Goldman Sachs - Guilty?

IMO, after reading Buffet's speech, Goldman is while morally reprehensible, not criminal.

Investors were, as I understand it, able to see the underlying assets. That IMO frees Goldman of any liability and any possibility of fraud. Having the chance to inspect the underlying assets before buying makes it completely irrelevant as to who set the package up.

obvious Child said:

IMO, after reading Buffet's speech, Goldman is while morally reprehensible, not criminal.

Investors were, as I understand it, able to see the underlying assets. That IMO frees Goldman of any liability and any possibility of fraud. Having the chance to inspect the underlying assets before buying makes it completely irrelevant as to who set the package up.

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Didn't they violate their fiduciary duty and disclosure requirements?
That seems pretty fraudulent to me.

Harry Guerrilla said:

Didn't they violate their fiduciary duty and disclosure requirements?

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Disclosing who set it up and what they were doing (shorting) would be violating their fiduciary duty to Paulson. Furthermore, when you're selling assets, as long as you disclose what the asset is and any legal liens on them, you're in the clear.

This case will come down to whether or not GS disclosed what the underlying assets where. Getting burned because you did not examine the assets is hardly a winnable tactic. As much as the GS officials were obnoxious during their testimonies, it is the duty of an investor to examine what he's buying into. And they were buying into collateralized debt and had the chance (as I understand it) to examine what was collaterized. That to me, makes GS innocent. It does not matter that Paulson was shorting as that itself does not affect the underlying assets.

True, Paulson did cherry pick the assets that went into the package deal, but it is the duty of investors to examine those assets. Buyer Beware has always been the motto of capitalism.

If however, GS did not disclose the underlying assets, then I think it's MUCH stronger argument for fraud.

Think of it this way, I try to sell you apples I bought from a guy who thinks they are going bad. You don't examine them before buying them and then get angry when you get home. Who's fault is that?

obvious Child said:

Disclosing who set it up and what they were doing (shorting) would be violating their fiduciary duty to Paulson. Furthermore, when you're selling assets, as long as you disclose what the asset is and any legal liens on them, you're in the clear.

This case will come down to whether or not GS disclosed what the underlying assets where. Getting burned because you did not examine the assets is hardly a winnable tactic. As much as the GS officials were obnoxious during their testimonies, it is the duty of an investor to examine what he's buying into. And they were buying into collateralized debt and had the chance (as I understand it) to examine what was collaterized. That to me, makes GS innocent. It does not matter that Paulson was shorting as that itself does not affect the underlying assets.

True, Paulson did cherry pick the assets that went into the package deal, but it is the duty of investors to examine those assets. Buyer Beware has always been the motto of capitalism.

If however, GS did not disclose the underlying assets, then I think it's MUCH stronger argument for fraud.

Think of it this way, I try to sell you apples I bought from a guy who thinks they are going bad. You don't examine them before buying them and then get angry when you get home. Who's fault is that?

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I don't disagree but doesn't Goldman act as investment advisers, right?
They should be disclosing that the creator is shorting the investment because they think it will drop in value.

Like selling an 80 year old lady a mutual fund that deals with options trading or something else very risky.(not sure that actually exists but as an example)

The adviser knows that the investment isn't proper for her and does it anyway.

Harry Guerrilla said:

I don't disagree but doesn't Goldman act as investment advisers, right?

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True. This partially depends on what Goldman said. But given their history, I seriously doubt they made any promises.

They should be disclosing that the creator is shorting the investment because they think it will drop in value.

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But doesn't that violate their duty to Paulson? Furthermore, GS have long positions themselves on the package which suggests to me they didn't agree with Paulson's position. I'll admit that there's some gray matter here, but Paulson shorting doesn't affect the inherent value of the assets. It just means Paulson thinks the assets will go bad. It's not GS's job to tell all potential investors what the others are doing.

Like selling an 80 year old lady a mutual fund that deals with options trading or something else very risky.(not sure that actually exists but as an example)

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Which is the morally reprehensible part. But that's not illegal. And to answer your pseudo-question, I don't think most mutual funds are legally allowed to delve into options the way hedge funds do.

The adviser knows that the investment isn't proper for her and does it anyway.

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True, but from what I understand, it's the institutional investors who lost big.
The kind who do have the expertise and resources to understand what was sold to them.

IMO, this really comes down to whether or not GS disclosed what the underlying assets where.

obvious Child said:

True. This partially depends on what Goldman said. But given their history, I seriously doubt they made any promises.

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That's probably true.

obvious Child said:

But doesn't that violate their duty to Paulson? Furthermore, GS have long positions themselves on the package which suggests to me they didn't agree with Paulson's position. I'll admit that there's some gray matter here, but Paulson shorting doesn't affect the inherent value of the assets. It just means Paulson thinks the assets will go bad. It's not GS's job to tell all potential investors what the others are doing.

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I don't get why they would go long when they knew Paulson was shorting it.
Seems counter intuitive to me.
Isn't Paulson require to disclose his position since he created it?

obvious Child said:

Which is the morally reprehensible part. But that's not illegal. And to answer your pseudo-question, I don't think most mutual funds are legally allowed to delve into options the way hedge funds do.

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I thought it was illegal?

obvious Child said:

True, but from what I understand, it's the institutional investors who lost big.
The kind who do have the expertise and resources to understand what was sold to them.

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I have no sympathy for them, they are supposed to research all their investments before putting such large sums into them.

While I have you pinned for a moment, what do you think of ETF's?
I see a lot of buzz around them which leaves me a bit apprehensive to invest in them.
Do you think they are a bubble investment?

obvious Child said:

Think of it this way, I try to sell you apples I bought from a guy who thinks they are going bad. You don't examine them before buying them and then get angry when you get home. Who's fault is that?

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If you (the seller) know that the guy you bought them from thinks they are going bad, then you should have to disclose this. I believe it fits the definition of fraudulent for you recommend buying the apples. Whether it is legally fraudulent is another matter. I don't know how the laws about it are written.

I think it is the case that investors look to Goldman for recommendations about investing. If Goldman does make recommendations, I think they should have to act in good faith.

If Goldman had themselves believed the investments to be a good bet, and they had failed, then too bad for the investors. But, if Goldman believed the investments to be a bad bet, recommended them as a good bet, and made sales of them based on their deception, then the law ought to hold them to account.

And as to the notion of buyer beware in Capitalistic systems: Bad information is one of the biggest reasons why Capitalism produces crises from time to time. Since this is the case, people who partake of transactions in Capitalist systems should always be required BY LAW to disclose pertinent information that they are privy to. Quite often people are required to do so. For example, in my state, if you sell a house, and it has things wrong with it, and you know that it does, then you are required by law to disclose that information. You will be liable if you do not.

Alot of people think that it is an inherent part of the Capitalistic 'game' to try and take advantage of people's ignorance. I couldn't disagree more: People who want the Capitalist system to work should always be for full disclosure. If we had complete openness from the players in the system, we would have never had the recent asset bubbles. Not only is the requirement of disclosure fair, it is essential as policy.

Harry Guerrilla said:

I don't get why they would go long when they knew Paulson was shorting it.
Seems counter intuitive to me.

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Maybe they didn't think Paulson's bet would turn out right?

Isn't Paulson require to disclose his position since he created it?

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I don't think so, especially since he's running a hedge fund and hedge funds are effectively free from regulation.

I thought it was illegal?

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Depends. Selling someone something they don't understand isn't illegal. Telling them "facts" about the item that are false and you know to be false to induce a sell is illegal.

I have no sympathy for them, they are supposed to research all their investments before putting such large sums into them.

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Indeed. I heard the German bank went under because of their losses.

While I have you pinned for a moment, what do you think of ETF's?
I see a lot of buzz around them which leaves me a bit apprehensive to invest in them.
Do you think they are a bubble investment?

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I don't know much about ETFs, but from what I do, how can they become a bubble in their own effect? Correct me if I'm wrong, but ETFs I do believe trade at the net asset value of the assets within the investment. So inherently, their value is tied to the overall market. While they can become bubbles due to the behavior of the underlying assets, I don't see how themselves can become bubbles independent of the overall market.

Dezaad said:

If you (the seller) know that the guy you bought them from thinks they are going bad, then you should have to disclose this.

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Why?

I believe it fits the definition of fraudulent for you recommend buying the apples. Whether it is legally fraudulent is another matter. I don't know how the laws about it are written.

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Not necessarily. Just because the organizer thinks the assets will go bad doesn't actually CAUSE the assets to go bad. I think Buffet is 100% correct in his statement that Paulson's shorting had no impact upon the asset quality. GS and every other investment bank should not have to tell all potential investors what everyone else is doing.

If Paulson was actively selling the underlying assets at a loss to trigger a depreciating market, that would be another story, but as I understand, Paulson merely picked the assets and then took out derivatives designed to produce income if the assets declined in value. Who's making bets on assets has never been required disclosure.

I think it is the case that investors look to Goldman for recommendations about investing. If Goldman does make recommendations, I think they should have to act in good faith.

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I agree with you partially there. If GS merely called people up and said "here, I have this CDO package, you interested? Here's the facts" and left it at that, they'd be in the clear. That's different from the 1990s brokers who were pushing stocks as great buys that couldn't go wrong when they knew that the stocks were total crap.

If Goldman had themselves believed the investments to be a good bet, and they had failed, then too bad for the investors. But, if Goldman believed the investments to be a bad bet, recommended them as a good bet, and made sales of them based on their deception, then the law ought to hold them to account.

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But since when was the advice of your adviser ever eliminated your own due diligence?

And as to the notion of buyer beware in Capitalistic systems: Bad information is one of the biggest reasons why Capitalism produces crises from time to time.

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Hence why the efficient market hypothesis is total absolute bull****. Information disparity is rampant in capitalistic markets.

Since this is the case, people who partake of transactions in Capitalist systems should always be required BY LAW to disclose pertinent information that they are privy to. Quite often people are required to do so. For example, in my state, if you sell a house, and it has things wrong with it, and you know that it does, then you are required by law to disclose that information. You will be liable if you do not.

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Ah, but your house example is facts about the house itself. Not what people are betting on what will happen to the house. There's the rub. GS as I understand it fully disclosed what the assets in the package were. Therefore, the pertinent information regarding the sale was made. Remember that they are buying into the income stream from the collaterized debt. It is their job to know what the assets that are generating that income are made of and frankly, that's the only thing that matters in terms of legal disclosure.

If we had complete openness from the players in the system, we would have never had the recent asset bubbles. Not only is the requirement of disclosure fair, it is essential as policy.

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Yes and no. In a logical, information parity capitalist market, sure. But we don't have a logical, information parity market. Right now Apple has capitalization in excess of 25+ huge firms combined. Not logical.