How did Goldman Sachs gain from this?

[Ghost of Cutten]

Quote from bellman:

This whole thing is ridiculous. Whoever bought the dang CDOs should have known somebody was betting against them. It's the way a market works. I really don't see what case the SEC has, and I think this lawsuit only further confuses what the real issues are in the financial crisis. So frustrating.

It's not so much that the buyer should get away with making a dumb investment. It's that an *issuer* of a security has an obligation to disclose material facts. A bit like a builder has an obligation to tell you if he built in a flood plain or on top of of a landfill.

If Goldman disclosed that, then they did nothing wrong. Caveat emptor, and they are quite entitled to go short too. If they knew it and hid it, then it is pretty darn shady, like a car dealer deliberately selling you a lemon.

 

[ToSubu]

Quote from Ghost of Cutten:

It's not so much that the buyer should get away with making a dumb investment. It's that an *issuer* of a security has an obligation to disclose material facts. A bit like a builder has an obligation to tell you if he built in a flood plain or on top of of a landfill.

If Goldman disclosed that, then they did nothing wrong. Caveat emptor, and they are quite entitled to go short too. If they knew it and hid it, then it is pretty darn shady, like a car dealer deliberately selling you a lemon.

agree 100%

 

[jagadish]

I think all institutional trades should be subjected to http://www.sec.gov/answers/insider.htm

 

[SomeYoungGuy]

There's two kinds of deals. One where both sides to the transaction can benefit (not that they necessarily do, but they can), the other where one side wins at the expense of the other side losing (aka zero sum).

Let's say I bought a Beanie Baby a while back for $100. Then I sell it to the next guy for $200. The price may go up even more and the next guy could make money (I lost potential profit, yes, but that's not an actual loss). Price might come back down, but I don't get anything if it does (I locked in profit, but I did not make actual money when it did go down).

This is the first kind of deal. This is akin to packaging mortgages together and selling them. They have a direct underlying which may go up or down; when I sell it that means I go flat and I forgo both future gain and future loss on the basis of the underlying.

The second kind of deal is a CDO, much like an index future. It's a gamble because an increase in value of the underlying does not enrich all players. It's a gamble because when I win, someone else loses an equal amount. Not theoretical value or opportunity cost, but actual real dollars that flow out of their account and into mine.

Let's say instead of selling that Beanie Baby, I sell a futures contract based on the price of Beanie Babies. If the price of Beanie Babies goes up, I am out actual real money and whoever bought that contract is up the same amount. Zero Sum. There is no way for both sides of the transaction to make money.

When you play in a zero sum game, the seller NEVER has your interests at heart.

 

[Sell 'em]

Quote from wareco:

Hmmm, I find it highly unlikely that the do-nothing SEC would bring charges against GS, of all people, unless they had a really good case.

The fact that they missed Maddof in such an embarrassing way and are now so universally perceived as 'do-nothing' is exactly why they would go tilting at windmills to put on a show of having reformed.

To be frank, I'm just as jealous of GS as the next guy, but case just filed looks weak at best. SEC doesn't have credibility, and the case is specious.

 

[spindr0]

Quote from the1:

When the Glass-Steagall Act was repealed in 1999 it tore down the Chinese wall so yes, the left hand knew exactly what the right was doing and acted on that information. We can thank Clinton, Greenspan, and Sandy Weill for this.

Clinton should have vetoed the Gramm-Leach-Bliley Act (which repealed parts of Glass-Steagall) but it wouldn't have made a difference since G-L-B was passed by a veto proof majority in a Republican Congress. The real culprit was Phil Gramm.

For some entertaining reading, check out his wife's role (Wendy Gramm) in the Enron scandal as head of the Commodity Futures Trading Commission during the Reagan Administration. I think there was some little detail about exempting Enron's trading of energy derivatives from regulation

 

[spindr0]

Quote from omegapoint:

But, wasn't it the ratings agencies that stamped those sec. low risk?

The ratings agencies were in bed with the underwriters. They actually provided CD's explaining how to achieve A ratings for CDO's.

 

[spindr0]

Quote from nickdes:

Did you forget who sits in the oval office, obama! The biggest socialist we have ever had. The SEC charges are political in nature, obama's gang of thugs are at it again.

It's really disconcerting how stupid and inept Obama makes Georgie Bush look.

:eek:

 

[Ghost of Cutten]

Quote from MarketMasher:

Good question. If I knew that Paulson was loading up a subprime timebomb and going short and I had access to bundles of cash, I wouldn't know what to do either....

You wouldn't, because back then Paulson was considered a 2nd tier manager with a journeyman track record, and Goldman like every i-bank was long housing. It was only some time after, that Paulson got rich and Goldman got short.

The idea that Paulson in 2005-06 was some kind of public Soros-like figure that everyone would think twice about fading is just ludicrous hindsight-bias. Goldman are going to change their view because a merger arb guy with a 10% per annum record is punting on a house price collapse, when prices have gone up for 70 years in a row? Pull the other one.

 

[Ghost of Cutten]

Quote from SomeYoungGuy:

There's two kinds of deals. One where both sides to the transaction can benefit (not that they necessarily do, but they can), the other where one side wins at the expense of the other side losing (aka zero sum).

Let's say I bought a Beanie Baby a while back for $100. Then I sell it to the next guy for $200. The price may go up even more and the next guy could make money (I lost potential profit, yes, but that's not an actual loss). Price might come back down, but I don't get anything if it does (I locked in profit, but I did not make actual money when it did go down).

This is the first kind of deal. This is akin to packaging mortgages together and selling them. They have a direct underlying which may go up or down; when I sell it that means I go flat and I forgo both future gain and future loss on the basis of the underlying.

The second kind of deal is a CDO, much like an index future. It's a gamble because an increase in value of the underlying does not enrich all players. It's a gamble because when I win, someone else loses an equal amount. Not theoretical value or opportunity cost, but actual real dollars that flow out of their account and into mine.

Let's say instead of selling that Beanie Baby, I sell a futures contract based on the price of Beanie Babies. If the price of Beanie Babies goes up, I am out actual real money and whoever bought that contract is up the same amount. Zero Sum. There is no way for both sides of the transaction to make money.

When you play in a zero sum game, the seller NEVER has your interests at heart.

But giant financial institutions, like the suckers in this trade, know all this. They aren't widows & orphans who don't know a put from a call. A middleman just matches you up with a willing buyer or seller on the other side - they aren't obliged to tell you if it's Jim Bob Sixpack or Renaissance Technologies.

It's only if you are the issuer that you have to disclose this, and from what I can see, Goldman did disclose they might trade in the securities too, including going short. In this kind of deal it is common knowledge that it's another pro on the other side of the bet - who else would it be? These were synthetics, not the underlying - they are pure hedging/speculation vehicles, like an S&P futures contract. You needed $25-50 mill just to be able to trade these things. The buyers knew full well they were buying from a financial institution, probably a hedge fund that wanted to be short.

IMO I don't see any great crime here - people are judging it as though Goldman tag-teamed some little old lady with a big bad hedge fund villain. In fact, some reckless rampaging professional/institutional housing bulls - the people responsible for inflating and causing the bubble, and thus causing the subsequent collapse and damage to society - got taken to the cleaners by a smarter, more diligent pro, and Goldman pocketed 15 mill as an arrangement fee. Not only is that not wrong, it's *admirable* to completely destroy clueless deep-pocketed gamblers who inflate bubbles. It is the duty of every speculator to rape, ravage, and trample over the beaten corpse of every gambler who ramps prices way beyond any reasonable estimate of fair value. It is socially beneficial to do so (helps mitigate bubbles by punishing those who cause them), it helps mom & pop and widows and orphans by reducing the insanity to which prices ascend. Goldman and Paulson should be commended for doing this trade, not criticised.

If anyone should go to jail, it's the buyers - for being negligent in their research and due diligence; for inflating the price of houses out of reach of ordinary people, purely for their selfish financial gain; for making markets less efficient; and for whining about it and running to the SEC instead of taking their losses like men. Their cheerleaders are even worse - at least the buyers are just conniving to immorally recover some of their losses; the cheerleaders are just pandering to their own class envy.