Two quick thoughts on Goldman, both of which show up the plaintiffs as cry-babies.
First, because the instrument used here was a synthetic CDO, all parties knew that by definition there was someone holding the short side of a position that had been custom made for this trade. That’s what a synthetic CDO is for. A synthetic CDO has no existence outside the trade and there is always a long and a short party.
So it’s not like Goldman hid the fact that there was a short seller. It hid only the fact that the short seller was the legendary John Paulson, who wasn’t a legend yet because he became a legend only by doing these sorts of trades.
What was Goldman supposed to disclose: that the guy on the short side was smarter – like way, way, way smarter — than Goldman’s clients on the long side?
Second thought: This is shocking to the extent that anyone goes to a modern investment bank expecting to be serviced by people who are both unusually smart and highly ethical. No one should expect that. Like everybody, we love to hate Goldman. But to be fair, its business model is no more set up to provide very smart and highly ethical than a cheap used car salesman’s is.
You can buy a used car from a provider who will give actual financial assurances of his high ethical standards, e.g. an extended warrantee. But you can’t get it for free. Ditto investment help. There are firms called hedge funds (full disclosure: we work at one) that are full of really smart people that are not in the business of playing against their own customers.
But they are expensive to use. The customers pay to be put first. If investment banks were ever on a “put the customer first” model, they dropped it long ago. Although in this case Goldman appears to have been on the same side of the trade as the loser plaintiffs.
– Andrew Redleaf and Richard Vigilante are the authors of Panic: The Betrayal of Capitalism by Wall Street and Washington.