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“I have not been able to understand it. The moment I read Goldman structured a deal called Abacus which invested in synthetic CDOs, it was enough to hide for cover. It sounded so similar to Enron which gave fancy names to all its shady investments.”
This is how Amol Agrawal begins his post on the Goldman Abacus deal offered to its clients IKB, a large German bank, and ACA Capital Management, a New York-based investment firm.
Now, the post outlines the various types of securities in the Goldman Sachs case but the complexity of these securities , for the first time reader, (and for those who revisit the topic, like me), can be mind-boggling.
So before we go all judgmental on Goldman Sachs and their like, let us first outline a few points that stand out clearly. Amol Agrawal does an outstanding job with his post but does not state his points. He lets the reader draw his/her conclusions.
So I’ll outline them here:
1. Make no mistake. This whole imbroglio is about GREED. If it weren’t for the investors’ greed, who saw an easy way to get quick returns for their buck via the inflating housing market, then Goldman Sachs and their like would never have been able to sell their convoluted products without due diligence conducted on these investments by their clients. Make no mistake, there was GREED on GS’ part as well; they were willing to bet both ways; They might call it hedging but what if someone sold you a house that they knew and are betting would drop in value, how would you react when you were left holding the can? Would you like to do business with that real estate agent again? Would you not blackball that real estate agent to all your acquaintances?
2. Synthetic CDOs are bets on the market. They do not have underlying securities backing them. The reason derivatives were invented was to hedge risk and not for speculation. And that’s what our Indian government (read RBI) is concerned about. Financial innovations need to be vetted thoroughly before they are introduced. Luckily, we can learn from the mistakes of our developed allies! The RBI needs to be reasonably sure that financial innovations,when introduced, are used for their originally intended purpose. Conservatism has its merits.
3. The Goldman Sachs case does come across as a witch-hunt. But that’s normal in the circumstances. It’s human psychology. For the simple reason, when you have a largely suffering majority, no one wants to meet a smart-ass who seems not only to have come through the crisis unscathed but also brags about having made a substantial profit from your GREED. And yes, the American public were GREEDY , as well; the ones who bet long on the real estate bubble.
4. Yes, this is definitely a case of a conflict of interest however much GS might try to camouflage it.
This is not a popular topic to write about while trying to be objective at the same time. So maybe we try and camouflage our outrage with pedantry and high-sounding words. Just kidding!
Have a great day!
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