Clash of the Titans: U.S. vs. G.S. … my bet’s on Goldman.

First, friends and family know that I’m no fan of investment banks.

My view: IBs are heavily populated with soulless folks who have strayed way too far the constructive role of efficiently raising capital for “producing” firms that make things and serve people … to a focus on simply making money via maneuvers that don’t advance the economy (e.g. 2nd and 3rd order derivatives).

Second, I took the bait on Friday and thought the SEC really had something on Goldman … that the crooks had gotten their come uppance.

Now, I’m not so sure. 

Admittedly, I’m heavily swayed by today’s WSJ editorial that reads in part:

The Securities and Exchange Commission’s complaint against Goldman Sachs is playing in the media as the Rosetta Stone that finally exposes the Wall Street perfidy and double-dealing behind the financial crisis. Our reaction is different: Is that all there is?

After 18 months of investigation, the best the government can come up with is an allegation that Goldman misled some of the world’s most sophisticated investors about a single 2007 “synthetic” collateralized debt obligation (CDO).

Far from being the smoking gun of the financial crisis, this case looks more like a water pistol.

WSJ, The SEC vs. Goldman, April 19, 2010

Fundamentally, the “synthetic CDO” at issue did not hold mortgages, or even mortgage-backed securities.

This is why it is called a “synthetic” CDO, which means it is a financial instrument that lets investors bet on the future value of certain mortgage-backed securities without actually owning them. (see pics and link below)

It was simply a mega-bet peddled to “whales” — sophisticated investors (mostly financial institutions with floors of MBAs and lawyers)    — a bet structured by an uber-bookie who took the other side of the bet.  A common practice among “players”. 


The main impact of the “action” was transferring a few billion dollars from the long-side housing gamblers (the financial institutions and other fat cats)  to the bookie (Paulson & Company).

Since the market crashed — i.e. the “favorite” lost the game — the whales (e.g. the Royal Bank of Scotland)  lost big — especially since they were betting with borrowed money.

My take: This wasn’t numbers being run on the city streets of Baltimore … it was big guys vs. big guys … who cares if they all lose? 

This didn’t cause the housing bubble or its bust … and Goldman will walk on the rap. 

* * * * *

Anatomy of a CDO

Wall Street Journal has an interesting depiction of how a synthetic CDO is put together.

Click either of the pics to go to WSJ’s interactive description — cool, but complicated.



2 Responses to “Clash of the Titans: U.S. vs. G.S. … my bet’s on Goldman.”

  1. Jeff Solomon Says:

    Regardless as to whether or not Goldman will have to pay significant penalties in a battle with the SEC, the brand will certainly be tarnished. I expect to see Goldman lose some business in at least the short-term to JP Morgan which has already overtaken them in most of the lead tables (with the exception of M&A).

  2. Laj Says:

    The “truth” (I put it in quotes because I have no strong opinion on the matter) is that every one knows Goldman Sachs is doing something illicit to be on top for so long and to make money off/in every crisis. Matt Taibbi’s continual bashing hasn’t helped either.;kw=%5B3351,11459%5D

    This is just the government’s way of charging them with *something* to assuage the demands of people for justice (or the appearance of it). It doesn’t matter what Goldman is really guilty of – as long as they are guilty of something, just get them into court for anything!

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