Difference between hedging & becoming the next GS with MBSs
Goldman Sachs is both praised and hated for effectively benefiting during the recession by Hedging against the Mortgage-Backed Securities it was also selling to its clients.
First of all is there any difference between what they did, and what is commonly known as hedging? Or were they actually defrauding their clients by selling what they intrinsically believed to be a doomed product?
If not, what is stopping the media from casting your firm as the next company to basically "hedge so well" that you are now a criminal?
It wouldn't be the first time a bank shorted its clients, but I'm not really sure... thoughts??
What in the hell are you talking about? There was no 'hedging'--passing them off onto AIG and other clients largely through deception and defrauding the US gov't is not 'hedging'. Start reading some books about the financial crisis and you'll realize it had little to nothing to do with Goldman knowing more than others in the game--plenty of people using MBS/CDS/CDOs to short housing had GS and other top banks on the other side of their trades, but it not all of them were able to as effectively pass them onto their clients when the game was already starting to collapse.
It has very little to nothing to do with 'shorting' their clients.
Okay- Can you please explain the following quote- not troll attempt. Lack of understanding-
"Generally speaking, Sen. Levin has accused Goldman of selling clients mortgage-backed securities (MBS) while at the same time holding a "huge short" position in the MBS market in 2007. "They gained at the expense of their clients, and they used abusive practices to do it," he said."
What would you call holding a "huge short?"
How is that a hedge? It has nothing to do with hedging.
Being long the CDS where that MBS is the underlying. Effectively they were buying "insurance" which would pay out if the MBS had a credit event / default.
Every time a market maker trades with a counter-party, they are inherently taking the opposite position as the client. If they believe the client made a good decision, they will hedge away the risk and collect spreads. If they think the client is an idiot and bought a sinking ship, they will leave the position unhedged and make a massive profit (assuming they're right, of course). What is wrong with this? It's just the nature of the game. It's all a big zero-sum game, and for every winner, there's a loser who sold them the winning position.
All this goldman bashing for selling toxic products is bullshit. Traders aren't supposed to counsel their clients on what to buy or sell. They're just supposed to facilitate the purchase or sale of whatever the client wants. The clients should have done their due diligence on the products and asked the right questions. The fool always gets burned, and he can't blame the trader for selling him the shit that he wanted to buy.
Selling clients shitty MBS when you know the collateral is utter crap and then down the hall shorting the shit out of it, is a little unethical, no? And I realize not just GS was doing this...
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