If it’s just my dulcet tones and stuttering delivery you want to hear, go to about 9 minutes in.  But Dan Roberts and Ruth Sunderland are both excellent on some clearly very topical matters.

The Goldmans case is continuing to dominate the financial chatter.  I think questions of justice and the financial system as a whole will soon start to dominate those of the strict legality of the trade concerned; for example, Peston uses the case to asks ‘where do these hedge fund profits come from?’ In most cases, I would answer: by allocating capital in such a way that reflects underlying profitability better, or some such words.  But in this case we can see a machine funnelling from a seemingly ill-informed party to a well-informed party.   In my comments I wanted to draw attention to the irresponsibility of the buyer of these CDO’s, ACA management and the Germany buyer (I think IKB).    But ultimately, they were so bad at buying these things, it was not just they who paid for them.  Peston:

it wasn’t just deep-pocketed professional investors – banks and insurers – who were on the other side of the hedge funds’ bets. When the hedge funds picked up their winnings, it turned out that some of these banks and insurers didn’t have the moolah. And the bill landed on taxpayers’ doorstep.

A Guardian podcast is not the best place to find a defence of Goldman Sachs.  Dan points out that they too lost money on this deal, which is surely important.  And Brad DeLong reports the most interesting view of all here:

Perhaps the reason that Goldman Sachs is so outraged at being accused of playing the investors in Abacus by concealing from them material information–that John Paulson played a big role in selecting the portfolio–is that they are totally innocent. Perhaps they were not trying to play the investors in Abacus by handing them a sub-standard produc. Perhaps, instead, they were trying to play John Paulson–a man who showed up with irrational expectations, eager to make bad bets, and who would have lost heavily had not he struck it freakishly lucky …

Please read the whole thing

I’ve been there: at my old company, some people bet repeatedly on a stock market crash from 1996 to 2001, and mostly lost a lot of money.  Similarly on the housing market.  Taking the other side of such people – who afterwards tarted around their supposed prescience – was generally a good policy – and was certainly profitable as a business strategy. Choosing just that one time they made money and extrapolating is dangerous.

So the ethics of this transaction might turn out to be fine, but people still have a right to ask whether such exchanges should be controlled, taxed, or stopped in some way, because their full implications go far beyond the private bubble in which the deluded or cynical participants actually operate.  The bills, in particular, have landed elsewhere.

Finally on Goldmans, Lex has an interesting observation:

Goldman has even done shareholders a favour by sharing more of its revenues with them, rather than paying them out as compensation, which accounted for only 43 per cent of net revenues, down from 50 per cent a year earlier. This is Goldman’s lowest ever compensation ratio as a public company … Assuming Goldman’s bankers can soldier on with a lower share of revenues, this boosts shareholders’ returns while denting the political case against them. But it does raise the issues of whether its bankers needed to pay themselves so much before, and whether Goldman is benefiting from what is now, post-crisis, an oligopoly in mega-flow banking.

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2 thoughts on “Podcasting on Goldmans, Libdems and The Volcanic risk to Globalisation

  1. Hi Giles

    I think comparing the Goldman Sachs Abacus deal to spread betting on an index of stock prices/property prices (where it’s understood that your potential winnings are someone else’s potential losses) might be a misleading analogy – at least as far as US securities law is concerned.

    As Steve Randy Waldman, who blogs on Interfluidtiy, points out (http://www.interfluidity.com/v2/784.html), there’s no reason that someone who is buying in to a CDO, even a synthetic one, should necessarily assume that someone else is betting large sums of money that it will fail. The SEC’s case seems to be based on the argument that this – plus the fact that Paulson had selected the MBSs in the CDO – was a “material fact” which should have been disclosed to potential buyers under US law.

    Ben Chu

    1. Thanks for the link – very interesting.

      “Investors in Goldman’s deal reasonably thought that they were buying a portfolio that had been carefully selected by a reputable manager whose sole interest lay in optimizing the performance of the CDO. They no more thought they were trading “against” short investors than investors in IBM or Treasury bonds do”

      It strikes me that if this is established, the case will win.

      i agree that in this case – unlike when I market-made UK housing futures, oh the glory days – there was an obvious way that GS could hedge, or be assumed to hedge, that would not have required finding a short seller. They could ahve gotten themselves exposed to US mortgages in many ways, I’m sure. Point taken.

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