It's dancing right on the line of fraud, isn't it? The elements of a fraud case are (paraphrasing model jury instructions) (a) a false statement, (b) intentionally made, of (c) a material fact that (d) someone reasonably relied on and (e) was injured (usually, financially) by.
The only thing missing from a fraud case in the "selling shit products" story is "knowingly making false statements", right?
grey-area's summary of the WSJ article isn't accurate.
GS knowingly sold AIG junk CDOs days before the collapse
GS didn't sell CDOs to AIG. GS didn't actually sell anything to AIG. GS bought insurance (in the form of credit default swaps) on the CDOs from AIG and apparently sold at least some of those swaps on to other banks for a profit.
If Goldman had done something to accelerate the deterioration of the value of the CDOs (something like insuring a house and then burning it down), then you could probably claim GS was in the wrong. AIG would have known it was insuring subprime mortgage CDOs. There also isn't anything in the article asserting that GS misrepresented the quality of the loans or anything like that.
Thanks for the correction. My contention is that they knowingly screwed over their client by recommending one thing while they played the other side of the deal. They were fined for doing so, but it doesn't seem a very effective punishment to me.
They're potentially using insider information on deals and risk in order to profit; I'm not sure they should even be allowed to bet against their clients, because it gives them all sorts of perverse incentives. But it's a complex area, and I'm no expert in it...
I agree it would be hard for that to end in a fraud conviction, and as you say perhaps more regulation would be required for that to even be possible, but perhaps more regulation of this area is required.
I'm not sure they should even be allowed to bet against their clients, because it gives them all sorts of perverse incentives.
You have to consider that when an investment bank sells you a structured product it then naturally has the opposite position. If you want something that pays off if interest rates rise, an investment bank can sell you something like that in the form of an interest rate swap. You are now long interest rates and the bank is short them, but there wasn't anything malicious there. The bank just sold you the product you wanted. Now the bank has to hedge somehow or sell the swap on to someone who wants to be short interest rates. It may have clients that are interested in that sort of exposure.
I'm not trying to defend Goldman here, but when people say things like "banks are betting against their clients" it usually shows a misunderstanding of the business.
I think your link and the actual SEC charges [1] are saying slightly different things. The portfolio backing the synthetic CDO was constructed by a Goldman client (Paulson and Co, a hedge fund) specifically so they (Paulson) could short it. That's fine. But the marketing material [2] for the CDO they used to sell the long end to clients makes no mention of Paulson and it specifically says that the portfolio was selected by another company (ACA Management) and that ACA had "commitment to long-term bondholder and counterparty security". If you flip through the slide deck (it's actually pretty readable) you find many slides dedicated to talking about ACA and its bona fides.
That was the fraud. It told its clients the portfolio had been created by someone who was trying to put together a reasonable-ish CDO when in fact it had been put together with the exact opposite in mind. I will also point out that there are no claims by the SEC that Goldman itself was short the CDO.
Thank you, your description does make Goldman Sachs sound to me like a boiler room operation to identify marks (or muppets if you prefer), who can be sold doomed products in order to make money for GS and their real customers (people like Paulson). I can't imagine why anyone does business with such sharks unless they have to, and it does sound like it could be legislated against. I'll have a read of the documents so I understand it better though.
The only thing missing from a fraud case in the "selling shit products" story is "knowingly making false statements", right?