Is this ethical and how does it differ from what Goldman did?
- Thread starter Optional
- Start date
No, the regulators do not feel there is a problem ethically. That is why they haven't done anything till now. The are trying to say it was Fraud because politicians are making them.
The POLITICIANS do.
And as you can see from yesterdays hearings, they know nothing.
Paraphrased
Politician: The American public doesn't understand what you do but they don't take the time to figure it out and us Politicians don't understand but we need to look like we are doing something to get reelected. Don't you feel what you did is wrong?
GS: You are an idiot.
Unless we clear every Senator and every Rep. in Congress this shit will never change.
Do yourself a favor and never vote Democrat or Republican ever again. Until then you are just hindering us from prospering. I mean that in the best way.
85% of Americans base their decisions on soundbites and Fox News. As of last night I am officially ashamed to be apart of this country and what it represents. Funny thing is it is apparently acceptable for these politicians to tell half-truths 24/7 but when an institution trades instruments with a market maker it is time to put the gloves on.
Levin should be relieved of all duties immediately. Did it really take him 6.5 hours to still not understand what the definition of a market maker is and what inventory equals in these transactions?
The "Maverick" should be put down, he's had a good run (laughable) but it is time for the straight talk express to retire into hiding and he deserves much worse than he will ever get.
Must be nice to billyslap your wife and still be able to get in the last laugh then rail 5 fat gaggers and fuck woman that are 40 years younger than your god forsaken ass.
Alright I think there is a fundamental misunderstanding about the products involved in this case... please read this before you blame Goldman for "taking the opposite side."
Synthetic CDOs were created to replicate the payment structure of a CDO. Why was this done? Too much demand for MBS and not enough actual assets. So they created a CDO synthetically using a portfolio of Credit Default Swaps to mirror the underlying CDO.
Now on to the more important and relevant portion: A Synthetic CDO cannot exist without a long and a short. It can't. Impossible to do since it is a financial derivative and not an actual asset (though the value relates to one). Everyone in the mortgage business knows this, if Paulson wasn't taking the opposite side of the deal, GS would have had to act as a principal and take the opposite side. If GS was CERTAIN that the mortgage market was going to fall, they would have just taken the opposite side themselves of every synthetic mortgage deal, and they did not come close to doing this. They mostly just lowered their risk and went slightly net short.
There has been a big stink about Paulson suggesting securities to go into the deal, but what people often overlook is that IKB also suggested securities. Why? Based on the nature of Synthetic CDOs I explained before, there has to be a long and short. As a result, the two sides have to come to an agreement on the underlying securities in the deal. Add in the fact that half of Paulson's suggestions were discarded, you have to realize that due diligence was done... but few (and certainly none of the ratings agencies or even the buyers themselves) could fathom how quickly delinquencies and foreclosures would accelerate combined with crash in housing prices (the collateral) would occur.
Keep in mind this was not some Joe Schmo who got swindled taking the long side of the deal. The parties were ACA and IKB. I don't know as much about IKB, but I'm familiar with ACA from my time at a Mortgage IB (and they had something like 90% of the deal anyway). They are sophisticated. Super sophisticated in the mortgage market. All they do is deal with mortgages and insurance on mortgage products. To somehow believe that they did not do due diligence on this is absolutely ridiculous. They had a desire for these types of securities, and liked the price. Sometimes people just take the wrong side of the trade, you have a view and it is wrong. Anyone who has ever traded knows this. It just so happens that they were really, really wrong with their market view and they lost. Cest la vie.
Now, to the point about ethics. As a market maker you are not an investment advisor. Your sole purpose is to make a market... aka provide a bid/ask. Once again, we're not talking about some clueless retail investor, these are institutions: HFs, Massive Corps, Central Banks, etc. They call you up and you give them a price, if they don't like it they can and will trade away with another firm. It's how it works. Now, those who are upset and say the desk shouldn't take the opposite side, realize that by having a view, you are essentially providing the market participants (aka clients) with better pricing. Why? If your desk is flat or short but want long exposure, what do you do? You want to bid. In market terms, you are a "Better Buyer." This means clients are getting a better rate from you than they are other market makers. This is beneficial to them! Same goes for selling, if the desk is Long or Flat, you want to sell more, so you are a "Better Seller." You can provide securities to clients who want them and lower price than other market participants. That's what clients generally want, a nice price. The market benefits from this.
That's about all I have right now, would be happy to clarify anything. Sorry for the length.
Agreed 100%.
The Carl Levin's of the world have no idea how a market-maker functions, and what increased volatility does to the value at risk (VAR).
I watched all 10 hours of yesterday's testimony and found Levin (and most other members of Congress) to be completely clueless.
These are not "refrigerators" or new cars being sold with a new product warranty to first time buyers. These are SOPHISTICATED institutions who do not always buy "new" AAA rated securities, but who are interested in buying/selling various RISK PROFILES for their portfolios. As opposed to Levin, they might actually see "value" in a clunker that has 120,000 miles on it and whose tires are so devoid of good tread that the car would be unsafe driven in rainy weather, but a perfectly good commuter car that gets you to the rail station.
Finally, someone on ET that actually KNOWS what they are talking about.
Thank You.
By the way, if anyone should know how to analyze credit risk, it should be the German Bank "IKB"!
They were one of the serial carry-traders who purchased these types of instruments for the Structured Investment Vehicles (SIV's) and floated paper in the Asset Backed Commercial Paper market against them borrowing short, and lending long!
Now, was ACA prudent and smart enough to perform the tasks of comprehensively and independently evaluating the underlying RMBS?
Of course not.
If they had, they would have never entered into the deal. ACA clearly failed in that regard just like the ratings agencies. In fact, it is hard to believe they did not know the intentions for the pool when the higher quality subprime RMBS were replaced. In addition, if AAA ratings were not handed out to everyone who applied, this deal (like so many others) would not have been done.
Again, people like Carl Levin and John McCain don't even understand what a market, or a market-maker is.
In fact, MCCAIN is the biggest hypocrite in the bunch as his chief economic advisor from his Presidential Campaign was none other than Phil "Enron" Gramm who spearheaded the legislation that rolled back 93 years of law forbidding "side-bets" in the financial markets and allowed for credit default swaps.
Note: See "Commodity Futures Modernization Act of 2000"