Wall Street Snake Oil Peddlers

by Mark on April 21, 2010

In the Old West peddlers roamed between prairie towns promoting a cure-all medicine called ‘snake oil.’ The ingredients were unknown chemistries. Citizens purchased the elixir. Many were poisoned. All were cheated. In the meantime the snake oil peddler slinked out of town in search of the next victim.

Wall Street’s most venerable investment firm, Goldman Sachs, is accused of snake oil sales. The SEC claims Goldman knowingly sold an investment that was designed to fail. The investment, called a Collateralized Debt Obligation (CD0), was a collection of high-risk sub-prime mortgages. Those, who purchased the CDO, bet on the rebound of the housing market – definitely a risky bet in 2008. According to the SEC, Goldman allowed one of their own hedge fund managers, John Paulson, to create the CDO and to select the mortgages. With the investment bank’s knowledge, Paulson bet against the CDO – believing the mortgages that he selected would go down. They did. Paulson earned $1 Billion his bet. The investors lost a billion. The SEC fraud charge claims the Goldman Sachs should have shared Paulson’s role and his counter-bet with the investors.

The banks defense is the investors were experienced financial managers and should have known better. In other words – let the buyer beware. But who are these investors? They are pension funds, 401K plans, individual retirement plans. They are us. We knew the risks. We are surprised the betting was rigged.

What should we do? Tar and feather the scallywags? That is too good for them. Congress is debating legislation aimed minimizing future Wall Street risks. Within the legislation are tighter rules on CDO’s and other derivatives including more clarity on the investments and more visibility on who is buying or selling them. Tell your congress representative support it. Let’s drive the snake oil peddlers out of the marketplace.

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