Musings On Markets

I waited a couple of after the indictment of Goldman to post my applying for grants it, since I’ve mixed feelings on the topic. As most of you who have followed my work know, I have been been more negative on the merchandise and procedures of investment banking institutions than most of my educational brethren. I think that investment bankers promise more than they can deliver and that there is much less value in most of the merchandise that they sell than they state in their sales pitch. So, what made this offer stands out?

1. A “big loser”: The securities bundled in the Abacus offer were priced at the height of the casing bubble. Like other housing supported securities it does lose cash. However, it was one of the “biggest losers”, with losses exceeding in the billions. 2. The John Paulson connection: The seller of the securities in the Abacus deal was the hedge account going by John Paulson, mostly of the winners in the casing bubble. His subsequent notoriety chronicled in a written book, has made him into a sage, at least in hindsight, about the casing bubble and its own implosion.

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3. Goldman was the intermediary: Among investment banks, Goldman Sachs was seen as the only one which was able to cut its deficits in the home loan supported securities debacle and get away relatively unscathed. The fact that it was the broker in this transaction has evoked suspicion that it was partnering with Paulson to consider the benefit of the suckers on the other side.

1. According to the SEC, Goldman Sachs claimed wrongly that Paulson was purchasing the securities (packaged under Abacus), when it was the seller. I examined through the sales presentation that I linked to earlier to see if there is an explicit mention of Paulson but I did not find any.

It is entirely possible that Goldman still left the implicit understanding that it was a buyer (I suppose that the SEC has something – emails, phone calls, mobile phone video – to back up its claim). I know that these are legalities at the mercy of the legal guidelines on what includes reasonable.

1. What if Paulson was the seller rather than the buyer, and why if the buyer of these bonds (ACA) have cared? Implicit in the SEC’s discussion that holding back again on the identification of the seller (Paulson) was somehow an offer breaker for the buyers of the securities mixed up in Abacus offer.

Notwithstanding the halo that Paulson might have acquired as a soothsayer in the housing bubble, he was a tone of voice in the wilderness in 2007 on housing prices. I question that ACA could have not bought these securities significantly, even if that they had known that Paulson was the seller. In addition, I don’t think any intermediary in the forex market (securities) must reveal to the buyer the identity and motives of the seller.

2. Goldman knew the housing marketplace would collapse and required advantage of its clients: I find this discussion to be beyond absurd, especially given the data to back it up. Actually, let’s take this argument at face value. If Goldman were that prescient about the housing market in 2007, there is a dozen different ways (most of them more profitable and less work than Abacus) that they could have made money on this belief.

So, why create this convoluted way to make money? Furthermore, investment banking institutions aren’t monolithic as it pertains to views about marketplaces. Having worked with investment-banking institutions for nearly 30 years, I can assure you that at any point in time, views about whether a particular market is under or overpriced (collateral, bonds, real property) diverge across an investment bank or investment company.

For every strategist/analyst at the lender who’s bullish, there is one who is really as strongly bearish just. Thus, I find You’re emails (in what he thinks about the market) to be sensational but completely irrelevant to the discussion. As an analogy, think of the following: In the event that you were a genuine property broker who believes that homes are overvalued, should you stop selling homes to clients who wish to buy houses?