Fridays news with Goldman Saahs is bullshit IMO.
The way I'm looking at it is the SEC case is bullshit. It will probably get settled. The market was nervous and people was just waiting for some reason to sell. It was options expiration week and market had rallied substantially. It needed cooling down. They heard GS, SEC, and Sued in one sentence and they sold.
GS has returned substancially from the low. The range for the day was 155.55 - 186.41 and the close was 160.70. There has been a buy the dips attitude since the rally began last March. If earnings are good this quarter then I don't see why the attitude will change and so far Intel was good. So mantra is to keep doing what's working till it stops working.
My biggest problem with the case is that the transactions are between accredited institution investors who are supposed to be the smartest people on Wall Street with huge research teams. They made bad bets that's all. When the instruments that the SEC are talking about were created people betting against the sub prime were losing money on the bets and some people got wiped out or were near wiping out for betting againts the sub prime market too early. I found it hard to believe that these big banks selling the insurance policies that people would not default on their mortgages were a bunch of crazy people.
In a nutshell from what I gather from reading the book "The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History" and listening the interview Lahde on Financial Sense
The instrument in question is something called collateralized debt obligations(CDO) and Credit Default Swaps (CDS). CDO in a nutshell are loans. CDS started out being the lender buying insurance to protect against the loan they just wrote. Pretty much the same as Private Mortgage Insurance (PMI) or those who know about mortgages. Lets say you buy a house with a mortgage; the lender usually make sure there is Private Mortgage Insurance (PMI) that the borrower pays every month so that if the you default on the loan the bank get paid back the loan from the insurer.
Wall Streat to that a step further now where instead of just the lender having the PMI on your house, anyone can take out an insurance policy that you are going to default on your house payment and get paid the value of the mortgage if you defaulted. On Wall streat it was done with a pool of loans or even against the company that issued those loans. Now the person who wrote those insurance policies usually do their homework and calculate the risk of the person defaulting and charge a premium based on their model if they decided the person was worth the risk of insuring.
Here is a Youtube video that explains CDS some more with diagrams There are other videos there that give a little more or another perspective.
The SEC is saying that GS did not disclose to the insurance company that the people who they were selling the insurance policy to were the people who picked out what loans would be covered in the policy.
My argument is that this is totally irrelevant. The insurance company only needed to know what they were insuring to make their decision which they knew. The person buying the policy or the person who created the policy is not as relevant as what is being insured. The way I understand these CDS usually work is that someone wanted to make a loan and then they ask thier broker to shop for someone who would provide insurance for the loan. Thus the person wanting to buy the CDS was usually some involvment in the loan and/or the creation of the CDS.
We'll just have to see I guess what comes out of it.
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