I’ll have some additional thoughts on the Goldman Sachs/SEC summed up in a post early next week, but in the meantime, a similar situation with another hedge fund is required reading. A very indepth article is available at ProPublica.
Let the outrage begin.
Dave
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It looks like Magnatar got the Gold Medal of cons – getting people to bet against you on something you can control.Report
Magnetar sounds like a supervillain.Report
oh my, oh dear. I hope all those energetic, dynamic creators don’t get all upset and Go Galt. what would we do without them.Report
I don’t know if I understand this well enough to be outraged, but it does seem to me that, in order to pull off a scam like this, you’d have to have a certain amount of disdain for your clients and, in some sense, for investing as such. Is that right?Report
@Rufus, Who’s to say investing isn’t best done with disdain for the enterprise? Clients, that’s a different matter…Report
@Michael Drew, I guess that’s true in that it seems a lot more shocking to me that they would be betting against their clients than that they would try to game the system.Report
@Rufus, Indeed, though ultimately perhaps not so shocking on either count, no?Report
@Michael Drew, I’ve probably been a bit too optimistic. It come from having a rigorously honest relative who works in finance. The sad thing is I had been hoping to invest at some point myself, but am starting to think it would be as bad an idea as thinking, ‘You know, I’m going to go make some money at that three-card Monty table.”Report
@Rufus F., I don’t for a second mean to say that people in finance are by and large unscrupulous, either. Only that scruples do have their obvious drawbacks when winning and losing are so clearly defined, and also that if ever there was a business worth not inflating into some kind of righteous…Report
@Michael Drew, …oops my cat hit submit there. …into some kind of righteous calling, it would be finance.Report
@Michael Drew,
I don’t for a second mean to say that people in finance are by and large unscrupulous, either.
That’s good because I work in finance. 😉
Only that scruples do have their obvious drawbacks when winning and losing
They most certainly do although I’m not sure it’s about scruples as it is prudent risk management. Merrill Lynch sees Lehman making boatloads of money in the subprime mortgage business and Lehman shareholders are generating large returns on their holdings. Merrill shareholders see Lehman’s returns and want those returns and demand Merrill get into the business as well. If Merrill doesn’t, it gets punished by its investors who will simply sell shares and buy shares of Lehman.
Risk management gets tossed aside in pursuit of higher earnings and bigger bonuses and when things blew up, it would have taken everyone down if not for the bailouts.Report
@Dave, well-put. Everyone has to compete with the lowest common denominator, kind of like in coal mining.Report
Right, that’s probably true. I do wonder what part the culture plays in this (I mean the culture of the financial sector). Most of the guys I know in finance are Canadian and their personalities tend more towards the model of the upright 19th century gentleman than the wall street master of the universe type. There has been a lot of speculation about why no Canadian banks failed, and the common wisdom is that it’s because Canada never deregulated like everyone else did. I also sort of think, though, that the culture is much more small-c conservative. They don’t take as many risks. If you’re an investor, there’s something to be said for that. If you’re an investor who wants to get really friggin’ rich right now, however, it’s not ideal.Report
@Rufus, Krugman thinks it’s the leverage:
http://www.nytimes.com/2010/02/01/opinion/01krugman.html
…But to what extent were the Cowboy culture and deregulation down here really discreet phenomena? Chicken and egg, though I tend to lean toward your view of which probably came first (ie the culture or the legal environment). But then I’m not at all sure, as not just financial culture but also political culture and institutional structures come greatly into play, and both are profoundly different in each country.Report
If the fines that eventually get levied end up likely to bankrupt them, will we have to bail them out lest the financial markets be destroyed?Report