Skip to comments.Goldman Sachs reaped riches from risky mortgages, but passed on the danger
Posted on 11/01/2009 11:01:10 AM PST by Bokababe
WASHINGTON In 2006 and 2007, Goldman Sachs Group Inc. peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages but never told the buyers that it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.....
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Many State Pension Funds, who GS sold to, took huge hits.
And why didn't the people running these funds who obviously did not engage in due diligence before buying these securities pay the price with their jobs.
Investing is the ultimate game of "caveat emptor." I have no sympathy for people who invested in these funds nor do I think anyone should have been bailed out as a result.
As much as I despise Wall Street and most of its ilk, why is this news that GS would engage in transactions where it made money and the other party lost?
What happened to independent research and due diligence?
Maybe they knew.
Maybe the people 'running' these funds are just as criminal as the politicians who amend (or ignore) the laws to allow this to happen.
Or, maybe, they were forced to buy these toxic assets, by hook or by crook.
Remember the banks were being forced to make these risky loans by groups like ACORN which were supported by the Democrat Party and it's members in office.
Yes, due diligence is called for. By all.
Well, therein lies the rub.
Much of the debt market investor class has put an inordinate emphasis on the ratings agencies’ “analysis” of debt issues over the last decade. What was not make clear to the investing public was how thoroughly bought and paid for the ratings agencies became during the housing bubble.
THE question that so many debt investors failed to ask themselves was this:
“If AAA ratings are accorded to the sovereign debt of the US and perhaps only a handful of SP500 companies (less than 10 out of 500), and these bonds are traded in some of the most liquid markets in the world, then how is is that debt composed of a mish-mash of mortgages to people with FICO scores lower than 600, derivatives and opaque markets are rated AAA?”
There were two forms of risk in much of this debt that is now imploding: default risk and liquidity risk. These oh-so-very-sophisticated investors failed to understand either risk completely, but especially they failed to understand the liquidity risk, and are now paying for it. Still, the one nugget of common sense that should have prevailed here was “If AAA ratings are so difficult to obtain, then why are they putting them on paper backed by deadbeat borrowers?” That’s mere common sense, no background in finance is required here.
The thing that has to happen most is to take down the government recognized ratings agencies (S&P, Moody’s and Fitch’s) and create a market whereby the buyers of debt issues pay for ratings and the issuers have to take their lumps at the hands of the ratings agencies. The idea that we’re going to get objective evaluations of debt issues when the issuers are the ones paying for the ratings is insane.
Oh my heavens. A bunch of Wall Street types were less than honest. I feel gutted.
Companies like Goldman Sachs have a special fiduciary responsibility -- they aren't just trinket dealers selling junk on the corner.
There are indications that what Goldman Sachs did, may have been illegal.
We seriously need to see a bunch of ratings agency types in orange.
So her we have a newspaper writing a story on something the SEC should have been all over. Where were they? My bet is playing Mah Jong with the Madoffs in Palm Beach.
I still have no sympathy for the banks here. They are in a position in which they can buy any laws they want from Congress. The repeal of the Glass-Steagall act was one of those laws that they purchased. They could have easily bought their way out of being "obligated" to lend to people who were not qualified either.
I still believe the best solution to this mess would have been to keep the government out of it and let the chips fall where they may with regards to the collapse of these funds. In the end, it would have encouraged investors to be far more cautious in their activities. Now that people expect the government to be the safety net for their poor business decisions though, I predict we'll see even worse financial disasters because the risk involved in making risky investments is gone.
Yes, we do, much as we had fraudulent accounting firms driven out of business in the early part of this decade. Same sort of thing: they crossed a line from mere malfeasance to felony fraud, and they should pay for it.
Chris Cox (yet another Harvard grad, like Paulson, Wagoner, Barney Frank, et al) will probably go down in history as the single most willfully incompetent head of the SEC in the agency’s history.
I took a ration of crap from some here on FR for calling on Bush to kick Cox out of the SEC during the early part of the melt-down, because it was clear Cox had utterly no clue what was going on. Never did receive a reply from the Bush administration on my call for Cox to be sacked; I’m sure my letter was round-filed. History has proven me (and many others) very charitable in our assessments of Cox, and has likewise shown Cox’s supporters to be completely ignorant of the malfeasance at the SEC.
When you have an agency that has a guy walk in with mathematical proof that Madoff’s fund was a scam, and the SEC can’t trouble themselves to at least do likewise analysis on Madoff’s claims... you have an agency that is completely useless.
GE and Goldman need to remember what happened to Westinghouse. They will go down.
Of course they do: what else you expect from the leftist media that tries to make you angry at the "rich," Wall Street, and free markets?
It appears they have succeeded even among conservatives.
Could you kindly explain what was "corrupt" about the sale of securities?
"Many State Pension Funds, who GS sold to, took huge hits."
Well, perhaps it is they who were negligent or corrupt? Oh, sorry, I am getting out of the party line: it's the Wall Street that's the enemy of the people.
This isn't purely "a Wall Street slam". The question is: "Did they break the law?"
I'm an investor, too. I have nothing against making a profit -- UNLESS they defrauded people or are guilty insider trading.
The big problem is that you can't tell where the Feds leave off and Wall Street begins anymore. They both appear to be covering each other and leaving the rest of us hung out to dry.
Wachovia buying Golden West for $25 billion, another deal which enriched Democratic donors, and then in a short time discovering it had purchased toilet paper never seemed a straight deal to me. Like to know where all those at Wachovia who signed off on the deal are now and what their assets are.
Very well put. But if the question is still unanswered, none of us has the right to claim corruption, don't we? Especially in such a cavalier manner as if it were self-evident.
"The big problem is that you can't tell where the Feds leave off and Wall Street begins anymore."
It is indeed a problem; we are sliding towards socialism. But this problem has nothing whatever to do with the article. The article is a pure anti-Wall Street propaganda. One unit of GS has simply made a bet and won. That's all.
I’m sorry, but the fundamental of investment is risk/reward.
If you can’t quantify those when making an investment, why then are you in the freaking game?
I don’t agree w/what Goldman did, but why were institutions taking the other side when they couldn’t calculate what they were getting?
“When you have an agency that has a guy walk in with mathematical proof that Madoffs fund was a scam, and the SEC cant trouble themselves to at least do likewise analysis on Madoffs claims... you have an agency that is completely useless.”
I remain utterly stunned by those particular aspects of the Madoff story. Madoff could have been stopped in his tracks years ago, easily, in two separate ways. As you say, with logically-derived proof from readily available CBOE volume figs that the options volume he would have had to have been running as nonexistent; Even easier; with a 5 minute phone call and a single query to the DTCC as to what his account number was and how much volume he was doing.
Dude - learn to read - I wasn’t talking about GS.
If the GS traders and execs were hanged publicly and painfully, for all to see, then it would stop, rather quickly.