In an editorial today, the New York Times calls for an investigation of Goldman Sachs and other financial firms for placing large bets against securities that they bundled and sold to clients. Titled “Betting against all of us,” the editorial was prompted by an article by Gretchen Morgenson and Louise Story that appeared in the Times on Christmas eve. That article is well worth a read (and deserved a bigger news day).
A key excerpt:
But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.
“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”
The article also highlights the role of Treasury official Lee Sachs in this market. His firm prior to joining the Obama administration, Tricadia Investments, packaged many of these types of CDOs and won big on bets against them. The Times editorial notes that an investigation “would have to reach into the Obama Treasury Department.”
Aspects of this story have been breaking for two years, ever since Goldman won big on bets against the subprime market in 2007. Most recently, McClatchy published a piece in early November on how Goldman bet against its own securities.
Reaction to the article has been somewhat mixed, in part because some bloggers have fixated on whether Goldman has a responsibility to its clients. Is it really all that scandalous for banks like Goldman to bet against the investors they’re trading with? It happens all the time, write Felix Salmon, Henry Blodget, and others.
That misses the point. The issue isn’t that Goldman was betting against its “clients.” It’s that Goldman misrepresented the nature of these bets and the securities they were selling. Morgenson and Story went to great lengths to show how Goldman and others were manipulating perceptions of the securities that they were packaging and selling, and were in fact designing them so that they would fail. That’s what stinks of fraud, not the fact of the bet itself.
To extend on the Times’s title for its editorial, “Betting against all of us” — if Goldman had simply bet that we’d get sick, and pushed clients to take the opposite side of the bet (that we’d remain healthy), that would be one thing. Cynical, but not necessarily fraudulent.
The real issue is that Goldman poisoned us before placing these bets. These securities were designed to fail, and Goldman, Tricadia, and other firms obfuscated this in order to win big on their bets.