What really happened at Goldman – A guide for laymen

What really happened at Goldman?

Step number one – successful hedge fund manager calls XX and tells them that he wants to short certain kind of mortgages because they will lose value – “I want to short this crap”

Step number two – Goldman goes and finds the other side – “who wants to go long this crap”

Step number three – Golden rule of SIV, SPV and off balance sheet vehicles – If you mix crap with good stuff, a rating agency is going to tell you that it is really good.

Step number four – Goldman gets a good rating

Step number five – Goldman sells the reasonably rated package to a group of sophisticated investors (German Banks not grandmothers)

Step number six – Who did the mixing? ACA

Step number seven – Who did they sell it to? Sophisticated investors

What is the problem or the charge? Insufficient disclosure of information! When something that is created specifically to facilitate a short and is positioned and sold as an investment should Goldman disclose the fact. Does it disclose this fact in other markets and other trades.

Will it stick? We don’t know but most likely not. But it will still wreak havoc on Goldman’s position. Gold and Oil need to breach a basic barrier and Goldman would need to unwind and in doing so create the downward spiral. In liquid markets this would not be a problem, but with a name crisis with Goldman at its center, it would not play otherwise.

 

 

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