I don’t believe anyone has accused Goldman of doing anything close to this. I believe you have misread the accusation.
Of course you would not have to worry because you would get plenty of opportunity to buy the stock anyway. For instance had you shorted Lehmans a couple of years ago at $80 you can still buy their stock for 11 cents even though they have filed for Chapter 11.
If you’re interested in a longer explanation of this sort of thing, there was a recent episode of This American Life about a company called Magnetar which did (allegedly) deliberately construct extremely high-risk CDOs, sell them on and then openly hedge against them (the first half of the episode covers Magnetar; the second half is a completely different story).
The lure of immediate huge gain at the cost of much bigger later loss that will be someone else’s problem to clean up is a pretty powerful driver of bad behavior in the business world.
Damn you for posting this before me! I didn’t see it mentioned at all as I approached the end of the thread, and I kept thinking what a good explanation it was. Yes, it’s a bit long, but it’s an excellent, in-depth look at the kind of dealings going on in the market.
The comparison to the plot of The Producers was amusingly appropriate.
Not to mention their updated lyrics. 
Correct. Paulson made the bets, and made a killing with that strategy. Goldman is accused of selling the investments without disclosing Paulson’s involvement. Their defense, as I understand it and as far as they’ve been willing to discuss it, is that a broker is under no obligation to reveal the identities of the seller and buyer to each other. The counterargument is that Paulson was not merely a seller, but actually helped Goldman to select the investments in the package, while Goldman made express assurances to investors that the package was assembled by a third party.
The prosecution will turn on whether Paulson’s role really was so determinative as to make Goldman’s sales pitch a lie.
Surely this whole thing is the ultimate expression of capitalism. Produce a product that has negative value so that you can sell it to people to enable the creator of the product to make money off its failure. Where do you go from here?
What is really scary is that what they have done is only different from the normal conduct of people in investment banking by degrees of nuance. It appears that this is the business model for the whole industry.
From the look of this major fund managers would rather protect their relationships with the crooks than criticise them.
I think the “Platonic ideal” of capitalism would have some super-huge, super-liquid market with the ability to perfectly price risk and no information asymmetries (i.e. no artifically inflating the credit rating of a loan package). Not that such a thing would ever exist.
A slightly better analogy is that Paulson thought the Bengals were way overrated in the wildcard game and went to GS and asked them to find a sucker to bet against him. Does GS then have an obligation to tell the sucker that Paulson picked that particular game rather than they just felt like entering the bookmaking business? Obviously the sucker knows that Paulson thinks the Bengals are going to lose because of the fact he is betting them large amounts of money the Bengals are going to lose. If Paulson had inside information and GS knew Paulson had inside information that would probably be closer to what some people are alleging but that does not seem to be what is being charged.
No, it’s the opposite of the perfect expression of capitalism. Capitalism is only possible when both buyer and seller get something they value more than what they are giving up. This requires a certain level of trust. (And, not to derail the thread too much more, this is why a certain amount of regulation is necessary to capitalism. It’s the degree of regulation that generates debate.)
If you knew that everyone wanted to cheat you and that every transaction was a losing proposition, you’d never buy anything. You’d only have two reasonable options: produce it all yourself or take it by force.
So enforcing fraud charges against GS is a way of telling investors “You can trust what people tell you about financial products and their value. If someone does lie to you, there will be severe penalties for them.” Without that level of trust, perceived risk goes up and market values go down. But, obviously, there’s some debate as to whether GS was intentionally lying or whether it “accidentally” sold a bad product.
I had dinner last night with a couple of ex colleagues that still trade for one of the big banks in HK. FWIW, the word on the street is that the goldman paulson trade was originally turned down by Bear Sterns as too dodgy. And if Bear turned it down as too much legal risk it had to be outrageously bad as they pushed the envelope more than anyone else in the biz.
Goldman Sachs have more or less perfected the art of finding a market (or set of market participants) that believes that some financial structure* can’t possibly fail (or at least can’t become essentially junk bonds) and betting that it can fail, and then (oh yes, at arm’s length, through the chinese wall, despite a separation of powers, and no doubt other convenient fictions) ensuring it does.
- such as the nation of Greece
Except they didn’t bet that it would fail, and there is no allegation by the SEC that they did. In fact, it appears to be just the opposite; they went long on the investment and lost money. Paulson was the one on the short side.
The issue is not if Goldman made or lost money, the issue is if Goldman fraudulently misrepresented the product. It’s corporate spin out there faster than Cinderella “how could we be wrong if we lost money on the trade.” When a) not clear if they did in fact lose money and b) who gives a flying F if they lost money, the question is did they commit fraud.
Look, an investment bank is a middleman that lines up someone long, and someone short all the time for a fee. The fraud comes in when one party (paulson and short) games the system, and then Goldman represents it as being unbiased and then goes out and gets an “independant” 3rd party to rate it as a “fair representation.”
You’re dead wrong here on whether Goldman made on lost money mattering. It matters significantly from a standpoint of public perception. As this thread demonstrates, many people believe that Goldman made significant money on the transaction. That contributes to their negative perception of Goldman. The real damage that this lawsuit could inflict on Goldman is to their reputation not the potential monetary losses from the charges themselves. Their exposure there is likely not a very meaningful number in the big scheme of things.
While you are right that whether they made or lost money doesn’t matter to the SEC’s case against them or their defense, it is very important in the larger picture.
They shorted their own products they sold their customers which they represented as organized by a 3rd party, that was a lie. In laymen’s terms I believe my sentence succinctly sums up the fraud case the SEC is bringing down on their heads.
No, that is not what happened. You are not reading the SEC accusation correctly. Here’s the accusation straight from the SEC.
Goldman is not being accused of shorting the security. In fact, according to them they went long. The SEC is accusing Goldman of not disclosing material information, which is that Paulson helped structure the security and then took a short position.
Interesting article in the Times today about Warren Buffet’s opinion on the whole affair.
He makes some pretty interesting arguments.
The New York Times really makes some outrageous mistakes. I can’t believe they let the following slip in.
Is the New York Times so incredibly bad at fact checking that they don’t know that in addition to the $5 billion in preferred stock that Berkshire Hathaway has warrants to purchase up to $5 billion of Goldman common stock at $115 per share? From the time the SEC allegations were made to the time Buffett made his statements, the Goldman stock had declined from $183.62 / sh to $145.20 / sh meaning that Berkshire lost almost $1.7 billion. I guess according to the New York Times that’s really not an investment. How incredibly stupid of them.