Matt Taibbi on the SEC/Goldman Case | Hacker News Reader

Matt Taibbi on the SEC/Goldman Case

rollingstone.com

4 pointspw0ncakes3 comments

What Paulson jammed into Abacus was mortgages lent to borrowers with low credit ratings, and mortgages from states like Florida, Arizona, Nevada and California that had recently seen wild home-price spikes. ... Goldman then turned around and sold this poisonous stuff to its customers as good, healthy investments.

Actually, that's not what happened. What Paulson put into Abacus was insurance policies on pools of those mortgages. The counterparties were not purchasing the rights to streams of payments from pools of mortgages, they were accepting streams of premium payments from him on a pool of insurance policies on pools of mortgages. Also, he sent a list of suggestions for which pools of mortgages should be insured to a third party, which rejected some of them. Finally, the customers were not individuals, but banks who should have the facilities to properly analyze the risks. There were failures of due diligence by both the institution responsible for the final selection of the instruments and the institutions that purchased them. If I buy a house insurance policy from someone, and they don't bother to check if the house is on a flood plain, why should they get to complain that they have to pay out when the water hits?

There were failures of due diligence by both the institution responsible for the final selection of the instruments and the institutions that purchased them. If I buy a house insurance policy from someone, and they don't bother to check if the house is on a flood plain, why should they get to complain that they have to pay out when the water hits?

The problem is when the seller does not reveal that sort of information to the buyer. There are a variety of existing laws covering that sort of behavior, for example: lemon laws and laws covering full disclosure in real estate.

This relates to the idea of asymmetric information in free markets. Not revealing pertinent information doesn't help anyone. It's fraud.

You need to understand that with this sort of product, there is always somebody betting against you, and if your models aren't good enough to make you indifferent to the fact that the guy on the other side got to choose some of the securities in the pool, given that you get to see what's in it before you place your bet, then you shouldn't be dealing in instruments that are this complex in the first place.

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