Friday, April 16, 2010

Having read a good deal of stuff about what can call the mortgage meltdown, I am lukewarm in the SEC going after Goldman Sachs for alleged fraud in the its involvement in the market for collateralized debt obligations (CDOs)...

First, the alleged victims weren't 'investors' in the traditional sense of the word (i.e., Mom and Pop investing their respective IRAs). The people on the losing end of these trades were all sophisticated players in the bond market.

Now, some might argue that even sophisticated players have the right to not get lied to by those they do business with... but a key characteristic of a sophisticated player on Wall Street is knowing that the person on the other end of a transaction is trying to screw you. You may not know just how they're trying to do it, but since you're confident they are trying, you discount much, if not everything, the guy on the trading desk who is trying to unload something is telling you.

Second, the losers thought they were making sure thing bets; they felt the people on the other end of the trade were the idiots. They thought they were screwing the likes of Goldman Sachs only to find out that Goldman screwed them. To me, you play this game, you live or die on how good you are, and you don't get to call in the feds to rescue you from your own stupidity.

Third, the losers did nothing of what the legal community calls 'mitigation'. They didn't look into the particulars of what they were buying, they conducted no due diligence... and as with the above, if these losers didn't care enough to conduct even a cursory due diligence, they shouldn't have the feds rescue them from their own stupidity.

Goldman Sachs doesn't do business the way that I would like... and neither do the firms that trade with Goldman. But that's the way they've chosen to play, they are fully aware of how it works... and they don't get to cry for Uncle Sam to save them when things go bad for them.