April 21, 2010--New York Yankees vs. Goldman Sachs
A number of people, including Andrew Ross Sorkin in his recent column in the New York Times (linked below), have compared what has been going on on Wall Street to a gambling casino.
They remind us that the stock market was organized at the end of the 18th century to help manufacturers and other merchants raise money so that they could start or grow their businesses. But in recent years it has become just another place to bet. Las Vegas on the Hudson.
In fact, many trades and transactions are no longer referred to as "investments," but rather, much more honestly, as "bets." Like "long bets" for traders who see the value of what they purchased going up over time, or "short bets" for those trades they expect in the short run to lose value.
We are learning more and more about these kinds of bets as the true story of what was going on behind the scenes that led to the recent crash are being forensically exhumed and exposed to public scrutiny and outrage. Like the hanky-panky at Goldman Sachs that the SEC cited earlier this week in its civil fraud suit.
It is a particularly good place for the SEC to start to hold these guys and many others like them hopefully accountable for what they perpetrated. Good, in part, because Goldman is the poster child for this sort of abuse and the nature of what they are accused of pulling off is rather easy for the uninitiated, me very much included, to understand.
They asked a hedge fund manager, John Paulson, to guide them in selecting a package of mortgage-backed bonds that were knowingly worthless and about to collapse. They then put these together into something called the Abacus Fund and sold a bug hunk of it to Paulson.
He bought it short, that is expecting, actually knowing it would default soon and he would cash in big time. And then of the other side, Goldman represented this same fund to some of its best clients, including many teachers and civic workers pension funds, as triple-A rated. That it was a good long investment/bet. With Goldman's recommendation, these funds bought Abacus as fast as Goldman could make it available.
What Goldman didn't tell anyone was they on their own had bought a batch of Abacus shares--knowing it would fail. Which it then proceeded to do, netting Goldman and Paulson billions in "profit." The pension funds, on the other hand, lost billions and millions of police and firefighters and teachers saw their pensions threatened.
Writers such as Sorkin have been trying to come up with analogies to make vivid the true perfidy of what Goldman, with Paulson's help, cobbled together. Some have compared it to a car maker building and selling cars without breaks. Not a bad comparison, considering all the news about Toyota.
Sorkin compares the Goldman scam to sports betting, like a bet on the Yankees vs. the Oakland Athletics. But he says, this doesn't quite capture what Paulson-Goldman were up to since in this analogy we're only talking about a sports bet. Just the gambler gets burned. In the Goldman case, other investor/bettors get hurt as does the larger global economy.
Not a bad analogy but it too has its limitations. Here's a fuller comparison to bet on a baseball game:
What Goldman did was to fix the outcome of the game before inviting anyone to bet on it.
Let's say you were inclined to bet on the Yankees which, considering the strong start they're off to this year, would not be a bad idea. But what if the bookie (Goldman) knew privately that A-Rod was not 100 percent and would not be able to play and that Derek Jeter would need to tend to a family emergency. Again, information not disclosed to you. To rig things even further, if your neighborhood bookie, with a knowing wink, lied to you by telling you that he heard that Ryan Sweeney, Oakland's current leading hitter, was injured, chances are this news, plus that about Jeter and Rodriguez, would have encouraged you to bet more on the Yanks than you had intended. After all, what gambler can pass up a sure thing?
So you place your bet on the Yankees. In the meantime, your bookie bets some of his own money on Oakland, knowing they in fact have the edge. And then of course Oakland triumphs. You lose a bundle and your bookie and the guy who supplied him with insider information both clean up.
This is more like what we're talking about when it comes to Goldman and John Paulson and the Abacus Fund.
When gamblers fixed the World Series in 1919 by getting the White Sox to throw games, the team for years thereafter was called the Black Sox and the gamblers went to jail.
They remind us that the stock market was organized at the end of the 18th century to help manufacturers and other merchants raise money so that they could start or grow their businesses. But in recent years it has become just another place to bet. Las Vegas on the Hudson.
In fact, many trades and transactions are no longer referred to as "investments," but rather, much more honestly, as "bets." Like "long bets" for traders who see the value of what they purchased going up over time, or "short bets" for those trades they expect in the short run to lose value.
We are learning more and more about these kinds of bets as the true story of what was going on behind the scenes that led to the recent crash are being forensically exhumed and exposed to public scrutiny and outrage. Like the hanky-panky at Goldman Sachs that the SEC cited earlier this week in its civil fraud suit.
It is a particularly good place for the SEC to start to hold these guys and many others like them hopefully accountable for what they perpetrated. Good, in part, because Goldman is the poster child for this sort of abuse and the nature of what they are accused of pulling off is rather easy for the uninitiated, me very much included, to understand.
They asked a hedge fund manager, John Paulson, to guide them in selecting a package of mortgage-backed bonds that were knowingly worthless and about to collapse. They then put these together into something called the Abacus Fund and sold a bug hunk of it to Paulson.
He bought it short, that is expecting, actually knowing it would default soon and he would cash in big time. And then of the other side, Goldman represented this same fund to some of its best clients, including many teachers and civic workers pension funds, as triple-A rated. That it was a good long investment/bet. With Goldman's recommendation, these funds bought Abacus as fast as Goldman could make it available.
What Goldman didn't tell anyone was they on their own had bought a batch of Abacus shares--knowing it would fail. Which it then proceeded to do, netting Goldman and Paulson billions in "profit." The pension funds, on the other hand, lost billions and millions of police and firefighters and teachers saw their pensions threatened.
Writers such as Sorkin have been trying to come up with analogies to make vivid the true perfidy of what Goldman, with Paulson's help, cobbled together. Some have compared it to a car maker building and selling cars without breaks. Not a bad comparison, considering all the news about Toyota.
Sorkin compares the Goldman scam to sports betting, like a bet on the Yankees vs. the Oakland Athletics. But he says, this doesn't quite capture what Paulson-Goldman were up to since in this analogy we're only talking about a sports bet. Just the gambler gets burned. In the Goldman case, other investor/bettors get hurt as does the larger global economy.
Not a bad analogy but it too has its limitations. Here's a fuller comparison to bet on a baseball game:
What Goldman did was to fix the outcome of the game before inviting anyone to bet on it.
Let's say you were inclined to bet on the Yankees which, considering the strong start they're off to this year, would not be a bad idea. But what if the bookie (Goldman) knew privately that A-Rod was not 100 percent and would not be able to play and that Derek Jeter would need to tend to a family emergency. Again, information not disclosed to you. To rig things even further, if your neighborhood bookie, with a knowing wink, lied to you by telling you that he heard that Ryan Sweeney, Oakland's current leading hitter, was injured, chances are this news, plus that about Jeter and Rodriguez, would have encouraged you to bet more on the Yanks than you had intended. After all, what gambler can pass up a sure thing?
So you place your bet on the Yankees. In the meantime, your bookie bets some of his own money on Oakland, knowing they in fact have the edge. And then of course Oakland triumphs. You lose a bundle and your bookie and the guy who supplied him with insider information both clean up.
This is more like what we're talking about when it comes to Goldman and John Paulson and the Abacus Fund.
When gamblers fixed the World Series in 1919 by getting the White Sox to throw games, the team for years thereafter was called the Black Sox and the gamblers went to jail.
posted by Steven Zwerling at
5:07 AM
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