What would have happened if the collateralized debt obligations were created and sold exactly as was done, shorted by Paulson, and the eventual buyer was Warren Buffett?
First of all, "my pal Warren" would not let his position be known to anyone beyond normal filing requirements and perhaps announced at some later date. Second, if it was disclosed that Buffett was betting against Paulson, Mr Paulson would be a huge fool if he did not think twice about his shorting the CDO given this new piece of information. Third, should the buyers of the actual CDO be treated differently than Buffett, or you or me? Of course not.
If I were CEO Blankfein, that is what I would have tossed back at Congress.
The buyers of the CDO established a price based not only on the prospectus, but also the independent advice of legal, tax and accounting consultants and were familiar with the type of security they were buying or insuring. If they did not receive this advice or were not familiar with the details of such a deal, they should not be playing with billions of dollars of other people's money. It is a certainty that when they were raising the money, they expressed qualifications of the highest order in their prospectus. What did they represent to their clients?
There are many bad deals out there. I thought that when Blackstone had its IPO, selling 10% of its shares to the public: the public got the shaft. It was a crappy deal designed to sap funds from a naive public. The $4 billion they received was not money they needed --- they had just received almost that much from the Chinese after a few phone calls and after raising billions privately. Should the investment bank have made an announcement that this was a bad deal? They helped get the deal done, just like a CDO deal, and they made a ton of fees. Investors had to make their own judgments. The fund acquiring the CDO was much more sophisticated than the public, and received fees that they negotiated.
The circus run by the SEC and the Congress is more reprehensible than anything Goldman Sachs did. It was Congress that pushed Fannie and Freddie to accept zero-down and low down payment loans and to that end did not demand better substantiated loan documents.
Congress repealed the Glass-Steagall Act allowing banks and investment houses to be one and the same. Congress allowed these new larger financial institutions to sell insurance, and grow into ever expanding new enterprises. How many times did the SEC review Bernie Madoff's investment firm and give them a pass? Madoffs scheme alone measured somewhere between a $15 to $50 billion heist, depending whom you believe, compared to the claimed $1 billion at issue with Goldman Sachs. Unlike GS, Mr. Madoff did lie cheat and steal from widows, orphans, and pension funds, and everyone else under the sun.
Then there is the matter of the Federal Reserve Board keeping interest rates near all time lows, creating the foundation on which the housing market bubble was built. This was further exacerbated by the SEC allowing leverage to rise from 1:12 to 1:40, and in some cases, more!
The current legislation under consideration in Congress may correct some bad laws on the books now, and the bullying of Wall Street may be an essential ingredient toward getting them through, but all of this is really corrective action -- economic band-aids, covering up economic wounds and trying to remedy actions related to Washington blunders.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. DISCLOSURE: He is active is an active investor trading stocks and options. At the time of this post he did not own shares of GS but may have open orders.