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Thats the definition of any zero sum bet though. Puts are also designed by people who will benefit if stocks drop in price, that doesn't necessarily make it wro

Thats the definition of any zero sum bet though. Puts are also designed by people who will benefit if stocks drop in price, that doesn't necessarily make it wrong or bad. The counterparties had access to all the same info Paulson & Co. did, they just didn't analyze it correctly or in as much detail.

apsec112 17y ago
The key difference between the two is that the idea behind a put is extremely simple, while the ideas behind a mortgage-backed collateralized debt obligation are extremely complex. Hence, a counterparty to the put could be reasonably expected to know what they are getting into, while the same does not apply in the Goldman Sachs case.
- yummyfajitas 17y ago
  As we all know, hedge funds, pension funds and investment banks are completely unable to evaluate complex investments. Note: CDO's are not sold to retail investors.
- jamiequint 17y ago
  If you buy something you don't understand (when all the info is clearly available to you) its your own damn fault. The organizations buying this stuff were required to have ISDA contracts (not easy to get). Their money is managed by professionals. If you want a place to put blame the most apt place would be Fitch, Moody's and Standard and Poors. The ratings agencies were far more complicit in perpetuating false understanding than GS was.
  - apsec112 17y ago
    "If you buy something you don't understand (when all the info is clearly available to you) its your own damn fault." Suppose I sell you a word processing program. Inside the program, I include a snippet of code that will cause the program to stop working in thirty days, without telling you anything about it. By your logic, you would not be within your rights to demand a refund, since it is "your own damn fault" that you didn't understand the ten megabytes of assembly code that I sold you.
    - jamiequint 17y ago
      That analogy doesn't work. They were selling bonds to financial professionals, who had to have complicated ISDA agreements to even enter into these purchases. Part of their job is to analyze the assets they are buying. Its reasonable to expect them to do so.
  - btilly 17y ago
    Read the complaint again. Goldman Sachs failed to disclose Paulson & Co's role, and then actively lied to investors about Paulson & Co's net position in the deal. This is material information that was not available to investors in the CDO. Hence the complaint. Edit Got the players wrong. Fixed.
  - jamiequint 17y ago
    @btilly (won't let me reply directly to your comment) I realize what you're saying is true, but most of the arguments being made are about being made about whether the trade itself (under normal circumstances) were unethical, I'm trying to counter those.
    - jacquesm 17y ago
      You keep doing that @ thing, there is a reason why you can't respond directly to the comments that you want to reply to, HN is set up to discourage flame wars by only showing the reply link when a comment is a little older. So be patient and then when the thread has cooled down a bit you can reply directly. If you really must reply there is always the 'link' link to the comment, the page that leads to does have the reply box. But beware of fanning the flames.
      - jamiequint 17y ago
        I don't need you to teach me about HN man, I've been here for over 3 years. Your suggestion that I stop replying though is well taken, the misinformation/misinterpretation in this thread is rampant and off-putting.
btilly 17y ago
The counterparties had access to all the same info Paulson & Co. did, they just didn't analyze it correctly or in as much detail. You have to separate issues here. Paulson & Co. were counterparties on a credit default swap with Goldman Sachs. That is fine. Goldman Sachs failed to disclose information to investors about Paulson & Co's role, and lied about their position. That is what the SEC is upset about. You are right that the credit default swap was a zero sum bet between equally informed counterparties. It so happens that one side analyzed the deal better. (Actually that is questionable. The bankers on the Goldman Sachs side knew that they would get large personal bonuses no matter what happened to Goldman Sachs. So they may have analyzed it correctly and done what was in their best interest. But let's not get into perverse incentives.) The issue that the SEC has with the scenario is that not only did Goldman Sachs fail to disclose Paulson & Co's involvement (instead saying that ACA had selected all of the bonds), they told investors that Paulson & Co had $200 million in equity in the deal, without disclosing the credit default swap position that meant Paulson & Co were actually significantly net short. This was a lie, and that is why Goldman Sachs is in trouble here. Edit I had the parties wrong. Fixed.
- jamiequint 17y ago
  OK, yes there was clear misrepresentation of who put together the CDO, that seems to be obvious from the available information. What I just don't see is why it that is material. By nature of buying a Synthetic CDO the buyers had to know someone was short, why should it matter who it was? They should have been buying based off the assets in the investment not based off of the counterparty.
  - dandelany 17y ago
    > By nature of buying a Synthetic CDO the buyers had to know someone was short, why should it matter who it was? Because the party who was short on the product was the same party who created the product, and Goldman did not inform investors of this fact. It's not a matter of just buying and selling. The RMBS's underlying the CDO were packaged by a party who had significant interest in seeing the package blow up. An Oversimplified Analogy: Imagine that I come to you and say, "I have a document that represents 100 mortgages and I'd like to broker a sale. If you buy this document, as long as less than ten of these mortgages go into default, you make money. If more than ten of them go into default, your counterparty in the sale (not me) will make money." "Okay," you say, "that sounds interesting. So where did all these mortgages come from?" "Oh, we got an independent company to pick a bunch of mortgages that they consider fairly safe and that they believe are a good representation of the overall U.S. mortgage market." "Great!" you say, and you buy a billion dollars worth. More than ten mortgages end up defaulting and you lose a shit ton of money. Imagine your dismay when you learn that the mortgages were not packaged by some third party as I claimed, but hand-picked by the very counterparty you were betting against. OBVIOUSLY if they were going to benefit from more than ten mortgages defaulting, they would have filled the entire document full of mortgages they expected to fail! This is fraud in its most basic form!

apsec112 17y ago

The key difference between the two is that the idea behind a put is extremely simple, while the ideas behind a mortgage-backed collateralized debt obligation are extremely complex. Hence, a counterparty to the put could be reasonably expected to know what they are getting into, while the same does not apply in the Goldman Sachs case.

yummyfajitas 17y ago
As we all know, hedge funds, pension funds and investment banks are completely unable to evaluate complex investments. Note: CDO's are not sold to retail investors.
jamiequint 17y ago
If you buy something you don't understand (when all the info is clearly available to you) its your own damn fault. The organizations buying this stuff were required to have ISDA contracts (not easy to get). Their money is managed by professionals. If you want a place to put blame the most apt place would be Fitch, Moody's and Standard and Poors. The ratings agencies were far more complicit in perpetuating false understanding than GS was.
- apsec112 17y ago
  "If you buy something you don't understand (when all the info is clearly available to you) its your own damn fault." Suppose I sell you a word processing program. Inside the program, I include a snippet of code that will cause the program to stop working in thirty days, without telling you anything about it. By your logic, you would not be within your rights to demand a refund, since it is "your own damn fault" that you didn't understand the ten megabytes of assembly code that I sold you.
  - jamiequint 17y ago
    That analogy doesn't work. They were selling bonds to financial professionals, who had to have complicated ISDA agreements to even enter into these purchases. Part of their job is to analyze the assets they are buying. Its reasonable to expect them to do so.
- btilly 17y ago
  Read the complaint again. Goldman Sachs failed to disclose Paulson & Co's role, and then actively lied to investors about Paulson & Co's net position in the deal. This is material information that was not available to investors in the CDO. Hence the complaint. Edit Got the players wrong. Fixed.
- jamiequint 17y ago
  @btilly (won't let me reply directly to your comment) I realize what you're saying is true, but most of the arguments being made are about being made about whether the trade itself (under normal circumstances) were unethical, I'm trying to counter those.
  - jacquesm 17y ago
    You keep doing that @ thing, there is a reason why you can't respond directly to the comments that you want to reply to, HN is set up to discourage flame wars by only showing the reply link when a comment is a little older. So be patient and then when the thread has cooled down a bit you can reply directly. If you really must reply there is always the 'link' link to the comment, the page that leads to does have the reply box. But beware of fanning the flames.
    - jamiequint 17y ago
      I don't need you to teach me about HN man, I've been here for over 3 years. Your suggestion that I stop replying though is well taken, the misinformation/misinterpretation in this thread is rampant and off-putting.

btilly 17y ago

The counterparties had access to all the same info Paulson & Co. did, they just didn't analyze it correctly or in as much detail. You have to separate issues here. Paulson & Co. were counterparties on a credit default swap with Goldman Sachs. That is fine. Goldman Sachs failed to disclose information to investors about Paulson & Co's role, and lied about their position. That is what the SEC is upset about. You are right that the credit default swap was a zero sum bet between equally informed counterparties. It so happens that one side analyzed the deal better. (Actually that is questionable. The bankers on the Goldman Sachs side knew that they would get large personal bonuses no matter what happened to Goldman Sachs. So they may have analyzed it correctly and done what was in their best interest. But let's not get into perverse incentives.) The issue that the SEC has with the scenario is that not only did Goldman Sachs fail to disclose Paulson & Co's involvement (instead saying that ACA had selected all of the bonds), they told investors that Paulson & Co had $200 million in equity in the deal, without disclosing the credit default swap position that meant Paulson & Co were actually significantly net short. This was a lie, and that is why Goldman Sachs is in trouble here. Edit I had the parties wrong. Fixed.

jamiequint 17y ago
OK, yes there was clear misrepresentation of who put together the CDO, that seems to be obvious from the available information. What I just don't see is why it that is material. By nature of buying a Synthetic CDO the buyers had to know someone was short, why should it matter who it was? They should have been buying based off the assets in the investment not based off of the counterparty.
- dandelany 17y ago
  > By nature of buying a Synthetic CDO the buyers had to know someone was short, why should it matter who it was? Because the party who was short on the product was the same party who created the product, and Goldman did not inform investors of this fact. It's not a matter of just buying and selling. The RMBS's underlying the CDO were packaged by a party who had significant interest in seeing the package blow up. An Oversimplified Analogy: Imagine that I come to you and say, "I have a document that represents 100 mortgages and I'd like to broker a sale. If you buy this document, as long as less than ten of these mortgages go into default, you make money. If more than ten of them go into default, your counterparty in the sale (not me) will make money." "Okay," you say, "that sounds interesting. So where did all these mortgages come from?" "Oh, we got an independent company to pick a bunch of mortgages that they consider fairly safe and that they believe are a good representation of the overall U.S. mortgage market." "Great!" you say, and you buy a billion dollars worth. More than ten mortgages end up defaulting and you lose a shit ton of money. Imagine your dismay when you learn that the mortgages were not packaged by some third party as I claimed, but hand-picked by the very counterparty you were betting against. OBVIOUSLY if they were going to benefit from more than ten mortgages defaulting, they would have filled the entire document full of mortgages they expected to fail! This is fraud in its most basic form!