Banks Bundled Bad Debt, Bet Against It and Won
nytimes.com
nytimes.com
I don't think the same bank should be allowed to do both. At the very least there should be a firewall between the departments.
What's wrong here is acting in bad faith by selling known-bad investments. At best it's insider trading, at worst outright fraud.
Take their deal with Hudson Mezzanine. Goldman offered Hudson a bet: if the housing market goes down, Goldman wins, if it goes up, Hudson wins. Hudson lost. What's the problem?
Firstly, that's not true if you're a "market maker" as many large banks are. Secondly, it's not true if you are selling for a reason (e.g. you need the cash to do something else with) or for a technical reason (e.g. you are an index fund). Thirdly, so long as you are not actively misleading the buyer, if he thinks it's worth that much, that's his call.
> Firstly, that's not true if you're a "market maker" as many large banks are.
Actually, it's always true. You sell things because someone else is willing to pay you more for them than you think that they are worth to you. You buy things because they're worth more to you than the money it costs to get someone else to give them to you.
Yes, there are lots of reasons why your valuation is different than the other party's, but the difference is why both of you are willing to do the deal.
> Thirdly, so long as you are not actively misleading the buyer, if he thinks it's worth that much, that's his call.
Absolutely. The buyer is willing to take the "profit", so he should be willing to take the loss. (The seller has similar issues - if they sell for "too little", that's their problem because they were willing to take "too much".)
There are such things as "gains from trade", you know. Not all assets are worth the same amount to all players! If you buy an asset that you think anticorrelates with your other assets to reduce variance, you don't need to think that asset is underpriced. And if you need to liquidate some of your assets to return to shareholders or, heck, buy a house, we call that "liquidity preference" and it means you don't necessarily think the asset is undervalued, just that cash in hand is worth more to you.
I wrote that trades happen because the parties value the relevant asset differently (the one that starts with the asset thinks that the cash is worth more than the asset to it, while the other thinks that the cash is worth less to it), so "correcting" me by telling me that is curious....
> to think that asset is underpriced
I didn't say anything about "underpriced". I said that the two parties had different opinions about the assets in question wrt themselves. They can both be correct. (They can also both be wrong.)
It also says that Goldman informed the clients that it might be taking a position opposite to theirs. So I'm really not sure I see the problem, apart from lazy reporting: "Goldman Sachs made money, scary financial words, now I've got a story."
I participated in this activity in that I created software systems to enable the creation, valuation, analysis and management of the securities. As such, I'm sure I'm biased, but perhaps I also have some additional information and perspective.
At the points in time when the securities were being sold, they were not known-bad. It's possible a few were sold afterwards, but they stopped being created pretty much the moment it was realized that they weren't going to perform. After all, the profit on them came primarily from holding a piece of the equity tranche (rather than from the sale itself), and the value of that tranche plummeted to zero and those bits were renamed 'toxic assets' in the press.
As this new information came to light, two activities occurred. One was the wind-down of a lot of the structured products. Another was that traders looked for ways to use the information for a profit, such as buying swaps to profit from it.
While I support 'what did they know, and when did they know it' style research to find bad actors (of which I'm sure there are some), it's my sincere belief that the vast majority of the deals were made in good faith.
I don't think the insurance/fraud analogies are accurate, nor particularly useful in garnering lessons learned.
Do you honestly believe that? There is no reason whatsoever to suppose they didn't know these CDO's were rubbish. However, there also wasn't any reason for them to care: they profited a bunch, which is what an investment bank should do. If they hadn't, they would have gone down, instead of other banks and institutions. This is cut throat capitalism: there is no room for considering ethics or the public good.
In fact, the CDO's were not rubbish. The CDO's are supposed to pay off in a certain way based on market outcomes, which they did. Goldman simply believed the market would go one way, while buyers thought the market would go another way.
For the vast majority of the time that those products were sold, the mechanism for profit was to keep a piece of the highest risk (and highest return, in theory) piece for the bank.
This is not a mechanism that works, at all, if one believes the products are rubbish.
That said, you make a good point that it's entirely possible to sell a product that you don't like for yourself, without doing it in bad faith. If you came to me and said "i want to put all my money into commercial REITs", I'd find a way to make the transaction happen. But I wouldn't put my money in with yours.
The fact that they held on to the highest risk portion of them as their intended means of profiting from the sale is pretty solid evidence.
There is.
Ostensibly.
lately I've been struck by the obviously directly related tendencies to
A) ignore history
B) act like everything is new