20 April 2010

Goldman Sachs: Creating and Profiting from US subprime crisis?

Warning: This article is very complicated, and, DO NOT read if you aren’t a curios person…

The story:
Goldman                 = Goldman Sach
I                              = Hedge Funds
You                         = Investors
Apples                     = CDOs
Bet                          = Credit default swap
Hal ehwal Pengguna = US Securities and Exchange Commission (SEC)

Goldman sells you a packet of good and bad apples. You buy a packet hoping that the apples are good and can share with your friends later. Then, I placed a bet with Goldman that those apples are bad one. Before this, I actually is the one who had hand-picked the apples, then sold to Goldman, before Goldman sold it to you. Finally, the apples unfortunately come out as bad ones, can’t eat either.

Who is the victim?

Who is the gainer?
I (Hedge Fund)

Who is Goldman then?
The intermediate person, who is pretending do not know anything. And, successfully provides his “good” service to both parties.

What is the news now?
Hal ehwal Pengguna is suing Goldman for his wrong-doings.

Last week, US Securities and Exchange Commission (SEC) lodged civil charges against world’s leading investment bank, Goldman Sachs & Co. for performing a complex deal.

Goldman is being charged for not adequately informed buyers that another client helped select the securities linked to the investment, with the goal of profiting if their value tanked. However, Goldman denies that it did anything wrong as an intermediary only.

The securities linked to the investment are called “Synthetic CDO”, which can be explained as follows:

Wikipedia: “A synthetic CDO is a collateralized debt obligation (CDO) in which the underlying credit exposures are taken on using a credit default swap rather than by having a vehicle buy physical assets. They generate income selling insurance against bond defaults in the form of credit default swaps, typically on a pool of 100 or more companies. Sellers of credit default swaps receive regular payments from the buyers, which are usually banks or hedge funds.”

In short, synthetic CDO is a portfolio of credit default swaps, which is a form of insurance on a bond or other obligation.

Some more, Warren Buffet said Goldman Sachs is one of the finest banks in the world.

I did my best to tell the story, are you clear now?

No comments:

Post a Comment

Finance Malaysia Blog appreciates your comment. Cheers!