short sightedness…

Posted on Wednesday 28 April 2010

Selling short: I ‘borrow’ a stock share and sell it. I wait for a time, then buy the stock [hopefully at a lower price] and return it to the lender. There are may ways to do this kind of borrowing, but the point of ‘going’ short is always the same – I make money if the stock declines.
Hedge Fund: Introduced in 1949 by an Australian, Alfred W. Jones, a Hedge Fund is an investment firm that makes its money on "hedging" it’s investments by pairing "longs" and "shorts" to offset catastophic choices. It’s a way of expanding the ability to take risk. But it has grown since then. With the freeing up of the derivative markets beginning in 1993 [exploding them in 2000,] instead of going "short" in the way described above, traders can make direct bets in the form of derivatives. All you need is a taker. It’s essentially gambling which has not been declared illegal. Hedge Fund Managers study the markets carefully. When they see a crack in the system, they devise a scheme to exploit it – usually by using derivatives to short or long some market behavior. In the case of Abacus, the Goldman Sachs product that has GS&CO and Fabrice Tourre in such trouble, that’s exactly what Hedge Fund Manager John Paulsen did.

He saw that the housing bubble was going to bust, and that the cdo’s, bundles of Subprime Mortgages, were going to become worthless as people began to default on their loans when their house values fell below their house’s worth. But he needed something to bet against, so he shopped around until he foud GS&CO who was willing to offer a product that was based on bundled cdo’s. He sealed the deal by picking some real losers. Fabrice Tourre didn’t hide Paulsen from the company that certified the choices, but he gave the impression that Paulsen was behind the package, when, in fact, Paulsen’s reason for creating the package was to bet that it would fail. The people who bought the package lost their asses, as did the people who took Paulsen’s bet, while Paulsen cleaned up – a billion dollars [he had paid GS&CO 15 million dollars to create the product].

Nobody is mad at Paulsen. He was just doing what Hedge Fund Managers do. So where did the Billion dollars come from? In a Las Vegas, some people win. Where do their winnings come from? The losers. It goes like this:
Loser’s Losses = Operating Expenses + Casino Operator’s Profits + Winner’s Winnings
Same thing with Hedge Funds, only there’s a kicker in there. The losers aren’t just people betting in the derivatives market. Our money gets in there too. And the way it gets there is through the fuzzing of investment and commercial banking – the thing that was blocked before Reagan’s deregulation. Our banks and financial institutions are playing in the casino too. AIG was "insuring" these bets. Banks and financial institutions were packaging these mortgage cdo’s as securities and trading them. Enron was and energy company, but what it really was was a derivative trading center. Our economy slides over into the dark side, and contributes to their profits. Why? Because there’s the possibility of getting a piece of these colossal winnings.

So, is there any reason to allow our economy to be part of a great big casino other than to allow very rich people to become even very richer people [including the managers who have these vast sums of money to play with]? I can’t think of a single one. And as for GS&CO, here’s a beautiful thought:
How Goldman might seek redemption
Washington Post

By Matt Miller
April 29, 2010

I don’t know which was more pathetic or depressing Tuesday: three Goldman Sachs bankers who squirmed mutely when Sen. Susan Collins pressed them as to whether they had a "duty to act in the best interests of their clients" — or Sen. Carl Levin’s badgering of Goldman’s chief financial officer over the firm’s short positions, as if it were a crime to be smart enough to see a meltdown coming and act to protect your firm and its shareholders. If you were a Chinese official tuning in to the televised showdown between America’s business and political elites, you had to be asking yourself: How can I short the United States?

It would be easy to pile on Goldman today, given how Wall Street’s greed and myopia contributed to the crisis. But in our hyper-accelerated political culture, there’s already been such an orgy of Goldman-bashing since Tuesday’s marathon hearing that I’d prefer to tackle a more intriguing question: Might Goldman have a path to redemption? Bear with me for a moment. At times you couldn’t help feeling for Lloyd Blankfein — blinking, squinting, acting as if the committee’s concerns were literally unintelligible. Don’t these people understand that market-makers can’t live by the ethical chains that bind ordinary mortals? Blankfein and his team were displaying the confusion and disorientation that business leaders always experience when public expectations about their role in society abruptly changes.

Not long ago Goldman was one of the country’s proudest business success stories, with a reputation for being "the best." Yesterday citizens nodded in agreement when Sen. Claire McCaskill said "the cultural reality of what you all do is just jarring to many Americans … it seems like hamsters in a cage trying to get compensation rather than producing any societal value." It is too late for Goldman to fully recover its reputation. But no restoration can even begin with damage control as usual. If I were Lloyd Blankfein (and his board), I’d be asking for ideas so far outside the box they’re on another planet.

So here’s my unsolicited redemption strategy. It would start with Goldman partners adopting a new public mantra. Because we’ve been among history’s luckiest beneficiaries of the bounty produced by market capitalism, they’d say, we now realize we have a special duty to make sure 21st-century capitalism works for everyone. For starters, that means leading, not fighting, efforts to clean up Wall Street excess. Goldman would support bans on vehicles such as "synthetic collaterized debt obligations" which exist only to facilitate the side bets that turned what should have been a containable subprime bust into a global crisis.

Next, Goldman would endorse higher marginal tax rates on annual income that exceeds, say, $5 million a year. The country’s fiscal situation is dire. Goldman’s leaders would say they stand ready to do their share (in ways that wouldn’t affect their lifestyles, or economic activity, one iota). Next, embrace your critics. Ask Andy Stern, retiring chief of the Service Employees International Union, to chair an advisory group of Wall Street foes to review and propose fixes for Goldman practices that seem antisocial. Don’t promise to implement them all — but look in good faith for ways to honor these critics’ views of your most troubling routines. Next, design a radical compensation reform to mimic Goldman’s old partnership structure — in which a partner’s net worth is always on the line. That’s the only way to ensure that risk doesn’t get out of hand when publicly held banks bet with other people’s money.

As a gesture of seriousness in this regard, Blankfein would give back to shareholders most of his 2006 and 2007 pay packages (of $54 million and $68 million, respectively), admitting they were unwarranted in light of Goldman’s subsequent need to be saved by federal action. Goldman would then launch the nation’s best-funded think tank and advocacy group, staffed with eclectic thinkers from both parties, to craft an opportunity and security agenda for the middle class in a global age.

Blankfein’s advisers will say this is preposterous. But a high-risk, high-reward wager is something a trader can understand. So think about it, Lloyd. This won’t blow over. Unsentimental pragmatism now requires changing Goldman’s ways via startling steps that make everyone sit up and take notice. Yes, no one will trust this "new Goldman" at first. But in the long term, your soundest course is to more closely align Goldman’s business strategy and external posture with society’s best interests. After this week it’s pretty clear what the first line of Blankfein’s obituary is set to read. All the money in the world can’t change that. Inspired acts of corporate statesmanship still might.
It would be called a "short" strategy – making a profit on the way down…

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