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If this is indeed similar to the ProPublica report (referenced in another post in this thread), then this isn't a case of someone in the "opposite side of a tra
by billjings 17y ago
If this is indeed similar to the ProPublica report (referenced in another post in this thread), then this isn't a case of someone in the "opposite side of a trade". The trade would not have existed without the hedge fund committing to buy the worst parts of it - the party buying the worst tranche was called the "sponsor" for a reason.
Not only that, but the sponsor wasn't short on just their portion of the trade. They were short on the entire CDO. They've got a bet that pays off if you crap out. Without that bet, you don't even get the prospectus - you don't even know about the security in the first place.
I recommend reading the ProPublica article.
- byrneseyeview 17y agoI've read the ProPublica article. This is even more of a stretch. Deals exist when there is demand on both sides. There can only be demand for both sides of the deal when there's disagreement about how the deal will perform. Goldman is being sued because one of their customers was right, and one of their customers was wrong. If the mortgage bubble had not collapsed, would credit default swap sellers and CDO buyers be penalized for profiting from the shorts' demise?
- siavosh 17y agoThe issue wasn't a disagreement in valuation, this is totally valid as you point out. The fraud allegation is because they were an advisor to their clients, and supposedly they misrepresented the valuation of products when then knew the value was something else.
- billjings 17y agoIf they had misrepresented their deal, then yes. If Goldman Sachs lied about matters material to the valuation of the deal then they've committed fraud.
- prodigal_erik 17y agoDeals also exist when the parties have different risk tolerances or time preferences for money. If I sell you my car because I need a down payment for a condo, that doesn't mean I think the car isn't actually worth what you're paying. If I know it isn't worth what you're paying because evil mechanics swapped all the working parts with bad ones, and I hide that from you, that's fraud.
- billjings 17y agoOr deals can exist because the stuff being traded is simply worth different amounts to different people. Like the gentleman who made his money selling ice to India in an article earlier this week.