Primus Guaranty (PRS) announced yesterday that it entered into a significant credit mitigation deal with one of its counterparties, reworking $1.2 billion in notional value of credit default swaps. According to the press release, $40 million in notional exposure written on a monoline insurer was terminated for $15 million, or 37.5 cents on the dollar. The other billion-plus is being moved to a subsidiary of Primus Financial capitalized with $36 million, which is the maximum exposure (plus future premiums on those swaps) that can be lost.

Working backwards, ring-fencing certain swaps clips the tail risk existing in the portfolio at about 3.1% – a fairly high level that’s about 50% above what I’ve modeled previously. From the press release, my assumption is that the counterparty is willing to do this to minimize credit/counterparty risk related to Primus; it’s not collateral per se, but it functions in the same way.

As for the monoline settlement, well, it speaks volumes about what happens if you aren’t a systemic risk – privately negotiated solutions actually come about, and it means that companies that took risks take losses (or at least agree to accept more uncertainty/variability). One possibly safe extrapolation: if counterparties to a company that doesn’t warrant liquidity concerns like Primus are willing to take substantial haircuts on their CDS transactions, you better believe that Santa Claus came down the chimney for everyone with claims against AIG that were repaid in full. It’s simply a perverse trait of the financial system, and our government, that smaller players are left to deal amongst themselves, whereas larger players are assisted and handed a different set of rules to play by.

More to come after earnings next week…

Lastly, a non-related note. I’ve learned a lot from David Merkel, and he asked those who read them to link to this about the SEC. It’s the least I can do, and I encourage you to read it.

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Disclosure: I own both Primus stock (PRS) and debt (PRD).

This isn’t going to be a typical book review, because my thoughts on the book can be summed up in a concise manner, and I think the real story is much more relevant in regards to current events.

Goldman Sachs: The Culture of Success is written by a former Vice-President at the company, detailing the path taken to the firm’s 1999 IPO. It’s a fairly involved historical work that covers major events and people that made Goldman what it was at the time it went public (the book was published in early 2000, so no vampire squid references). My two complaints:

That said, Goldman Sachs (GS) makes for a good story, albeit one that is not overly colorful – chalk it up to Goldman’s insistence on teamwork, but there are few real characters; the typical biography is a dignified portrayal of top management.

With Goldman’s success, there’s a temptation to view this as a case study in how to great a global financial services company, or manage an organization. I think that’s misleading for two reasons. First, there’s certainly an element of change to surviving as a Wall Street partnership through a tumultuous century-plus. Second, there’s no identifiable hard-and-fast rule beyond “be long-term greedy,” and management’s judgment at various times led the firm to move aggressively into and quickly away from the same business, like asset management.

One theme that runs through the book is the changing culture at Goldman Sachs, and how it became more short-term greedy at times; normally this led to a period of bad results down the line. A central issue: can Goldman (or any investment bank) compete with its clients through proprietary risk-taking, and still play the proper role in serving their clients? Goldman’s actions have indicated they believe it’s possible, or at least beneficial to them to do both. Compounding that issue is the capital structure of the firm, which was a partnership (with unlimited personal liability for members) before the IPO removed that onus.

When Goldman was a partnership, there was significant downside to prop trading and other risky activities – namely, a large failure could bankrupt the individual partners at Goldman. Under the current structure, that isn’t the case, as the classic equity call option exists. Did the reformulation of Wall Street into a corporate world, as opposed to a partnership world, come with the creation of systemic risk? I don’t have any hard evidence, but I can’t imagine that the risks being taken in the middle of this decade would have occurred had personal liability still existed.

Roger Ehrenberg wants to make the compensation of traders more equity-like, which he says is the real story behind Andrew Hall’s potential $100 million payday from Citigroup (C). The partnerships of old risked their own capital to serve customers; the modern quasi-hedge fund risks the capital of others to primarily benefit employees. As unlikely as it might sound, looking back in time to smaller, more focused financial companies based on the partnership model offers a starting point for reframing the debate about Wall Street reach and compensation.

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