Goldman is looking for the patsy

April 28, 2010

In poker, if you don’t know who the patsy is at the table, it’s probably you. In the first session of questioning at yesterday’s Senate hearings on Goldman, an exchange between Fabulous Fabrice Tourre and Maine Senator Susan Collins laid bare that Goldman’s game is to find patsies.

Collins pointed to an e-mail snippet from one of Fab’s e-mails (page 34, exhibit 1c….careful, big file):

[T]his list might be a little skewed towards sophisticated hedge funds with which we should not expect to make too much money since (a) most of the time they will be on the same side of the trade as we will, and (b) they know exactly how things work and will not let us work for too much $$$, vs. buy-and·hold rating-based buyers who we should be focused on a lot more to make incremental $$$ next year.”

–Goldman Sachs email from Fabrice Tourre

Tourre explained the e-mail pointing out the obvious. In its role as a market maker, Goldman makes money on the bid-ask spread. The wider the spread, the more profit for the broker. Hedge funds know the market well, so they aren’t easily taken advantage of. Not so “buy-and-hold ratings-based buyers.”

Stocks trade in high volumes with lots of liquidity and total transparency. Bonds not so much, derivatives even less so.

It’s a big reason Wall Street loves the derivatives business so much. It’s opacity means wider spreads, hence bigger profits.

But even the smart “end-users” of derivatives have to know they’re getting taken advantage of. Yet they not only put up with it, they’re lobbying arm-in-arm with Wall Street to keep derivatives trading in the dark. Why? Probably because they’re willing to sacrifice on the spread if it means they don’t have to put up collateral for their trades.

This seems a foolish stance. Opacity and leverage in the derivatives market makes it vulnerable to systemic collapse. If I’m an end-user, my hedge does me little good if my counterparty goes horizontal…

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see