We thought it was well-known that while Goldman Sachs (GS) bond sellers were peddling risky mortgage securities, its traders were going short the same thing.
But it’s Golmdan, and so there’s an endless appetite to revisit its actions before and during the crisis (like, did you know that the bank was a prime beneficiary of the AIG bailout!?).
And so McClatchy drops this monster investigative piece on the bank’s secret bets against the housing market.
What’s the news? Not clear.
Now, pension funds, insurance companies, labour unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman’s failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.
“The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion,” said Laurence Kotlikoff, a Boston University economics professor who’s proposed a massive overhaul of the nation’s banks. “This is fraud and should be prosecuted.”
John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman’s maneuvers depends on what its executives knew at the time.
“It would look much more damaging,” Coffee said, “if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless.”
What’s most bothersome here is that this whole story can be read as an example of how a bank avoids conflict of interest. In one corner, traders are making decisions based on what they see, and in another corner, salesman are packaging and selling products based on customer demand (remember, it’s not like the banks had to try real hard to pawn these products onto end buyers. There was a desperate dash for yield that spurred their creation). The alternative would be just as damaging, that the traders and bond salesman are coordinating.
It’s also worth noting that Goldman wasn’t exactly completely short housing. They bought hedges against a housing fall (those infamous credit-default swaps), but the bank still lost a ton of money during the worst of it last year.
Bottom line: It just doesn’t sound like the bank did anything wrong here, though apparently we haven’t heard the last of this.