This is not even close to what Goldman did. There is nothing wrong with getting your clients long bellies and yourself short because there is no way you could know with certainty that the market would go up or down. What Goldman did was package mortgages that <b>they knew would fail </b>and sold them - with help from the cozy relationships they had with the rating agencies - to institutions as AAA rated securities and shorted them because they knew they were garbage. That is pure and absolute fraud. You don't know for sure if bellies will go up or down so there is fraud involved.
First of all nobody can KNOW whether or not any deal will fail. Beyond that it not like the contents of these deals were only known by GS. Anyone buying them could of and should of done their homework to make sure the deal made sense. Apparently some did and refused to buy the junk. The ones who didn't got burned. That's life pal. In any event anyone who thinks that selling garbage to someone else and betting against them is fraud probably is a little too soft for this business.
So you are saying that an investment bank - which makes markets and structures products for people to buy and sell deceived a commercial bank which specializes in corporate lending and literally does credit analysis on all types of companies and loans literally hundreds of times a day into believing this synthetic CDO was riskless and pulled the wool over their eyes concerning each pool of mortgage security? Mortgage loans are mortgage loans just like pork bellies are pork bellies and barrels of oil are barrels of oil. There is no fraud here. Just another market participant thinking they are more right than another one. IKB got greedy and stupid. Nothing to see here, move along.
Whether or not it's illegal, it's clearly unethical to recommend that a client engage in a trade when you yourself are taking the opposite side. It's little different than a penny stock pump n' dump scheme. Brokers should definitely have a fiduciary duty to clients, to the point where an arrangement like the OP describes would constitute fraud. It's one thing to give poor advice or make a bad call, quite another to advise a client to buy security X when you yourself are shorting it. A big part of the problem is that an institution like GS combines market-making, prop trading and research/advisory businesses under one roof. A bigger part are the multiple bailouts and tremendous government subsidies to the finance industry that allow the bad apples to take infinite do-overs.
The scenario described by the OP makes no sense unless you (the broker) thought that the price would decline. Executing trades for clients does not require you to take any directional exposure.
So you are saying that the people on the other end of the trade were duped? Smart people like that being told an illiquid asset like a synthetic CDO was riskless? Come on man.
illiquid or not, GS did not have any more information on the CDO than the client had, everyone had free access to information regarding the underlying mortgages or references names in the synthetics. I dont understand what your issue is. Whether Paulson helped picking or not makes no difference to the investor, at least it should not. It also did not make a difference to the market when Buffet bought into GS many months too early. Thats why GS should have disclosed Paulson's participation and GS deserves to be criticized for that but FOR NOTHING ELSE. Anything else was going market practice and the takers were fully aware of this. I cannot even believe how congress/senate does NOTHING about all those shady bucket shop fx brokers who blatantly cheat RETAIL INVESTORS while their balls itch that GS dared to hedge their long exposure to housing. Pathetic.
The net short is the number they presented to the SEC and to the subcommittee, you seriously think they cheat on this number? THe only idiot in the room must be you, funny that you are the only one who did not realize.
really? A broker has a fiduciary duty to be on the same side than his clients or at least inform them if not? First time I hear that!!! Since when does your broker tell you that he is on the other side when you trade an fx position? In fact at initiation he is on the completely opposite side of the trade than you. Same with all other OTC trades. Get a life buddy or at least do a little thinking how markets really work!!!