Its my understanding that GS is being accused of playing both sides: telling clients to continue to invest while GS was internally hedging for a fall. This article possibly points out some evidence of this.
I think it's slightly more subtle than that. They didn't actively tell clients to invest - rather, they had clients who wanted to go long housing, and facilitated the trade without telling the buyers that GS thought it was a bad idea. At least, that's my understanding, based on talking to some people who spent decades at GS and left between six months and three years ago.
"The German bank on the losing end of the Goldman Sachs derivatives deals that have attracted the ire of the Securities and Exchange Commission was so absorbed in the pursuit of high-yield returns from financial instruments linked to the U.S. housing market that it preferred to lose one of its top executives rather than change course."
Sounds a bit like what happened at Harvard; in that case, envy forced out the team that was earning them their high rate off return, leaving B Ark types who mindlessly continued the same strategy (it was so bad they neglected to unwind one position until they'd needlessly lost 1 billion dollars on it). In this case, their portfolio manager of the German bank in question predicted what would happen, was ignored by upper management, and then left.
The bank was getting squeezed by the spread between their short term commercial paper and their long term investments like this one, e.g. others were noticing their reckless real estate bets as things in general in this market were starting to get bad. But they needed high yields to keep the game going (they got bailed out/bought out by another German bank in the end), so in this case (not the only one, I gather) they went to Goldman to get that.
Others with a clue like Paulson (who was at the other end of the transaction) and certainly many at Goldman thought they were wrong ... but at what point do you get so sure someone is wrong that you refuse to do business with them? They were hardly the only ones betting this way!
Note also that things get really ugly when everyone stops doing transactions in a market, which is exactly what eventually happened, resulting in unmarketable "toxic" financial instruments. We need liquidity in markets and I don't think it's the job of entities like Goldman to "pull away the punchbowl". That's supposed to be the job of e.g. the Fed, especially the NY Fed (headed at the time by our current Treasury Secretary).
A lot of the blame should be laid at the investors feet; why did they buy something they so manifestly failed to understand?
(If you don't want to have to spend all your time managing your investments then you're best off sticking to simple things like index funds or cash. That's not a bad choice at all)
Funny old world.
In a deflation, which we still seem to be in (or so many think), the trick is to find safe places, because the big way to lose is to have the entity you're investing in go under. This is why blue chip bonds were so popular during and for a long time after the Great Depression. AT&T with its government monopoly wasn't going to go under....
One should also note that a T-bill is funding the Federal government's deficit (hardly putting your money in a place where it will "get put to work, creating productive stuff"); you do that for safety and short term liquidity. You can get higher yield instruments ... with a higher risk (almost by definition). Obviously there's a lot of risk aversion nowadays.
(In fact, in general but in particular right now the Federal government has a perverse incentive to make their instruments look like the safest in the world....)
But if you have any inflation above interest rates, surely you could just take out a loan, buy durable goods (houses, tinned fish, iron ore), hide them under your mattress, and make a killing.
Gold has been favored for deflations since it's "the only liquidity that doesn't depend on someone else's liquidity", but FDR got Americans out of that game when he confiscated the nation's gold supply. It wasn't legal to own gold until a little while after Nixon closed the gold window, and the wild gyrations after that due to a variety of factors didn't make gold look like a good place to put your money (in general, commodities haven't been a good bet against inflation in the modern era as we get better and better at extracting/growing/whatever them).
Hmmm, my father is the sort of person who can play this game, he's at times acquired various sorts of goods and sold them generally at a profit (I can remember one time 1/4 of our garage being filled with cases of suntan lotion), and he never played that game.
Probably because if you have the sorts of skills and network my father has, there are much better games to play, in his case N startups, a few of which paid off big. Also real estate, but that's mostly passive in his case.
Regardless of which side prevails in the courts, there are some ethical issues that have been raised. Would you ever buy something from Goldman now? Personally, I've had brokers tell me they thought I was being to aggressive or careless with investments, that's pretty much what I pay them for. Perhaps it's a different relationship at that level. Between the flash trading and front running questions and then the piles of cash that they've made since the crisis, it definitely warrants more investigation.
If you invest in index funds, odds are pretty high that you simply won't make money at any given point in the future, that was good advice 60 years ago, there are an awful lot of people who did that and see 2000 to 2010 as totally flat. It doesn't seem easy to call cash a good idea either, at some point the over extended currencies are going to normalize.
I agree with you on the ethical issues but I didn't believe them to be particularly trustworthy in the first place, all of their incentives are lined up to do things that will make them money and their advice will be tainted by this.
Re: Index funds and cash - yeah, they aren't going to get you stellar returns. Cash in particular gives you poor dividends. The point of these is that the chance of your money vanishing is low and they require little time investment, enabling you to focus on your area of expertise instead.
If I had to choose areas to invest in that would (potentially) give better returns, I'd try:
1) Investing in oneself. ie improving skills, becoming better known, etc. Much easier to get above market returns here, of course.
2) A small number of small/medium size companies in unfashionable areas you can study and understand; basically stocks where there is the potential for decent growth and comparatively few people are looking.
3) Well chosen property for the leverage. You'd need to really spend time choosing well or the leverage would potentially fuck you over.
If so, isn't this primarily about economies of scale? Since the only reason both roles take place within one firm today are because there are efficiencies associated with the ancillary services (and perhaps capital requirements) that give a conglomerate iBank an advantage over two smaller firms. ??