While reading through news on the SEC\u2019s case against Goldman Sachs, I can\u2019t help but wonder if the charge would have been brought regardless of what happened in the market.<\/p>\n
The action against Goldman Sachs comes from their arrangement and sale of mortgage backed collateralized debt obligations (CDOs).\u00a0 In 2006, John Paulson, approached Goldman Sachs with an interest to short housing prices.\u00a0 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.\u00a0 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.\u00a0 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.\u00a0<\/p>\n
Goldman Sachs worked with ACA Capital Management and Paulson to put together the basket of mortgages within the portfolio on which the two sides would bet.\u00a0 ACA was also the largest investor betting that the basket would increase in value.\u00a0<\/p>\n
The main issue in the SEC\u2019s case seems to be that Goldman Sachs misled investors by not disclosing to them who was on the other end of the CDOs, Paulson.\u00a0 The SEC does not contend that the investors were unaware that there was someone on the other side, as they were experienced in financial tools, but rather these investors needed to know that Paulson specifically was on the other side.\u00a0<\/p>\n
It seems almost a moot point of determining who is on the other side of a bet.\u00a0 If you are making a bet that you believe to be beneficial, it shouldn\u2019t matter who is on the other side, as long as they are financially sound.\u00a0 If you believe you are making a good bet, the person that is betting against you really shouldn\u2019t matter.\u00a0<\/p>\n
For example, if someone approached you and asked you if you would like to make a bet that the winning horse in this year\u2019s Kentucky Derby will have a final time of two minutes or greater, you might be inclined to take that bet. (Only two winning horses, three total horses, have in the history of the race finished in less than two minutes.)\u00a0 Would you need to know who was betting on the other side that the winning horse would finish in less than two minutes?\u00a0 More than likely you wouldn\u2019t care, as long as you were paid if your bet turned out to be right.\u00a0<\/p>\n
Further, think about the absurdity that would go along with having to introduce all market participants to each other.\u00a0 Investor Y, this is in Investor X, you two are betting against each other, it just doesn\u2019t seem necessary.\u00a0 Another example, when you sell a stock online, or through a broker, someone else is buying that stock, otherwise you wouldn\u2019t be able to sell it, you have no idea who that person is, should the brokerage firm introduce the two of you before the deal is allowed to go through?\u00a0 It seems like it might be more than a little inconvenient, and you probably don\u2019t care who is on the other end of that trade.\u00a0<\/p>\n
Had the investment turned out to be a good one for those investing in the CDOs believing that housing prices would increase, would the SEC still have brought the charges?\u00a0 Nothing would have changed, except that the other side would have made the money.\u00a0 The investors betting for housing prices would have made close to $1 billion and Paulson would have lost close to $1 billion.\u00a0 I would hope, for consistency that the SEC would have brought the same action in that situation if the SEC truly is unhappy about the disclosures that Goldman made about the parties involved in this deal.<\/p>\n","protected":false},"excerpt":{"rendered":"
While reading through news on the SEC\u2019s case against Goldman Sachs, I can\u2019t 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).\u00a0 In 2006, John Paulson, approached Goldman Sachs […]<\/p>\n","protected":false},"author":79,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ocean_post_layout":"","ocean_both_sidebars_style":"","ocean_both_sidebars_content_width":0,"ocean_both_sidebars_sidebars_width":0,"ocean_sidebar":"","ocean_second_sidebar":"","ocean_disable_margins":"enable","ocean_add_body_class":"","ocean_shortcode_before_top_bar":"","ocean_shortcode_after_top_bar":"","ocean_shortcode_before_header":"","ocean_shortcode_after_header":"","ocean_has_shortcode":"","ocean_shortcode_after_title":"","ocean_shortcode_before_footer_widgets":"","ocean_shortcode_after_footer_widgets":"","ocean_shortcode_before_footer_bottom":"","ocean_shortcode_after_footer_bottom":"","ocean_display_top_bar":"default","ocean_display_header":"default","ocean_header_style":"","ocean_center_header_left_menu":"","ocean_custom_header_template":"","ocean_custom_logo":0,"ocean_custom_retina_logo":0,"ocean_custom_logo_max_width":0,"ocean_custom_logo_tablet_max_width":0,"ocean_custom_logo_mobile_max_width":0,"ocean_custom_logo_max_height":0,"ocean_custom_logo_tablet_max_height":0,"ocean_custom_logo_mobile_max_height":0,"ocean_header_custom_menu":"","ocean_menu_typo_font_family":"","ocean_menu_typo_font_subset":"","ocean_menu_typo_font_size":0,"ocean_menu_typo_font_size_tablet":0,"ocean_menu_typo_font_size_mobile":0,"ocean_menu_typo_font_size_unit":"px","ocean_menu_typo_font_weight":"","ocean_menu_typo_font_weight_tablet":"","ocean_menu_typo_font_weight_mobile":"","ocean_menu_typo_transform":"","ocean_menu_typo_transform_tablet":"","ocean_menu_typo_transform_mobile":"","ocean_menu_typo_line_height":0,"ocean_menu_typo_line_height_tablet":0,"ocean_menu_typo_line_height_mobile":0,"ocean_menu_typo_line_height_unit":"","ocean_menu_typo_spacing":0,"ocean_menu_typo_spacing_tablet":0,"ocean_menu_typo_spacing_mobile":0,"ocean_menu_typo_spacing_unit":"","ocean_menu_link_color":"","ocean_menu_link_color_hover":"","ocean_menu_link_color_active":"","ocean_menu_link_background":"","ocean_menu_link_hover_background":"","ocean_menu_link_active_background":"","ocean_menu_social_links_bg":"","ocean_menu_social_hover_links_bg":"","ocean_menu_social_links_color":"","ocean_menu_social_hover_links_color":"","ocean_disable_title":"default","ocean_disable_heading":"default","ocean_post_title":"","ocean_post_subheading":"","ocean_post_title_style":"","ocean_post_title_background_color":"","ocean_post_title_background":0,"ocean_post_title_bg_image_position":"","ocean_post_title_bg_image_attachment":"","ocean_post_title_bg_image_repeat":"","ocean_post_title_bg_image_size":"","ocean_post_title_height":0,"ocean_post_title_bg_overlay":0.5,"ocean_post_title_bg_overlay_color":"","ocean_disable_breadcrumbs":"default","ocean_breadcrumbs_color":"","ocean_breadcrumbs_separator_color":"","ocean_breadcrumbs_links_color":"","ocean_breadcrumbs_links_hover_color":"","ocean_display_footer_widgets":"default","ocean_display_footer_bottom":"default","ocean_custom_footer_template":"","ocean_post_oembed":"","ocean_post_self_hosted_media":"","ocean_post_video_embed":"","ocean_link_format":"","ocean_link_format_target":"self","ocean_quote_format":"","ocean_quote_format_link":"post","ocean_gallery_link_images":"on","ocean_gallery_id":[],"footnotes":""},"categories":[70],"tags":[],"class_list":["post-9692","post","type-post","status-publish","format-standard","hentry","category-business-regulation","entry"],"_links":{"self":[{"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/posts\/9692","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/users\/79"}],"replies":[{"embeddable":true,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/comments?post=9692"}],"version-history":[{"count":0,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/posts\/9692\/revisions"}],"wp:attachment":[{"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/media?parent=9692"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/categories?post=9692"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/law.marquette.edu\/facultyblog\/wp-json\/wp\/v2\/tags?post=9692"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}