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Comment by spinlock | Hacker News Reader

Question: did Goldman have a fiduciary responsibility to it's clients to _not_ sell them securities that they wanted to buy?

It's easy to blame the banks but don't forget that the people who were buying this crap were being paid millions of dollars a year for their "expertise." This is not a boiler-room stealing pensions from little old ladies. This happened in the board-room. The buyers were the one's who failed their fiduciary responsibility to their clients (i.e. the little old ladies who rely on their pension).

The reason pension funds, etc... would buy this crap is because they are underfunded and they need to generate impossible returns to meet their future payouts. We shouldn't give them a free pass on underfunding their liabilities and then blindly taking on extreme risk to make up the shortfall.

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The big question is: Why are the rating agencies still in business? They labelled rotting poisoned rat meat as prime organic steak.

Part of cleaning up the mess should have been to create new rating agencies under regulatory probation, and to review all the rating agencies' ratings. I suspect that would hae found too many slimy things on banks' balance sheets, so instead the Fed sucked the poison out of the banks with QE.

I wonder what the quid pro quo was. I suspect if you look for anomalies between sovereign debt ratings and debt-to-gdp ratios you might find answers.

Ratings on sovereign debt seem kind of irrelevant to me. I don't see why the agencies would have any sort of edge.

But I agree one of the most dumfounding facts of the present situation are that these rating agencies are still in business. I think the argument is that they were transparent about what methodologies they used to produce these ratings. But regardless of that, the blatant conflict of interest means this whole business model should be dead. I think Jim Simons of Renaissance Technologies made the point that it's the buyers who should pay for stuff to be rated, not the issuers. Possibly it may have worked like that in the past until the government stepped in and changed it... can't quite remember.

Ratings are besides the point. Implied "ratings" should be recoverable from the market-clearing yield on any given bond. Bond buyers should perform their own due diligence, either in-house or by paying a third party.

What good does it do to have an intermediate institution (one that has no skin in the game) suppress the perceived riskiness of certain assets and inflate the perceived riskiness of others?

Because buyers don't want to be stuck with performing all the due diligence themselves. You have to understand that investment management as a business isn't really about returns. Its about gathering assets to manage and not losing them.

Yup. Unfortunately, the only reason S&P, Moodies and Fitch matter is because ... wait for it ... they were named in the Securities and Exchange act of 1934 as the only agencies that banks were allowed to use. It's one of those huge unintended consequences that the scheme to make sure that commercial banks were invested in high quality securities is at the heart of a financial meltdown 74 years later.

  extreme risk

You mean the Triple-A rated CDOs?

Yeah, exactly. Blaming the victim isn't really appropriate here.

I avoid buying things that I do not understand and I also avoid buying things that seem too good to be true. If both of those traits happen to reside in the same item, I avoid it even more.

Which is why you pay bankers at GS to inform you about those things you do not understand; and when they tell you this CDO is triple-A rated and safe, you think 'great, good safe investment for my pension fund'.

Ah, that leads to another one of my rules: if someone is paid commission based on me buying something, I try to scrutinize it just a tiny bit; especially if I have a fiduciary duty to do so.

Thats not really how the people doing the buying say it works. See in order to justify their compensation and fees they tell their investors about their detailed knowledge of the market. They talk about how their investment process works. They talk about the extensive due diligence they perform on their investments. They talk about their robust risk management procedures.

The CDO was triple-A rated. The buyers, despite what they told their LPs, just bought stuff without thinking too hard about it. You don't pay bankers to inform you. This is true whether you are a pension fund, hedge fund or other asset manager. If you told your LPs, "Well we just ring up GS and ask them what to buy and then buy it" you would be out of a job very quickly.

  "This resolution holds Goldman Sachs accountable for its serious 
  misconduct in falsely assuring investors that securities it sold were 
  backed by sound mortgages, when it knew that they were full of 
  mortgages that were likely to fail."

"serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail"

GS told these investors that these were safe investments when they knew they weren't. This is not a case of a pension fund calling up GS-General-Store and demanding to buy CDOs, this is a case of GS saying 'hey these are really safe investments for you' when they knew full well they weren't.

My problem with this is that we trying to fix finance by expecting Goldman Sachs to act as good citizens. Guess what will never happen.

Goldman is not a good citizen. It is a market maker. It provides the function of creating financial products that people want to buy. Goldman also wrote the first swaps against the mortgages in these securities. Guess what, they didn't do it out of the goodness of their hearts. They did it for the fees.

Goldman is one of the few actors in this mess that performed their jobs well. Rating securities was not their job. Determining if mortgages were sound was not their job. Their job was to package loans that were underwritten by other banks and sell them to _qualified investors_ who wanted to buy them. Goldman did it's job very well.

Ratings agencies had the job of determining the quality of these securities. They did their job poorly.

Investment managers had the _incredibly high paying_ job of selecting sound investments. They did their job poorly.

Goldman is the only one who even comes close to being competent in this entire mess.

I'm not blaming the victims. The victims are people who are relying on the pension funds for their retirements.

I'm pointing out that the managers who were entrusted to invest the assets of those funds deserve a huge helping of blame. These managers were supposed to be experts and were literally paid millions of dollars a year to manage the assets. They failed even the most basic test of competency and they should be held accountable for it. Why aren't we talking about clawing back their fees?

Goldman did _not_ rate the CDOs they sold.

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