctaul financial vehicle, is it a bond? or is it a futures contract on a credit position?
If they (the principles) took money out against the loan, when it defaults, do they owe the money back?
If not, does that mean the loan originator eats the loss?
I assume that the Credti Default Swap pays off the failied loan for a fraction of the (vaule) cost of the loan? If it works like insurance, but if not, how does this really work?
Who are the ones who lose the money that was withdrawn agaisnt the defaulted loan?
Who are the orginiators of the CDS, who has to pay when the call is in?
Please advise your answers to these quesion on you blog so everyone can benifit form understanding this situation better.
Thank you
William
Help me understand
I am trying to understand how this all works – please help if you can.
I believe a Credit Default Swap is basically a bet, an option(insurance) against defaulting credit positions (loans) – is that correct? What is the actual financial vehicle, is it a bond? or is it a futures contract on a credit position?
If they (the principles) took money out against the loan, when it defaults, do they owe the money back?
If not, does that mean the loan originator eats the loss?
I assume that the Credit Default Swap pays off the failed loan for a fraction of the (value) cost of the loan? If it works like insurance, but if not, how does this really work?
Who are the ones who lose the money that was withdrawn against the defaulted loan?
Who are the originators of the CDSs, who has to pay when the call is in?
A little Confused
I think I understand the basic structure of the CS transactions – CS raised money from investors like Lupert-Adler, which funds then were loaned on projects such as Yellowstone, Promontory, etc. with CS acting as the broker. These loans were backed by credit default swaps for a fee to the insurer, so no risk to the lenders. The borrowers (owners) used the loans to return equity and refinance traditional project loans with no recourse back to property owners. So, the owners essentially got their money back from projects that had many years to go before equity would be returned through normal course.
Further, it was the likes of AIG (maybe 100% AIG) that provided CDS’s, but it is too big to fail so the 850B federal bailout backstopped AIG CDS’s – thus moving capital from taxpayers to the feds, then to AIG, then to CS and its investors. So, Lupert-Adler and Bobby Ginn, etc. got the taxpayers to make them richer.
Does that sound right? I was a little confuced about your comment that "principal" take out profit like drawing on a home equity line. Can you help me with this?
Toby – Be Careful What You Allege
Toby –
You better have your facts straight before you make allegations about the all of the Credit Suisse borrowers. You are implying that the distributions to the equity sponsors were substantially all profit. What facts do you have to back this up?
Ginn and Adler may have received $333 million, but the vast majority was return of INVESTED EQUITY OR PARTNERSHIP LOANS, which is basis, not profit. Additionally, Ginn and Adler were the the only sponsors of the CS loans that injected capital back into the credits.
After taking over $200 million in Yellowstone Club proceeds and spending it on planes, etc., Blixseth is now claiming, "the devil made me do it!" He did not reinvest a dime.
CS Appraisals
The appraisals were not false appraisals, but rather something called TNV (Total Net Value) appraisals. Essentially, they took the total anticipated sellout and subtracted the total anticipated development costs. Cushman had to give some credence to the projected sales, and costs were given by the borrowers.
You are right that these were not FIRREA compliant, MAI "AS-IS" appraisals. They were never sold as such to the hedge funds that bought the bonds.
Ken
Ken incase you didn’t know what an appraisal is, it is a series of like properties compared to the subject property being purchased, to determine if the piece of property being purchased is worth what the buyer is paying.
Firstly Ginn Financial ‘organized’ the Appraisals, what they were compared to who knows, but they were clearly appraised incorrectly using questionable methods, but as we now know this is nothing new to Ginn, appraisal fraud has been alleged in all his Communities. Golf lots for instance in Bella Collina were appraised for $600,000 to $900,000 you can now buy one Bank-Owned for $5,000 and still no-one is buying them, so those appraisals must have been legitimate don’t you agree.
I wonder when the Appropriate Authorities will see how many of Ginn Financial’s loans are in default, I would imagine it would be a huge percentage, no doubt this will be news in the future, it is all going to unfold very soon and will make great reading, the Goldman Sach’s fiasco has whetted the appetite for Bank’s being accused of Fraud, expect a lot more to fall into the same category.
Reply to William
Disclaimer: I am not an attorney, CPA, or licensed securities dealer, etc. but here’s my best shot.
I don’t know what the vehicle was, but it was analogous to shorting a stock. If the loan does not default, you are only out your premium, but if it does, the company behind the CDS reimburses you for the defaulted amount.
The loans were non-recourse, meaning that the underlying property was the only thing the debtors could go after. CS actually encouraged the principals to take the profit distributions – sort of like taking cash against an equity loan on your house. They do not have to pay the money back unless a lawsuit finds them complicit.
CS was the loan originator but CS did not lend their own money. They were essentially a broker. The money came from private investors. These investors took the loss. They may have recourse against CS if they can prove that CS was negligent – e.g. misrepresented the value of the underlying collateral.
I don’t know who the originator of the CDSs is, but CS marketed them and presumable gets a commission.
I encourage additional input from industry professionals.
Reply to Buzz
Bobby did a video in the Bahamas in August 2008 shortly after the CS default. In that video he explained the CS credit facility as being like an equity loan. They could pay it down then borrow back.
You can see the video. Click on GoToby Archives on the left side of this page. Find the story titled Bobby Ginn Video Provides Details of Credit Suisse Debt Facility dated August 29, 2008. There is a link in the story to the video.
The CS lawsuit alleges that CS used inflated fraudulent appraisals to create false equity, telling each developer that their properties were worth much more than they really were. They encouraged the principals (Bobby and Lubert Adler) as well as Blixseth from Yellowstone Club to take some of their profits (substantiated by the rise in equity) out of the loan proceeds. In that sense, it was like a cash-out equity loan, which allows homeowners to pull equity out of their house as it appreciates.
Reply to Ken
You make a good point. I should have referred to the payment as primarily an equity distribution. However, the distribution was allegedly based on false appraisals suggesting that the underlying equity supporting the loan did not exist. The S&P Rating Research Report of May 16, 2006 refers to it as ‘a very large distribution to the equity sponsors.’
Reply to Ken
It sounds like you are making closing arguments to convince a jury – picking hairs so to speak – to protect CS from a possible lawsuits by the private investor/lenders. The allegations are what they are. Readers (and the courts) can come to their independent conclusions.
If the appraisal method was improper; whether to sway the borrower or to sway the private investor/lenders, it was still improper (or illegal).
The question is now in the hands of the same judicial system that acquitted OJ Simpson.