"Regulators say Goldman allowed Mr. Paulson's firm, Paulson & Co., to help design a financial investment known as a CDO, or collateralized debt obligation, built out of a specific set of risky mortgage assets - essentially setting up the CDO for failure. Paulson then bet against it, while investors in the CDO weren't told of Paulson's role or intentions."
Excuse me, "setting up the CDO for failure"? In retrospect we can see that it failed, but at the time many investors were willing to bet that these CDOs were going to pay them great returns. And why would Goldman tell the purchasers that Paulson was on the other side, betting against the CDOs? Isn't there always someone on the other side? Wouldn't that be improper for Goldman to identify the other side of the trade? Shouldn't the investors have realized that someone might hold the opposite position? Didn't the investors in the CDOs recognize that there were risks with their investments? There was a housing bubble and these investors expected there to be no problems with the markets (just as countless many others did). Okay, their investment failed; they took a bet and it didn't work out. Now Goldman is charged with fraud?
Many, many individuals felt that Paulson was tilting at windmills. That his investments surely wouldn't work out. Well, they did, and they resulted in billions of dollars for himself, his firm and his investors.
Investing is a zero sum game, is it not? For every winner there's a loser. Goldman appears to have constructed CDOs (that's what happens with these instruments, right?; someone has to take mortgages, bundle them together, and create an instrument) at Paulson's request and they were able to find someone to buy them; Paulson took the opposite view.
Can someone explain how fraud enters into this? It's not clear to me and perhaps there is a lot more to it, but this doesn't seem all that horrible. Is the SEC trying to show their power because of their horrendous failure in the Madoff case?
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I agree with most of your points. Before the fact, no one knows if the market is going to go up or down. I think Goldman will pay a fine and move on and we will see more regulation. A couple of issues. According to the SEC complaint, Goldman said the CDO was structured by an independent entity, not Paulson. There is something fishy about that if it was not disclosed.
ReplyDeleteAnother issue is that I think we will find that the Goldman prop trading desk was shorting the CDO. If you remember before Regulation FD, there were analysts like Henry Blodget putting a buy rating on a stock and then emailing others that he thought it was a piece of junk. After Reg FD analysts were required to certify their statements, disclose positions, etc. Maybe the prop desk is unaffected by these regulations, but there is a similar pattern.
Thanks! Some good points.
ReplyDeleteFor the latest from Goldman see http://www2.goldmansachs.com/our-firm/press/press-releases/current/sec-response.html