

Matt Taibbi on the SEC/Goldman Case - pw0ncakes
http://www.rollingstone.com/politics/news/;kw=[3351,136554]

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bd_at_rivenhill
_What Paulson jammed into Abacus was mortgages lent to borrowers with low
credit ratings, and mortgages from states like Florida, Arizona, Nevada and
California that had recently seen wild home-price spikes. ... Goldman then
turned around and sold this poisonous stuff to its customers as good, healthy
investments._

Actually, that's not what happened. What Paulson put into Abacus was
_insurance policies_ on pools of those mortgages. The counterparties were not
purchasing the rights to streams of payments from pools of mortgages, they
were accepting streams of premium payments from him on a pool of insurance
policies on pools of mortgages. Also, he sent a list of suggestions for which
pools of mortgages should be insured to a third party, which rejected some of
them. Finally, the customers were not individuals, but banks who should have
the facilities to properly analyze the risks. There were failures of due
diligence by both the institution responsible for the final selection of the
instruments and the institutions that purchased them. If I buy a house
insurance policy from someone, and they don't bother to check if the house is
on a flood plain, why should they get to complain that they have to pay out
when the water hits?

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isleyaardvark
_There were failures of due diligence by both the institution responsible for
the final selection of the instruments and the institutions that purchased
them. If I buy a house insurance policy from someone, and they don't bother to
check if the house is on a flood plain, why should they get to complain that
they have to pay out when the water hits?_

The problem is when the seller does not reveal that sort of information to the
buyer. There are a variety of existing laws covering that sort of behavior,
for example: lemon laws and laws covering full disclosure in real estate.

This relates to the idea of asymmetric information in free markets. Not
revealing pertinent information doesn't help anyone. It's fraud.

~~~
bd_at_rivenhill
You need to understand that with this sort of product, there is always
somebody betting against you, and if your models aren't good enough to make
you indifferent to the fact that the guy on the other side got to choose some
of the securities in the pool, given that you get to see what's in it before
you place your bet, then you shouldn't be dealing in instruments that are this
complex in the first place.

