Why the Goldman Sachs case is a Witch Hunt
When I was an officer at NYMEX I had to get a Series 7 & here’s the problem that those of us who know the rules have with what has happened at Goldman… But first, allow me to give you a little background:
1. Goldman Sachs bundled sub-prime mortgages into mortgage backed securities and marketed them
2. The securities were sold to individuals, pension funds, other trading firms and Goldman’s own in-house traders
3. Two of Goldman’s in-house traders started to believe the housing market was going to drop and they made such a vociferous argument that they convinced their managers to allow them to start SHORTING mortgage backed securities, INCLUDING THEIR OWN.
4. When the bubble burst, the house accounts managed by those two traders made over a billion dollars
So the SEC is suing Goldman because the company made money by selling the securities to the public, then made money in their own account when the bubble burst. In the complaint, the SEC contends that even though Goldman knew there was going to be trouble, they kept selling these toxic bonds to the public. Yes, it looks bad but here’s the problem.
The SEC has VERY STRICT RULES that prohibit the sharing of information between a financial firm’s analysts and the traders. Why? Well think about this. Let’s say the analyst have put a deal together that is going to cause Microsoft stock to go up. If they told the in-house traders, they would all buy Microsoft stock before the deal happened and they would benefit from inside information. So they have what they call a “Chinese Wall” between the analysis side and the trading side of the business. It’s so rigorous that Analysts and Traders aren’t allowed to ride in the same elevators or eat in the same cafeteria for fear that a trader may overhear the conversations between two analysts.
Anyway, if Traders and Analysts ARE NOT ALLOWED TO SPEAK, how the heck is that Goldman Trader supposed to persuade a Goldman Analyst that his mortgage backed securities are about to go sideways & he should stop recommending them to the public? His job was to make as much money as possible by trading his house account. That’s it. He had a hunch, he bet his hunch & it paid off. And now the SEC is going after the poor guy as if he did something wrong.
It’s a public hanging in the interests of “headline justice”.
–Posted by Sean Carrington, Director of Technology, Vault.com
Sean Carrington was Chief Information Officer of the New York Mercantile Exchange (NYMEX) from 1999-2001.
**Update: Sean Carrington and Vault Finance Editor Derek Loosvelt had a substantive email debate over the merits of the Goldman case. Click here to read their discussion, which breaks down some of the key issues at stake in the case.