I posted yesterday regarding a story that McClatchy Newspapers was reporting on their website. The piece was about how Goldman Sachs was betting on a collapse of the housing market. The piece is a good one, except that it is stuff that the well informed is aware of. I am much more interested in learning how they got short sub prime. Because simply getting short the ABX Index was not going to do it. It looks to me that GS was underwriting lots of sub prime junk which really is not against the law. How they did it. When they did it is the question. Nonetheless, its still a very interesting story that needs to be further investigates.
http://tradersutra.blogspot.com/2009/11/mcclatchy-does-it-again.html
Let me just come out and say that I am not against Goldman Sachs, they were one of the only people who saw a crisis coming, the question here is when? When did they decide to go short or pair back? We have heard from many that GS had lost money for some 10 consecutive days on their mortgage desk in late 2007. I am ok with the fact that they were huge underwriters and securititizers of sub prime debt. Again its sinful for anyone to be involved in predatory lending, but that business was running on all cylinders, you simply can't blame GS for getting into the act. I am OK with the fact that after they had dumped all of that inventory onto the hands of pension funds and bond funds. Here the question again, when did they clean out their inventory and when did they actively go short? If GS was actively going short CDS from AIG and dumping billions in CDO/CDL/Subprime MBS unto the market, that is fraud and they should be prosecuted. We simply don't know the answer, and I am giving them the benefit of the doubt here. I don't have a problem with GS when they were squeezing AIG for every nickle of collateral from their CDS hedges. Goldman was well within their rights to demand collateral. AIG should have never underwritten insurance for which they didn't have the funds to payout. Where I have a problem with Goldman Sachs is right here.
I have a problem with outfits like Goldman Sachs who used CDS offensively against AIG/CDO's as opposed to as a natural hedge. It looks to me that Goldman had an entire program of trades put together to go effectively short the sub prime market, they then again went on the offensive with outright CDS purchases from AIG. Their sole purpose in doing the CDS deals was NOT TO get long protection on the underlying bonds they had underwritten or held in house. AIG was simply the prime driver they chose to monetize their P&L's. They knew that they can squeeze AIG and they did so.Looking at the situation, it seems to me there were two separate type of camps buying CDS insurance from AIG. In one camp there were outfits like Society General and Deutsche Bank, these institutions were huge players in the sub prime market. They held/underwrote billions of MBS/CDO on their books. They needed to naturally and defensively hedge their bets. The other camp, Goldman Sachs who used AIG as their step child for offensively constructed trades to capitalize on AIG's miss-priced subprime risk. At the end of the day, both of these camps should have known AIG couldn't pay out on all of its obligations, because it was next to impossible to do so. They never should have been made whole. But if anyone was going to be made whole it should really be the ones who defensively hedged their bets like SocGen and Deutsche not Goldman Sachs.
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