Last Friday the Securities Exchange Commission filed suit against Wall Street firm Goldman Sachs claiming that the firm did not properly disclose to buyers of a specific "synthetic CDO" investment that there were parties betting the other side of the February 2007 deal. Surely the SEC knows that when such a synthetic instrument is created there are buyers on the "long" side and sellers on the "short" side (or the broker itself is acting as principal and taking a side of the deal). The fact that the deal worked out great for the sellers and horribly for the buyers doesn't mean there was fraud involved. In fact Goldman apparently had a little bit of the long side as they lost $90 million on the instrument involved.
This situation also should be a chance for the investing public to again understand the roles of various players, including firms such as Goldman who serve as broker and often as principal. Lloyd Blankfein, Goldman CEO was quoted in 2004 to say, "In our market-making function, we are a principal. We represent the other side of what people want to do. We are not a fiduciary...we are not managing somebody else's money."
To fuel populist support for financial reform, the SEC apparently wants to cast Goldman Sachs in the role of a villian using the hindsight of a February 2007 trade on a housing market that everyone now knows was already in serious decline. There is no such villian, simply a trade where the smart money profited enormously while another suffered serious losses, just the capitalist system at work.
The investing public should take this opportunity to again remind themselves of the various roles of different parties. As Mr. Blankfein says, a broker is not a fiduciary (remember a fiduciary is one who is legally charged to act in the best interest of their client). Just because someone calls themselves an adviser, doesn't mean they are acting on your behalf. Just ask the investors who purchased the above referenced synthetic CDO with Goldman Sachs as their adviser.
p.s. We remind all that Payne Wealth Partners is a fiduciary and we take very seriously our obligation to act in the best interests of our clients.
