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What's wrong here is acting in bad faith by selling known-bad investments. I participated in this activity in that I created software systems to enable the cre
by mschy 17y ago
What's wrong here is acting in bad faith by selling known-bad investments.
I participated in this activity in that I created software systems to enable the creation, valuation, analysis and management of the securities. As such, I'm sure I'm biased, but perhaps I also have some additional information and perspective.
At the points in time when the securities were being sold, they were not known-bad. It's possible a few were sold afterwards, but they stopped being created pretty much the moment it was realized that they weren't going to perform. After all, the profit on them came primarily from holding a piece of the equity tranche (rather than from the sale itself), and the value of that tranche plummeted to zero and those bits were renamed 'toxic assets' in the press.
As this new information came to light, two activities occurred. One was the wind-down of a lot of the structured products. Another was that traders looked for ways to use the information for a profit, such as buying swaps to profit from it.
While I support 'what did they know, and when did they know it' style research to find bad actors (of which I'm sure there are some), it's my sincere belief that the vast majority of the deals were made in good faith.
I don't think the insurance/fraud analogies are accurate, nor particularly useful in garnering lessons learned.
- Confusion 17y agoAt the points in time when the securities were being sold, they were not known-bad Do you honestly believe that? There is no reason whatsoever to suppose they didn't know these CDO's were rubbish. However, there also wasn't any reason for them to care: they profited a bunch, which is what an investment bank should do. If they hadn't, they would have gone down, instead of other banks and institutions. This is cut throat capitalism: there is no room for considering ethics or the public good.
- yummyfajitas 17y agoThey certainly believed they were rubbish. However, a belief that the market will swing in a certain direction is not the same as knowing a product sold is rubbish. In fact, the CDO's were not rubbish. The CDO's are supposed to pay off in a certain way based on market outcomes, which they did. Goldman simply believed the market would go one way, while buyers thought the market would go another way.
- mschy 17y agoThe story conflates timelines, as does the discussion. It makes it hard to take any of it seriously. For the vast majority of the time that those products were sold, the mechanism for profit was to keep a piece of the highest risk (and highest return, in theory) piece for the bank. This is not a mechanism that works, at all, if one believes the products are rubbish. That said, you make a good point that it's entirely possible to sell a product that you don't like for yourself, without doing it in bad faith. If you came to me and said "i want to put all my money into commercial REITs", I'd find a way to make the transaction happen. But I wouldn't put my money in with yours.
- mschy 17y agoThere is no reason whatsoever to suppose they didn't know these CDO's were rubbish. The fact that they held on to the highest risk portion of them as their intended means of profiting from the sale is pretty solid evidence.