While reading through news on the SEC’s case against Goldman Sachs, I can’t help but wonder if the charge would have been brought regardless of what happened in the market.
The action against Goldman Sachs comes from their arrangement and sale of mortgage backed collateralized debt obligations (CDOs). In 2006, John Paulson, approached Goldman Sachs with an interest to short housing prices. Paulson clearly believed at the time, correctly, that housing prices were at unsustainable levels; he believed that there was a bubble in the market, and he wanted to make a bet that prices would decrease. In order for Paulson to make a bet against housing prices, there needed to be somebody on the other end to make a bet that housing prices were going to increase. The very essence of a CDO is that there necessarily must be two opposing parties to take different views on a future direction of a product or market. Continue reading “Was an Action against Goldman Sachs Inevitable?”