Posted on 04/26/2010 6:27:20 AM PDT by SeekAndFind
The players on both sides of the trade that the SEC has targeted knew the risks and knew one side was bound to lose. It's far from the worst sin of this mess.
Goldman Sachs. John Paulson. Those are hot-button words that have dominated business news lately, with many of the reports biased toward a black-and-white supposition: guilty.
This column, however, wouldn't live up to its name if it didn't take a contrarian view. Not surprisingly, I'm going to discuss the Goldman/Paulson flap from a slightly different perspective.
What I believe may have happened -- at worst -- is that Paulson, a hedge fund manager, identified various bits of mortgage flotsam he wanted to short, betting they would go down. Then he might've gone to Goldman Sachs (GS, news, msgs) and asked something like, "Hey, would you put a basket of this stuff together?"
It seems to me that Paulson did nothing wrong. (I myself constructed a few "put baskets" of stocks I hated back in the late 1990s. At that time, the player on the other side of my trade was a brokerage firm.)
If that's what occurred, Goldman probably didn't want to take the other side of that trade. So, it would've gone out and found some suckers -- I mean, buyers. But what is most important to understand is this:
A buyer-beware market
This is not a mom-and-pop market of innocents. This is a sophisticated, buyer-beware "upstairs" market. All participants have ISDA (International Swaps and Derivatives Association) agreements -- and the mountains of supporting data that go with it. Nobody unsophisticated operates in this derivatives market. Furthermore, every participant knows there is a short-seller on the other side of every purchase.
(Excerpt) Read more at articles.moneycentral.msn.com ...
One argument the SEC has been making is that Goldman should have disclosed that John Paulson was somehow involved in the selection of securities in the Abacus collateralized debt obligations.
What the SEC fails to mention is that a counter-party to Paulson — ACA has the final say in what comprised the portfolio to be traded.
Even if Paulson had complete discretion over the selection, I doubt the buyers would have cared. His reputation was not what it is now, after making a fortune shorting subprime, so his opinion on any given security was nothing special. And remember, few people believed the bears back then when they said housing was in trouble.
In fact, some very smart people were bullish on the subprime/Alt-A sector. For example: David Einhorn, who later predicted the collapse of Lehman Brothers, was the largest shareholder of now-collapsed lender New Century Financial — his fund owned more than 10% of the company — and he was also a director.
Fleckenstein ping.
I don’t understand why so many want to demonize GS for being on both sides of trades - it’s what traders do.
The GS error - from others as well - was setting up derivatives that were leveraged out at over a 100:1. This was irresponsible on the part of broker mgnt. but all the regulatory agencies just skipped over this too. I don’t think they had a clue what they were looking at - worse didn’t care.
Congress can't demonize the true culprits, because it will get the finger pointed right back. Fleckenstein touches on it in his column: we probably should go after FASB and the rating agencies for taking their eyes off the ball (or in the ratings agencies' case--dropping it).
At the same time there is e-mail evidence that was released over the weekend that shows how GS helped WAMU and it’s sub-prime tool write enough liar loans that resulted in the biggest bank failure in US history, while at the same time Goldman was betting heavily that WAMU would fail, and when it did Goldman was the only one left holding any money.
That may not be illegal, but it sure as hell isn’t ethical, especially in light of what came afterwards. It seems to me that Goldman and others like them are operating “legally” because they created new “products” (like derivatives) that were not covered in the existing laws, rules and regulations; ergo they must be “legal”.
Goldman Sachs has their fingers in every single dirty trick and shady deal that we hear about. If any of us tried these kinds of tricks with our businesses, we would never survive a Sarbanes-Oxley audit.
Of course it really helps GS get away with whatever they want if the SEC investigators who are supposed to be on watch, are online watching porn instead...
Who is watching the watchers?
Or ex-Goldman guys, working for other ex-Goldman guys, going all the way back to Bob Rubin (maybe before), and stretching out into the future as far as Chelsea Clinton's Goldman-executive boyfriend.
There is also the question of "perfect knowledge", and whether anyone trading on the basic of knowledge so good is really investing -- or just harvesting.
I don’t know. I’m not an attorney or an SEC investigator, and I lack the depth of knowledge to offer any specific or meaningful fixes.
I do know that I could not get away with these kinds of financial dealings and still be able to look myself in the mirror.
Now the left is SURPRISED someone lost?
Berny Madoff had that answer.
Because this is the little sideshow investigation - cooked up jointly by Goldman and their staff in the Administration - to keep the public's eye off the big stuff.
If I were to explain Derivatives to a fifth grader, your example IS the one I will be using. It’s simple, yet truthful.
The big stuff is the unregulated CDS and CMBS markets and how every one of these institutions sold toxic garbage with a AAA slapped on it to the entire world. By holding this little sideshow, they are going to try to pretend that
“the problem has been addressed”. So the big question about when Goldman, JP Morgan, and others are going to disgorge billions in fraudulently obtained revenues won’t come up.
now, as long as the counterparties had their lawyers read the deals -- and all such deals are nothing more nor less than contracts -- then caveat emptor.
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