april 20, 2010

Goldman, Chutzpah & Sachs!

SEC filing a lawsuit against Goldman & Sachs (GS) for securities fraud is clearly the news of the week (except for the (c)ash cloud delivered by Iceland to its European friends….). And no wonder! It is far from clear what the end result will be.

Even ignoring possible additional information that will leak out over the coming weeks, and ignoring any emotional or political interference with the legal procedure, I think it is very hard to tell whether GS actually has done anything wrong!

If we assume that the news available in yesterday´s media tells us the true story then the situation is the following: GS has helped John Paulson (the billionaire hedge fund manager) to go short in a number of mortgage-backed securities in a very convenient way (I wish I had had the opportunity back in 2006…). By bundling together a number of credit default swaps in one portfolio (the so-called synthetic CDO) and then taking the short end of this structure (which is perfectly OK) then Paulson managed to profit from the fall in house prices in the US. Someone had to take the long end, of course, and in this case the main buyer seems to have been a German bank called IKB. As it turned out, the "coglione" in this deal was IKB.....

Of course, if GS had informed the long investors that the famous Mr Paulson was on the short end, then they would probably not have bought the CDO. The question now, however, is whether one should REQUIRE GS to tell the investors that this was the case. Should one require one advanced institutional investor to inform another advanced institutional investor who is the counterparty to the deal? I DON´T KNOW!! If the buyer was a retail investor, then YES, GS should probably have had to tell the investor that the assets in the CDO pool were chosen by some wise guy in order to be as credit-risky as possible! However, I think IKB, and any other investment bank, should be perfectly capable to tell on their own whether assets are worth buying or not! They don’t need GS to tell them that. (There are some claims that GS told IKB that Paulson were going to be long the structure. That seems to have been a lie and that is not OK, of course. However, again, it is up to IKB to make the decision to buy or not, and it is quite pathetic to claim that the decision was based entirely on the actions of Paulson.)

Anyway, I am not a big fan of big investment banks playing with tax-payers money and paying half of their profits (but not half the losses) to their employees and I am happy to see them (and their share prices) getting hammered. However, I doubt that this is the right way to attack them. They should simply be closed down and reopened as partnerships! Preferably tomorrow!