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Gold, man? Sacks
Apr. 16th, 2010 07:53 pmAnd so, the investment bank big swinging dicks don't look so cocksure now, do they? Goldman Sachs charged with fraud by the SEC, which, presumably, feels that it should at least ought to do something.
This is all very strange. From my cyncical eyes, Goldman Sachs has done nothing that I wouldn't expect it to do. In Cliff Notes form, a hedge fund wanted to go short on the US CDO market (it was Paulson, which correctly identified that the whole thing was going to go tits up). It got Goldman to put together a product. Goldman then sold this product to a collection of children in a candy store. As Paulson guessed, the product went tits up within a year, and Paulson made a fortune (a billion bucks).
Interestingly, it appears that IKB, the German bank that was the first signal for the whole affair and the bank which I mentioned back in July 2007 as being curiously deep in debt for a relatively small operation, was the main buyer of this portfolio.
So, how is Goldman (which made a paltry $20m or so on the deal) being accused of fraud? Well, says the SEC, apparently it didn't tell IKB that the counterparty wanted to go short and that the counterparty had approached Goldman to build the product.
Well, correct me if I'm being naive here, but finance is a tough world. Suppose the market hadn't collapsed? Would Goldman have gone to IKB and said "oh, sorry, we thought the property market in the US was going to go tits up. It didn't, so the whole deal is void". No, of cvourse it wouldn't have. That kind of "well, we didn't think such a thing would happen, therefore we won't pay out on our guarantees that we offered if it did happen" are reserved for companies such as Equitable Life.
Indeed, in this business, I would have thought the whole point would be to not tell the potential buyer what line the potential seller wanted to take. To do otherwise would make it impossible to make a market.
I mean, if I'm a market maker, and I have a big overhang of stock at 4pm on a Friday, I'm not going to tell traders out there "hey, I've got a big overhang of stock, guys". Fuck me, no. I'm going to pretend that I'm short and that I need to pick up something. Pretending that you are the opposite way from your real position is just standard.
Well, it was. Now, according to the SEC, it's fraud. I eagerly await poker players being sued because they put in a big bet when they had complete shit, on the grounds that this was a blatant misrepresentation of the strength of their hand.
Jeez, misrepresenting your hand is what top level finance is about. That's why some clever people (Paulson) make money and some stupid people (ABN Amro, IKB, and a stream of dead companies in the past) lose it. The problem is, the SEC is full of klutzes who just don't understand this simple point. They think it's more like selling a car that's faulty. But that's a completely wrong comparison. What it is, is, I show you the car, and say "you can either sell it to me for one and a half grand or buy it from me for two grand." If you take the sell option then you lose if the counterparty sells it on for more than 1.5 and win if he has to sell it for less than 1.5. If you take the buy option then, well you lose if you can't sell it on for more than two. Sure, there's a spread, but if the car is a complete klunk, you take the sell option, and the counterparty loses.
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This is all very strange. From my cyncical eyes, Goldman Sachs has done nothing that I wouldn't expect it to do. In Cliff Notes form, a hedge fund wanted to go short on the US CDO market (it was Paulson, which correctly identified that the whole thing was going to go tits up). It got Goldman to put together a product. Goldman then sold this product to a collection of children in a candy store. As Paulson guessed, the product went tits up within a year, and Paulson made a fortune (a billion bucks).
Interestingly, it appears that IKB, the German bank that was the first signal for the whole affair and the bank which I mentioned back in July 2007 as being curiously deep in debt for a relatively small operation, was the main buyer of this portfolio.
So, how is Goldman (which made a paltry $20m or so on the deal) being accused of fraud? Well, says the SEC, apparently it didn't tell IKB that the counterparty wanted to go short and that the counterparty had approached Goldman to build the product.
Well, correct me if I'm being naive here, but finance is a tough world. Suppose the market hadn't collapsed? Would Goldman have gone to IKB and said "oh, sorry, we thought the property market in the US was going to go tits up. It didn't, so the whole deal is void". No, of cvourse it wouldn't have. That kind of "well, we didn't think such a thing would happen, therefore we won't pay out on our guarantees that we offered if it did happen" are reserved for companies such as Equitable Life.
Indeed, in this business, I would have thought the whole point would be to not tell the potential buyer what line the potential seller wanted to take. To do otherwise would make it impossible to make a market.
I mean, if I'm a market maker, and I have a big overhang of stock at 4pm on a Friday, I'm not going to tell traders out there "hey, I've got a big overhang of stock, guys". Fuck me, no. I'm going to pretend that I'm short and that I need to pick up something. Pretending that you are the opposite way from your real position is just standard.
Well, it was. Now, according to the SEC, it's fraud. I eagerly await poker players being sued because they put in a big bet when they had complete shit, on the grounds that this was a blatant misrepresentation of the strength of their hand.
Jeez, misrepresenting your hand is what top level finance is about. That's why some clever people (Paulson) make money and some stupid people (ABN Amro, IKB, and a stream of dead companies in the past) lose it. The problem is, the SEC is full of klutzes who just don't understand this simple point. They think it's more like selling a car that's faulty. But that's a completely wrong comparison. What it is, is, I show you the car, and say "you can either sell it to me for one and a half grand or buy it from me for two grand." If you take the sell option then you lose if the counterparty sells it on for more than 1.5 and win if he has to sell it for less than 1.5. If you take the buy option then, well you lose if you can't sell it on for more than two. Sure, there's a spread, but if the car is a complete klunk, you take the sell option, and the counterparty loses.
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