All this talk about GS defrauding investors and paying out Billions after Billions in bonuses has in fact overshadowed the more interesting and quite brilliant sidestory. The story of the hedge fund that made the absolutely correct call and made schmucks out of others to fill the pockets of its uber-in-the-shadows investors, something that is its responsibility all along!
Fine, so yes, the CDO was manufactured from bonds having SUBPRIME (remember that keyword) mortgage loans as the eventual underlying.
And, yes, if the housing market had just gone on as swimmingly as it had for the last few years, the long positions in the CDO would be raking in a steady stream of cash.
And yes, these were the same derivatives that most of the sophesticated financial institutions were investing in blindly.
But the only thing that GS supposedly failed to mention was that the mortgage portfolio was put together by the same firm (the hedge fund) that would be taking the opposite position to the one taken by GS investors (the hedge fund 'heavily influenced' the portfolio selection - as per the SEC complaint). Minor detail, right, but they did mention to investors that the hedge fund ALSO had invested, cheeky b*%#$s!
But full marks to the hedge fund, it fully did its homework, picking up the securities it correctly anticipated to fail based on the characteristics of adjustable rate mortgages, low credit score borrowers, and high home price appreciation. And it just bought some credit default swaps against the mortgage and sat back to hear the ka-ching!
And no need to be sorry for the 'poor' investors or GS itself, which in its statement said had lost $90 million of its own money on the CDO deal, they certainly paid out Billions in bonuses to their staff for all their losses.
So everyone's happy!
