We find new information from the dispute from the Wall Street Journal Editorial: (bold highlights mine)``More fundamentally, the investment at issue did not hold mortgages, or even mortgage-backed securities. This is why it is called a "synthetic" CDO, which means it is a financial instrument that lets investors bet on the future value of certain mortgage-backed securities without actually owning them.
``Yet much of the SEC complaint is written as if the offering included actual pools of mortgages, rather than a collection of bets against them. Why would the SEC not offer a clearer description? Perhaps the SEC's enforcement division doesn't understand the difference between a cash CDO—which contains slices of mortgage-backed securities—and a synthetic CDO containing bets against these securities.
``More likely, the SEC knows the distinction but muddied up the complaint language to confuse journalists and the public about what investors clearly would have known: That by definition such a CDO transaction is a bet for and against securities backed by subprime mortgages. The existence of a short bet wasn't Goldman's dark secret. It was the very premise of the transaction."
Like us, the Wall Street Journal finds this as reeking with sensationalism.
``Did Goldman have an obligation to tell everyone that Mr. Paulson was the one shorting subprime? Goldman insists it is "normal business practice" for a market maker like itself not to disclose the parties to a transaction, and one question is why it would have made any difference. Mr. Paulson has since become famous for this mortgage gamble, from which he made $1 billion. But at the time of the trade he was just another hedge-fund trader, and no long-side investor would have felt this was like betting against Warren Buffett."...
[my comment:
People become attracted or conscious about full disclosure ex-post.
When the bubble blossomed no one essentially cared. This is an example of time constancy-interpretation of information depending on the conditions of that period, ergo full disclosure may not have been significant at all.
Heck, lots of institutions fell for pyramiding and Ponzi schemes like Bernard Madoff!
If the public have been circumspect fraudulent get rich schemes as PONZI and PYRAMIDING won't have existed at all. The fact is that there are just too many intellectual patsies out there.
And just piggybacking on the skyrocketing prices mattered then. Would there have been a crash if there had been no antecedent boom?
Besides, I have hardly seen any argument which stated that the counterparties which had been big financial institutions have a battery of lawyers, economists, accountants, statisticians, quants, security analysts, financial analysts and other experts who would have had the power from preventing this to happen. The so called losers (no they are not victims) were not gullible individuals.
So what stopped them? A stasis in thinking?! A mental blackout?
The fact is that these institutions fell for the seduction of the inflation boom, which after all was generated by the government. Expert or no expert they paid the price for falling into the trap set up by their own cognitive biases ]
``By the way, Goldman was also one of the losers here. Although the firm received a $15 million fee for putting the deal together, Goldman says it ended up losing $90 million on the transaction itself, because it ultimately decided to bet alongside ACA and IKB. In other words, the SEC is suing Goldman for deceiving long-side investors in a transaction in which Goldman also took the long side. So Goldman conspired to defraud . . . itself?...
[my comment: see Hyman Minsky quote in prior post]
``Perhaps the SEC has more evidence than it presented in its complaint, but on the record so far the government and media seem to be engaged in an exercise in hindsight bias. Three years later, after the mortgage market has blown up and after the panic and recession, the political class is looking for legal cases to prove its preferred explanation that the entire mess was Wall Street's fault. Goldman makes a convenient villain. But judging by this complaint, the real story is how little villainy the feds have found."
[my comment: Oops, " an exercise in hindsight bias" seems representative of our "fait accompli argument".]
Bill Sardi in Lewrockwell.com argues that additional regulatory lapses had been part of the story,
``the Commodities Futures Modernization Act which Congress passed a decade ago, opened the door for trades like John Paulson’s. This legislation eliminated the long-standing rule that derivatives bets made outside regulated exchanges are legally enforceable only if one the parties involved in the bet were hedging against a pre-existing risk. Prior regulations said the only people who can bet against an investment actually have to own shares in it. Here is Paulson betting against an investment he had no ownership in."
Like us, Mr. Sardi believes that this is being "staged for political advantage" of the administration in preparation for the Mid term elections.
``For sure, the Administration in Washington DC will be portrayed in coming months as the hero, rescuing the public from the blood-suckers on Wall Street. Be it government to save us all from problems it created and then pin a badge of honor on itself. The current and former administrations in Washington DC are, and have been, so tightly controlled and managed by Wall Street, even with its ex-CEOs strategically implanted within the Executive Branch, as to call all alleged reforms and sanctions into question. These are just for show...
``Goldman Sachs knows it has to make the President look good or there will be unending SEC prosecution. The public wants to know whose side is the President is on, the financial titans on Wall Street or the unemployed on Main Street? It will be scripted from the beginning.
``And now a final question – will Goldman Sachs be the fall guy in exchange for future favors from the government? If fines are handed out and nobody goes to jail, you will know this was likely preplanned."
We have long known that the global financial system have been "gamed" by the elite in cahoots with politicians. And part of the game is the borrow and spend policies, that actually benefits the banking cartel.
As we earlier said, it won't take long for this political masquerade to be unraveled.
Perhaps if the markets continue to stumble more and deeper, then there will "compromises" (via fines), which ends the US government part of the story.
But the unintended consequence could be the potential follow on class suits by other private parties. It's like opening the Pandora's box. The ultimate risk here is that the incentives to remove the profit and loss mechanism in the markets will lead to a total market malfunction.
Update:
Just to be clear, nowhere in this blog space (as well as in my earlier post) did I say that the political implication here is for the US Government to take over Wall Street. Nationalization betrays the essence of the banking cartel.
What I have been saying is that this has been a political ruse meant to either shore up somebody's electoral image or an attempt to control the gold markets.
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