bluntlysaid


Goldman

I posted the following (paraphrased) on my Facebook:  

Don’t know where I land re: Goldman. On the one hand, Goldman is a market maker and has always sold securities that some investors hold while others short. On the other hand, Goldman shorted its own mortgage portfolio in 2007 yet willingly sold securities to investors knowing they were on the wrong side of the bet. I think it comes down to whether investors could have known that Goldman shorted the CDOs it sold. If this was public information, then you can’t blame investors for running towards a fire that others were clearly fleeing from.http://www.nytimes.com/2010/04/17/business/17goldman.html?hp

Since then, I’ve talked to my buddy at Goldman and confirmed that the prop desk that takes positions on for Goldman is legally prohibited from sharing notes with the desk that designs and sells the securities. That makes a lot of sense since Chinese Walls are the only way to prevent insider trading.  Interestingly, even though it’s true that Goldman’s short position against the Abacus securities were relatively insignificant relative to the firm’s larger positions, the bet did jump to CEO Lloyd Blankfien’s attention.   I imagine that the trader ordering the short was was called into Lloyd’s office:  

Lloyd: Why the fuck are you taking a $3B position against the mortgage industry

Trader: Sir, all of my research and experience tells me that shit is about to go down

Lloyd: Then why are all of our competitors still buying mortgage securities

Trader: Because they have inferior information.  I’m willing to best the soul of my first born child on this one

Lloyd:  Alright. Go ahead and short our mortgage portfolio, but, if you’re wrong it’s your ass that’s on the line

I am 100% positive that Goldman’s CEO knew the firm was shorting securities that another desk was going out and selling. However, that in itself is neither illegal nor wrong. His job is NOT to share arbitrage opportunities with investors at large.  His job is to ensure that there is a marketplace for securities and that’s exactly what he’s done. I personally absolve Goldman for shorting the mortgage industry although I would never vouch for something that I myself am trying to get rid of.

On the other hand, if its true that the creators of the Abacus security knew that it was comprised of XYZ collateral but told investors that it was comprised of ABC collateral—well, that’s plain old fraud.

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