The Smoke And Mirrors Of The Goldman-Sachs Suit

On Friday, the Securities and Exchange Commission (SEC) unloaded on Goldman-Sachs by filing a Federal lawsuit against them for playing both sides of the mortgage-backed securities market.

The suit alleges that Goldman-Sachs, on one hand, was securitizing (bundling) mortgages into certain investment vehicles called mortgage-backed securities and selling them to their large commercial customers (aka Institutional Investors and Mutual Funds). Those commercial customers were happy to buy these instruments because they could see constantly increasing profits from their investments as the underlying mortgages started to adjust their rates upwards; since most of those mortgages were Adjustable Rate Mortgages or, simply, ARMs. Apparently, they felt the housing market was sound.

At the same time that Goldman-Sachs was directly selling these securities as "long" investments, it was also allowing a major hedge fund, run by John Paulson, to engage in the very common brokerage practice of borrowing these securities and selling them "short". Paulson was engaging in this shorting activity because he was betting on a collapse of the housing bubble and, subsequently, a loss in value of all these mortgage-backed securities. As it turned out, he was right. Because of this, his hedge fund made a billion dollars when, in 2007, the housing market started to collapse; foreclosures exploded; and, the value of these mortgage-backed securities started to unravel.

Of course, from now until the elections, expect Obama and the Democrats to demonize Goldman-Sachs and all of Wall Street for profiting off the pain that America and the world suffered in the housing collapse and as a result of the subsequent recession. But, please understand that the hedge fund could have very well lost a lot of money if the housing market remained healthy to this very day. However, once again, Obama is trying to convince you to shoot the messengers (John Paulson, Goldman-Sachs, and Wall Street) while ignoring the message. Very simply, if all those mortgage-backed securities where made up of solid-gold mortgages, we wouldn't be talking about any of this, today. Instead, we're living through a deep recession because it was Federal policy to push people into mortgages and housing that they weren't qualified to be in.

The true culprit here is the mortgage industry. But, more so, because of the two Federally-backed (and controlled) mortgage entities: Freddie Mac and Fannie Mae. And, it was people like Senator Dodd and Barney Frank who protected and defended the risky loan practices of these two major lenders of the country.

What's really happening here is very much like you or I blaming a racetrack for selling us a $2 bet on a horse that ultimately comes in last. In this case, the racetrack is Goldman-Sachs who had sold bets with some customers who were betting that the housing market would stay healthy; and, in another case, selling bets to a hedge fund that thought the housing market would collapse. In a similar fashion, no one complained or wanted to sue Obama's buddy, George Soros, when he made a billion dollars by betting against the British pound just prior to it's collapse in 1992.

But, now, Obama's SEC is being being used as a political tool to try and take our eyes off the real problems that face this country and, instead, chase Goldman-Sachs as a bogey man in another attempt to rescue the Fall election for the Democrats by making it look like Obama is looking out for us. If there is one thing that Goldman-Sachs is guilty of is the fact that they didn't disclose that a hedge fund was shorting the investments. But, anyone who buys stock and other securities at the levels that these commercial customers were buying them knows full well that there had to be shorting activity going on. As a small investor myself, even I, know that there are "shorts" against the stocks that I'm buying. It so prevalent on Wall Street that it's just as common as having butter on toast. That's why I think that this is just more smoke and mirrors. I'll even bet this lawsuit may be dropped once its usefulness to the Fall elections is over. Ya think!