Tuesday, May 11, 2010

So, Bob, Whadaya Think a' Goldman Sachs?

Without expressing any opinions on the Goldman Sachs situation, let me see if I can relate it to what you're studying for your exam. This is what the SEC is alleging so far in their civil suit: a sophisticated securities product called a "synthetic CDO" (collateralized debt obligation) based on residential mortgage-backed securities was marketed by Goldman Sachs to their investors. What investors didn't know, allegedly, is that Goldman Sachs allowed a hedge fund to help select the mortgage-backed securities for the portfolio and then bet against the portfolio. The marketing materials made it appear that the hedge fund's interests were aligned with those of the investors, when, in fact, their interests were in conflict with investors. Where's the conflict? If true, the hedge fund was able to structure a portfolio that would likely collapse and profit from that while, meanwhile, the investment bankers are selling the portfolio to investors, as if it's a good investment. Ouch. How many times have you read and tried to understand the phrase "undisclosed conflict of interest"? Well, this is one of those, apparently. Selling securities while concealing important/material facts is a big no-no, as all the big players know-know. Again, I'm not saying that's what happened; I'm just explaining how the SEC's actions relate to "undisclosed conflicts of interest" and "ommissions of material fact in the offer/sale of any security." There will be big, thick books written on this topic. I just wanted to relate the development to what you're studying in a brief blog post. By the way, if you have a few minutes, check out the actual SEC complaint at


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