4 ms·

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

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!
- jacquesm 17y ago
  That's an excellent explanation of the underlying issues. Now let's hope the prosecution does as good a job as you just did of explaining this to the jury, and that they make it a criminal case in stead of just a civil one.
btilly 17y ago
The assumption with securitization is that the people securitizing the deal are attempting to aggregate risky assets then slice of tranches with different levels of risk/reward. When they are telling you that these slices are relatively safe, the presumption is that there isn't grounds for disbelief. The fact that the people structuring the deal were short on the deal is evidence suggesting a far, far more involved analysis before getting involved. That's a red flag that should cause significantly more due diligence. The entire purpose of the SEC is to make sure that such material information is not lied about.
ZachPruckowski 17y ago
Suppose you're making a sports bet on an American Football game. You bet $10 that the Griffons will beat the Hydras by 3 points or more. It doesn't really matter to you if George or Bob are the ones to take your action, since they're both trustworthy friends of yours and they can't affect the outcome. But if you're betting against Hank, who manages the Griffons, that's something you want to be made aware of. Even if he can't directly influence the game, knowing that your opponent picked the players for the team he's betting against, he's got a lot of information that you can't easily come by, and it'd be a bad move to bet against him. It's a bit of a bait and switch to say that you're betting against another neutral party when you're in fact betting against someone involved in the game.

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!

jacquesm 17y ago
That's an excellent explanation of the underlying issues. Now let's hope the prosecution does as good a job as you just did of explaining this to the jury, and that they make it a criminal case in stead of just a civil one.

btilly 17y ago

The assumption with securitization is that the people securitizing the deal are attempting to aggregate risky assets then slice of tranches with different levels of risk/reward. When they are telling you that these slices are relatively safe, the presumption is that there isn't grounds for disbelief. The fact that the people structuring the deal were short on the deal is evidence suggesting a far, far more involved analysis before getting involved. That's a red flag that should cause significantly more due diligence. The entire purpose of the SEC is to make sure that such material information is not lied about.

ZachPruckowski 17y ago

Suppose you're making a sports bet on an American Football game. You bet $10 that the Griffons will beat the Hydras by 3 points or more. It doesn't really matter to you if George or Bob are the ones to take your action, since they're both trustworthy friends of yours and they can't affect the outcome. But if you're betting against Hank, who manages the Griffons, that's something you want to be made aware of. Even if he can't directly influence the game, knowing that your opponent picked the players for the team he's betting against, he's got a lot of information that you can't easily come by, and it'd be a bad move to bet against him. It's a bit of a bait and switch to say that you're betting against another neutral party when you're in fact betting against someone involved in the game.