Unsurprisingly, apologists for Goldman and Wall Street have been coming out of the woodwork in the last few days. Goldman CEO Loyd Blankfein himself was on Charlie Rose last week, arguing that Goldman is a “market maker” – and therefore it’s not a big deal that they were shorting the housing market while simultaneously telling people to buy. He’s actually kind of right… There are a lot of things that Goldman did during the collapse of the housing market that could be construed as immoral, insensitive, or dishonest, but might not be “against the rules”. We may think it’s disgusting, but Goldman does that sort of thing all the time, as does everyone else on Wall Street. It’s called hedging, and it’s actually pretty smart, as long as you don’t mind letting people get screwed fairly often.
But that’s not why the SEC is going after them… it’s actually much worse:
A Collateralized Debt Obligation, or CDO, is advertised as something very specific: whether its Mortgage backed or Car Loan backed or Credit Card backed or whatever, it’s designed to distribute the risk of all it’s individual components so if some of the components go bad, the CDO will retain it’s value. That’s what people think they’re getting when they buy a CDO, and thats what Goldman told them they were getting when they bought Abacus 2007-AC1, the CDO in question.
The whole problem is that Wall Street was creating CDOs composed of the exact same crap all the way through – subprime mortgages; many of which had teaser rates that made them very likely to all go bad at the exact same time. We know that Goldman thought these CDOs were full of crap, which is bad, but no different than the rest of Wall Street when the #$@& started hitting the fan. But that’s not exactly what the SEC has a problem with: Goldman is in trouble because they allegedly let a hedge fund called Paulson & Co. select the crappiest crap and put it in this Abacus CDO and then Goldman turned around and sold it to the highest bidder.
It’s like a baseball card store owner letting one of their friends open all the baseball card packs and pull out the good players. Goldman not only knowingly sold kids packs filled with Pittsburgh Pirates, but then they let that same friend make millions of dollars betting that the kids wouldn’t get a Derek Jeter.
That’s just called Fraud.