The CDO blame game
By Chris ClairI’ve been working at digesting all the mortgage CDO news of late. Magnetar. Goldman/Paulson.
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.
April 22nd, 2010 at 10:22 am
Ummm, Paulson didn’t market “those securities.” Why the media and blogosphere continues to miss this point is beyond me. Remarkably, this is the one point the SEC seems to have gotten right in the GS case.
April 22nd, 2010 at 10:28 am
True, Paulson didn’t market them, but the firm was responsible for helping put them togehter. So I should have made that distinction.
April 23rd, 2010 at 10:11 am
Some of the investors also may not have access or knowledge of the entire chain of entities and business processes required to put these instruments to market,,,there is a fiduciary responsibility of those with licenses and in the position to put these complex investments to market.
Or is there no fiduciary responsibility, or ethics…
April 23rd, 2010 at 10:22 am
The issue isn’t whether these buyers bought securities they didn’t understand. The issue is that Goldman did not disclose that a short seller (Paulson) had a role in selecting the contents of the portfolio. That single fact would have changed the minds of some investors. Paulson had no obligation to report that fact.
The bigger issue to me is that GS, and others, were loading up on leverage in the CDS market. Those leveraged bets should have bankrupted AIG, and with it, their ability to pay on those CDS. Instead, the American tax payer bankrolled AIG so GS could get paid 100 cents on the dollar.
GS, and the others, should have taken those CDS bets in the shorts, like any ordinary investor whose money is always at risk.
April 27th, 2010 at 8:28 am
Tom is exactly right. Everyone took a hit on their investments in 2008 except Goldman whose AIG counterparty risk was assumed by the US taxpayer. So Goldman got paid in full on a failed company that could not pay. Totally corrupted risk reward concept.