Comments on: Is there a Goldman CDO scandal? http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: DanHess http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/comment-page-1/#comment-10532 Wed, 30 Dec 2009 00:00:45 +0000 http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/#comment-10532 If you create a financial instrument that is based on fraudulent mortgages, how can that be a legitimate financial instrument? Incomes, assets claims, appraisals and many other things all constituted fraudulent false statements. These were the basis for the products in question.

The crises would never have been as severe if fraud hadn’t been repackaged and sold, allowing new fraudulent mortagages to be originated.

Did Goldman know that the loans were fraudulent? They were called Liar Loans for goodness sake! Everybody knew!

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By: nktrumpsall http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/comment-page-1/#comment-10488 Mon, 28 Dec 2009 18:47:52 +0000 http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/#comment-10488 “Financial firms that securitize or underwrite securities often take positions opposite to the security to protect themselves from adverse market movements during the selling period.”

True enough, everyone hedges, and so they should. Synthetic MB CDOs, however, are extremely complex instruments. When valuation, pricing, and forecasts of future performance are based solely on sophisticated computer models developed by the seller, the customer is at a distinct disadvantage.

In theory, free markets work based on some degree of transparency and a fair availability of information. There were more established, transparent ways to hedge bets on the real-estate market boom. No-one should have been allowed to create synthetic MB CDOs, among other “instruments” in the first place.

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By: nktrumpsall http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/comment-page-1/#comment-10486 Mon, 28 Dec 2009 18:26:00 +0000 http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/#comment-10486 Many people here are knowledgeably and eloquently making the same point.

Buyer beware? We weren’t there when the salespeople were doing their job, so we don’t know (but can suspect) that perhaps someone was being snowed. Just look to the Procter & Gamble and Gibson Greeting Cards’ suits against Bankers Trust to see how it can happen.

This kind of behaviour is why Glass-Steagall was established in the first place. It is exactly why GS — among others — lobbied so hard over the years for deregulation, then chose to go public when it did.

In the U.S. GS and others like them need to see the re-establishment of dividing lines between the businesses.

However abhorrent their behaviour, GS has always excelled at establishing very long-term plans, and ensuring and/or taking advantage of their presence, obvious or not, within governments around the world. It would be very difficult for anyone to clip their wings at this point, but you can be assured they have many contingency plans in place to respond to change of any kind.

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By: MiltonRecht http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/comment-page-1/#comment-10471 Mon, 28 Dec 2009 08:45:46 +0000 http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/#comment-10471 Financial firms that securitize or underwrite securities often take positions opposite to the security to protect themselves from adverse market movements during the selling period.

Firms that create and sell a security are looking to make their profits from the commission or markup on the security and not from investment gains. During the selling or underwriting period, it is not unusual for a firm to be holding the security in inventory for future sale. While the firm is holding the security, it is at risk for adverse market changes and price movements. Firms will hedge the security they are holding by taking an opposite position. Some customers will already have purchased the security, so the firm has a position opposite to its customers.

If the firm is frequently selling the same type of security, the firm may put on a more permanent, longer-term hedge to save costs. To someone who does not see the holding of the opposite position to customers as a hedge against inventory risk, will think it looks like a bet against the customers.

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By: Anonymous http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/comment-page-1/#comment-10428 Sat, 26 Dec 2009 19:54:39 +0000 http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/#comment-10428 They should be prosecuted for fraud

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By: DanHess http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/comment-page-1/#comment-10418 Sat, 26 Dec 2009 03:48:06 +0000 http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/#comment-10418 Let’s be clear here:
Goldman was not merely some dealer or reseller.

Goldman created these financial products. They put their brand on this toxic waste. There is no question that buyers, and especially those overseas bought these things in large part because they were buying a Goldman Sachs branded product.

Did folks trust the *new* (investment) vehicle they purchased *from the manufacturer* and not look too much under the hood because of the Goldman brand? Of course.

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By: JMS http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/comment-page-1/#comment-10395 Fri, 25 Dec 2009 16:11:12 +0000 http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/#comment-10395 “When I go to the car dealer, I know that the car dealer has no fiduciary duty and that his goal is, of course, to sell me a car. However, if the car dealer sells me junk, I certainly have recourse against him through lemon laws and warranties.”

I think this analogy demonstrates the problem, fixedincome’s point is that the relationship between Goldman and the purchasers of these synthetic CDO’s is not like that of a store and consumer. The better analogy is that of a car company and a mechanic. If you wanted to use legal terminology the relationship would be “between merchants”.

If Goldman willfully hid information, is Goldman dissembled, if Goldman outright lied, then yes they would be both morally and legally wrong. But if the evidence here is correct and Goldman let the mechanic knock around the car as much as they wanted, then an institutional purchaser assumes the liability.

JMS

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By: jaherman http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/comment-page-1/#comment-10387 Fri, 25 Dec 2009 13:30:44 +0000 http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/#comment-10387 “It’s also critical to differentiate between a broker/dealer (the arm of an i-bank responsible for distributing securities) and a registered investment advisor. The former, in fact, owes no fiduciary duty to its clients (though for retail purposes this is a hotly contested issue in the industry), while the latter decidedly does.

And while GS does have arms of its business that function as RIAs (Goldman Sachs Asset Mgmt, which manages mutual funds, for example) the investment bank and broker/dealer elements responsible for building and selling CDOs do not operate under those registrations and their institutional clients absolutely, positively know that.”

I think many of our comments above recognize this point. However, it still isn’t exculpatory for Goldman Sachs.

When I go to the car dealer, I know that the car dealer has no fiduciary duty and that his goal is, of course, to sell me a car. However, if the car dealer sells me junk, I certainly have recourse against him through lemon laws and warranties. As I mentioned above, caveat emptor is not quite as strong a concept in law as people believe it to be.

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By: fixedincome http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/comment-page-1/#comment-10376 Fri, 25 Dec 2009 04:36:53 +0000 http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/#comment-10376 Many of you are coming at this from the perspective of what one might refer to as a “retail” rather than institutional or at least, qualified, client.

Differentiation between the two is critical because the latter are generally considered to be both sophisticated and sufficiently capitalized to assume whatever risks they’re taking by–knowingly–purchasing securities that are not registered with the SEC and that do not come to market with regulated disclosure requirements. That includes just about every CDO ever built. It is illegal to otherwise sell such securities directly to “retail” investors.

I’m not certain that GS is entirely without guilt, but not for most of the reasons mentioned here.

It’s also critical to differentiate between a broker/dealer (the arm of an i-bank responsible for distributing securities) and a registered investment advisor. The former, in fact, owes no fiduciary duty to its clients (though for retail purposes this is a hotly contested issue in the industry), while the latter decidedly does.

And while GS does have arms of its business that function as RIAs (Goldman Sachs Asset Mgmt, which manages mutual funds, for example) the investment bank and broker/dealer elements responsible for building and selling CDOs do not operate under those registrations and their institutional clients absolutely, positively know that.

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By: rogueecon http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/comment-page-1/#comment-10374 Fri, 25 Dec 2009 02:58:23 +0000 http://blogs.reuters.com/felix-salmon/2009/12/24/is-there-a-goldman-cdo-scandal/#comment-10374 Your points, along with those of Goldman and Henry Blodget, make a lot of sense and are very logical. I would advise the same line of defense for drug dealers. It’s always the fault of the user, and the dealers are only providing a service that the users are demanding. It couldn’t get clearer than that.

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