House of Junk- Fortune Magazine on Goldman Sachs

[socalhousingbubble_IHB]

<p>Great walk-through of the mortgage cluster-eff by Allan Sloan.</p>

<p> <a href="http://money.cnn.com/2007/10/15/markets/junk_mortgages.fortune/index.htm?postversion=2007101609">http://money.cnn.com/2007/10/15/markets/junk_mortgages.fortune/index.htm?postversion=2007101609</a></p>

<p>Reasonably comprehensible explantion of mortgage tranches and how easily the lower ones get wiped out when things turn bad (like is happening now).</p>

<p>Most interesting aspect is that Goldman was shorting against the very securties they had wrapped up in a bow and sold to investors:</p>

<p><em><strong>"Goldman said it made money in the third quarter by shorting an index of mortgage-backed securities. That prompted Fortune to ask the firm to explain to us how it had managed to come out ahead while so many of its mortgage-backed customers were getting stomped. </strong></em></p>

<p><em><strong>Goldman's profits came from hedging the mortgage securities it keeps in inventory in order to make trading markets. It said in a recent SEC filing, "Although we recognized significant losses on our non-prime mortgage loans and securities, those losses were more than offset by gains on short mortgage positions." </strong></em></p>

<p><em><strong>As we interpret this - the firm declined to elaborate - Goldman made more on its hedges than it lost on its inventory because junk mortgages fell even more sharply than Goldman thought they would. "</strong></em></p>

<p>My question is, was is really <em>just </em>hedging, or did they realize how rotten this muck really was?</p>

<p>-SCHB</p>

 

[IrvineRenter_IHB]

Nobody over hedges. If the cost of a hedge exceeds your potential for profit, the short position is primary and the long position is the hedge. If Goldman Sachs made more on the hedge, it was not a hedge, it was their primary investment.

 

[EvaLSeraphim_IHB]

Too bad Elliot Spitzer is sitting in the governor's mansion. I suspect he would have loved to prosecute a case like this.

 

[awgee_IHB]

GS will never be prosecuted. GS and JP Morgan make the banking laws.

 

[lendingmaestro_IHB]

As Cramer would say...You've got Jewish Bankers and Jewish Lawyers, and I am both!

 

[No_Such_Reality_IHB]

<p><em>If Goldman Sachs made more on the hedge, it was not a hedge, it was their primary investment.</em> </p>

<p>Or a case of being so incredibly wrong that they got it right. </p>

 

[socalhousingbubble_IHB]

<p>Well, I'm sure their defense will be that they accidentally profited from the scenario!</p>

<p>SCHB</p>

 

[lawyerliz_IHB]

<p>These people never heard of conflict of interest? Any money they paid should be handed over to the people they shorted immediately.</p>

<p>As if. . . </p>