Goldman Sachs sucks.
The equity owner could also play a role in selecting the mortgages on which that C.D.O. was based. So theoretically at least—and some suspect this is not just theoretical—the equity owner could choose securities that he thought had a good chance of going to hell. As one person says, this is akin to “betting that your own house is going to burn down” after you build it with highly flammable materials.
There are many permutations of this trade. Some people believe that Goldman engaged in versions of it, and that it facilitated them for hedge funds. Goldman defends this. “We own equity, we buy a credit- default swap, and we are hedging ourselves,” says Cohn. As for selecting the collateral, he says, “It’s no different. Our clients are smart, sophisticated institutions. They should know that’s the case.”
He has a point. As long as no one explicitly misrepresented where their interests lay—and there is no evidence of that—supposedly sophisticated investors have a duty to understand what they’re buying, not to base their decision on what the “smart guy” is doing.
And if the mortgage market hadn’t collapsed—and there’s no way anyone could have known for sure that it would—then these deals wouldn’t have been so profitable, and no one would care. But when I ask one knowledgeable person about what happened to some of the deals that Goldman is rumored to have done, he responds with one word: “Torched.” Or as another person says about the bigger picture of the crisis, “Goldman’s management team was almost flawless in its execution. But how many people needed government help because of the things Goldman sold them?”
They sold garbage to investors (like schools and retirement funds) betting they would go bad.