Goldman case all too usual in Financeland

4 responses

  1. Jake says:

    Good post Mark.

    I’d only add that failing to conduct sufficient due diligence is certainly the investors (buyers) fault and there’s no excuse for it. And loses stemming from such lack of research are deserving. However, GS is also certainly at fault in this case (if the allegations are true)simply because of the lack of transparency on the Abacus CDO they “sold” to the pension funds in regards to Paulon’s involvement. This situation is, IMHO, at the root of the problem in the investment industry today. It’s a wild west environment: create any product you can sell (even if you know it is a bad investment), market it those most gullible and make a ton of money on the involved fees. Heads the manufacture wins, tails they win. That’s fine if we’re talking about vacuum cleaners or electric razors (where the buyer can access quality and price easily). But with more complicated purchases that are long-term in nature (think medicine, tax, law, investing) buyers need to know that the advice providers are held to some standard of competency and ethics that allow the buyer to have comfort in knowing their best interests (a fiduciary relationship) is being taken into consideration. Yes, people have to be responsible for themselves, and caveat emptor, etc. But the regulators (at least in the retail chain) need to acknowledge clients put on a lot of faith in their advisors and this combined with the asymmetry of information and substantial moral hazard (commissions) that exists causes many, many people to lose lots of money over years of bad (high fee) investing. In regards to the GS/Pension fund/Paulson situation, all players where sophisticated, so I know it’s less meaningful. But GS’s actions (if true) are rampant in the retail chain as well and needs to be addressed. In a nutshell, creating and selling investments known to be terrible “products” to unsuspecting buyers should not exist. By eliminating commissions the moral hazard would be avoided and bad products (sold with short-term commission thinking) would disappear. The compensation arrangements would be a performance fee or “trailing” compensation tied to the life of the investment, etc. My two cents…

  2. Keith T says:

    I don’t think it’s easy to write this off as a case of failed due diligence. GS is alleged to have marketed the product as a product desgined to succeed where in fact it was a product designed to fail.

    • Mark McQueen says:

      Thanks for stopping by Keith.

      I’m not saying that there was no misrep. That’ll come out via the court trial. My comment was more generic: lots of deals close every week where one side has materially more info than the other. And that’s the guy who usually wins out.

      MRM

  3. Keith T says:

    Fair enough and agreed that information asymmetry is wildly common. The link below is an interesting look at GS’s stance. Roughly paraphrased, it doesn;t deny Paulson’s involvement but says that since you knew more or less what was in the portfolio, it doesn’t it matter who picked it:

    http://dealbook.blogs.nytimes.com/2010/04/19/the-goldman-defense-caveat-emptor/

    Even if there was formal compliance with whatever disclosure obligations were in place, did GS design and sell the portfolio in bad faith?

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