Update on GS v. SEC and public opinion

So I posted recently about what the content of the case was against Goldman-Sachs.  I wanted to weight in on the case (I know, surprising).  (For reference here is another article which stands closer to my opinion.)

So here is my thing, these were not average investors.  These people involved in the deal had the sole job of vetting and buying/selling securities of this nature.  They should have known that there was danger.  See here is the issue that most people don't understand: The buyers (all people in these transactions have a seller and a buyer) didn't care.  They were betting that the housing market would go up forever and they just wanted a steady income stream from Paulson for free (since the market would go up).  The bigger issue is that they didn't charge enough for the risk.  If the buyer had charged enough then Paulson would likely have not entered into the transaction either.  I mean Paulson was betting heavily against the grain, almost no one was betting that way at the time, that is why the Synthetic CDO was so cheap and thus why Paulson took it (in an economic sense).  If there were a lot of people betting against the housing market then there would have been more demand and less supply which would have raised prices (i.e. Paulson would have paid more every month to the buyer).  There was little risk to them but a large reward and they were betting it would pay off.

Now look at this the other way.  If the world was different and the market didn't crash then Paulson would have been out a lot of money (well not a lot but out money) and we wouldn't be talking about this.  The issue is that due diligence was not done by the buying party.  As a society we don't like people who bet against stuff.  For instance, take an opposing bet on a craps table and see what happens, you will get a lot of stares.  Why?  Because as a society we want to go long.  Bet for something rather than against so when someone makes money against something we as a society get mad.  I feel like there is a lot of that here.  I mean look at how often congress wants to ban short-sellers.  This is a huge problem, without the ability to bet against a security all the securities will be over valued and the market will be more bubbly and more people would lose money.  We need people to bet against securities and ideas when it makes sense.

Is Goldman-Sachs at fault of anything?  No.  They brought together a buyer and a seller.  They didn't want to hold the buyer's side.  Does it matter than some people bet for and some against in the same company?  No.  Each area is responsible for their own money making and you can bet if the short sellers lost a lot of money they would all be gone just like those who made the securities lost their jobs when the short-sellers were right.  I mean the biggest problem is that people were buying stuff just because it was from Goldman-Sachs, the reputation meant that no one thought about what they are buying.  This is like you going into a store and t he clerk saying you should buy X and then you just buy it because if they sell it it must be good.  Now reputation is a good thing and allow people to make decisions with less information.  However I hope that in the future people will look at that less.

One outcome is that people will be more likely to do their due diligence when buying non-traditional securities.  This can only help us.  The market works best when all people work in their interest and if you don't know what you are buying then you can't do that.

I will say that one hopeful outcome of this is that complex instruments will eventually have smaller disclosure documents and simpler reporting.  I mean who is going to read thousands of pages?  I feel like a standardization of securities in this market would do a lot to help reduce the paper and help the individual buyers and sellers make a better choice.  (If you have money and want to invest in a start-up I have a fabulous idea for a company who can address the importance of derivatives and the transparency needed to create a market.  There is a market and non-government solution to these problems and I know what it is.)