I had managed to work up a pretty good head of righteous indignation against securitization and the Wall Street cabal foisting these synthetic piles of crap on the investing public when I read this Wall Street Journal story today.
The Journal spoke to some of the 100 or so investors on a conference call Monday night with John Paulson. Those investors described portions of the call, including this:
“On the conference call, Mr. Paulson calmly explained the trade with Goldman, which involved a “short” bet on mortgage bonds. He said that the very nature of the transaction required both a “long” and “short” investor, suggesting that investors knew that a bearish investor had bet against the deal.
“Mr. Paulson suggested to clients that the large investors who purchased the Goldman deal and others relied on rating firms, and didn’t do enough of their homework, investors say.”
Upon reading that, I thought back to every story I’ve heard since the Magnetar piece came out describing how the firms behind these CDO deals took advantage of everyday folks via those folks’ pension funds and other unsophisticated investors who either didn’t understand or wasn’t told how these deals were put together. At that exact moment, my sympathy for these investors was greatly diminished.
While I’m still working through my thoughts about the Magnetar and Goldman/Paulson deals, I do know this: Investors, if you don’t understand what you’re buying, don’t buy it. If it seems too good to be true, it probably is.
More from the Journal: “Mr. Paulson sent a letter to investors Tuesday night saying that in 2007 his firm wasn’t seen as an experienced mortgage investor, and that “many of the most sophisticated investors in the world” were “more than willing to bet against us.”
It’s called due diligence for a reason. Investors who lost big on these securities can say they were swindled, or that they didn’t have all the facts. But at the end of the day any investor willing to buy into a synthetic CDO in the kind of mortgage environment we saw in the 2006-2007 period should have had every reason to believe they were going to take it in the shorts. Neither Paulson nor Goldman nor Magnetar caused those mortgage holders to default on the underlying mortgages. Which doesn’t absolve them of responsibility for the way they put those securities together and marketed them, but someone had to buy them. And there was apparently a long line of suckers.