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I’m sure you’ve heard the recent news that the SEC has charged Goldman Sachs with fraud ^[3] for misleading some of its investors. At the core of the complaint is that Goldman structured and marketed a synthetic CDO but failed to disclose key aspects of the product. The key aspect in question here is that the architect of the CDO hand picked the pieces of the CDO and then bet against it.

If you read the complaint and are still unsure what happened, this video explanation by Patty Hirsch on Marketplace will explain it with an easily understood analogy and the absence of much editorial (which is hard to find these days):

I, and many many others, suspect this case was conveniently timed with the announcement of financial reform. I think financial reform is very much needed but this particular charge isn’t related to the core of what we need to reform. All the major players are enormous financial entities who should have known what they were doing and asked the right questions. If the investors didn’t ask how the products were being created and didn’t conduct their due diligence, the fault lies with them. If they asked and Goldman lied, then Goldman is at fault.

It remains to be seen how this all shakes out but unless we get specifics of how people were deceived, it looks to me like someone is just being set up for other motives. As an investor, you should know that there’s someone on the other side of the deal. Goldman is like a bookie, they profit off the action, not off the end result. You bet on the New York Jets and they find someone to bet against it, taking a piece of the action along the way. They don’t care if the Jets win or lose, only that the game happens. I think it doesn’t matter that investors didn’t know that Paulson shorted it, because someone is on the other side of that CDO and it doesn’t matter who it is, but if there was clear deception then it should be dealt with.

What are your thoughts on all this?