[ksar]

As a quick refresher, these guys sold CDOs that they knew weren't priced correctly, obfuscated the mispricing, and then profited on short positions against the securities. Took 7 years to settle for being straight up crooks. Still the Wild West out there.

[tim333]

There should really be some way to punish the individuals responsible, even just a fine comparable to the bonuses they made, rather than just having their employer pay compensation while those responsible continue to get richer.

[forgetsusername]

>There should really be some way to punish the individuals responsible

Honest question: do reasonable really look at the The Great Recession and think that there are "individuals" wholly responsible for what happened?

[mtgx]

I think the problem is not "we can't find anyone who did wrong here", but "there are so many who cheated people that we wouldn't know where to start, or we'd have to arrest thousands - so we might as well do nothing about it".

Regardless of punishing those guilty or not (which I think they should be), it's absolutely criminal that virtually nothing has changed in how these companies operate, and that the "too big to fail" companies continue to remain too big to fail. The next time these banks crash - and they will crash - the taxpayers will have to bail them out in the trillions of dollars.

[forgetsusername]

>it's absolutely criminal that virtually nothing has changed in how these companies operate

Except that this is simply not true if you've been paying attention beyond the populist headlines.

[enraged_camel]

Can you give some concrete examples of what has changed in their modus operandi? Preferably with citations,but I won't even hold you to that.

[Lawtonfogle]

>Honest question: do reasonable really look at the The Great Recession and think that there are "individuals" wholly responsible for what happened?

Yes, that is how we handle complex issues. We look at the people who did the biggest wrong and hold them responsible for most if not all of the blame, even though we understand that there were far more actors who could've greatly impacted the actual harm done. Consider child abuse. There are certain forms where, depending upon reactions from parents and therapy offered, the outcome could vary greatly from extremely harmful to minimal damage to the child. But regardless of the outcome of the harm, and regardless if the outcome was influenced by other parties, we place the guilt of all the harm, both realized and risked, on the one who committed the abuse. We do not need mastery of how the financial system broke to deal out punishment just like we don't need mastery of the pathways by which emotional abuse leads to suicide attempts to punish the abuser.

It isn't perfect, but it is better than just washing our hands after slapping a few wrists when we don't understand all the details.

[appleflaxen]

> comparable to the bonuses they made

I realize this might be what you are saying already, but to be clear: tt should be /multiples/ of the bonuses they made, if you want to discourage this kind of behavior.

[oceanstone]

Is there a definitive list somewhere? If there was, a boycott could be organized.

[tim333]

I think one of the problems is that it's hard to allocate blame. The guy selling iffy securities will probably claim he thought they were good and so on. I'm not quite sure how you fix that. Require the bank to list individuals as part of the settlement perhaps?

[VeilEm]

> that they knew weren't priced correctly

Things are priced at what they will sell for. It's more that they were hiding information about the risk (which of course would have drastically lowered the value and the price people would be willing to pay). I think the difference is significant, however.

[jynnantonnyx]

I have a box for sale labeled AAA. Price $5. Guaranteed to contain $6. Email me for details.

[jevgeni]

So, did anybody e-mail you?

[deciplex]

Can you expand on the significance of this difference? I guess you're asserting that the "correct price" is the one that someone will pay for it, and that something is only "incorrectly priced" if no one will buy it. But the point is precisely that no one would have bought these goods for the indicated price had GS not obfuscated what they were selling in the first place. It seems to me that you're really splitting hairs.

[BurningFrog]

I think VeilEm is saying it was a bait-and-switch, or maybe false marketing.

If you pay me $50k for a BMW, and I deliver a Honda, the problem isn't that $50k is the wrong price for a BMW.

[shrewduser]

there's no difference.

they weren't priced correctly is a perfectly reasonable thing to say, and synonymous with they lied about their level of risk.

[jevgeni]

CDO's are huge and complicated deals. All the little details are documented in the prospectus. Granted it's 700 pages long on average, but maybe people shouldn't be buying 2-3 billion USD securities if they don't have the capacity to understand and model them properly.

[shrewduser]

there aren't many humans who can grok that kind of info and truly understand it, that's why they were supposed to be rated accurately by ratings agencies.

[nl]

They were hiding the risk, both from the purchases and the ratings agencies.

BUT - and this is pretty important - the ratings agencies were negligent in their rating methodology. Intelligent buyers could see the problems.

The book The Big Short covers this in some detail.

[manuelflara]

A really good movie based on the book, with the same name, just came out. Watched it yesterday and I recommend it a lot. http://www.rottentomatoes.com/m/the_big_short/

[forgetsusername]

>They were hiding the risk

Please explain how they were "hiding" the risk.

Risk is unknown ex ante. Nobody knows the value of it. It is the responsibility of those buying the risk to have an estimate and price the security accordingly, ahead of time.

[nl]

Please explain how they were "hiding" the risk.

They mixed mortgages which were extremely unlikely to be repaid into packages with enough AAA rated mortgages so that they would meet the credit-rating agencies policy of rating mixed packages as AAA if a certain proportion were AAA.

However, these bonds would be valueless if any of the securities that made them up defaulted.

They sold the packaged bonds a AAA-rated securities without disclosing the likelihood that they would default.

Yes, this was stupid of the ratings agencies

Yes, the buyers should not have bought things they didn't completely understand.

But GS deliberately obfuscated the nature of what they were selling.

Risk is unknown ex ante.

That isn't entirely true. On this example specifically, it's pretty easy to see that if a household can just afford mortgage payments at a discounted rate it is pretty likely they won't be able to afford it when the discounted rate expires.

[yummyfajitas]

They mixed mortgages which were extremely unlikely to be repaid into packages with enough AAA rated mortgages so that they would meet the credit-rating agencies policy of rating mixed packages as AAA if a certain proportion were AAA.

There is no such thing as a AAA mortgage. AAA is a rating for bonds and other fixed income securities.

However, these bonds would be valueless if any of the securities that made them up defaulted.

This is not how a CDO works.

They sold the packaged bonds a AAA-rated securities without disclosing the likelihood that they would default.

Why don't you show us the CDO prospectus you allege doesn't do this? Once you produce it, I'll show you the exact (mandatory) table where it's done.

https://en.wikipedia.org/wiki/Collateralized_debt_obligation

Your comment is the financial equivalent of "The NSA is hacking my pixels in order to break the rot13 encryption." The words kind of suggest computing/finance, but anyone who knows what the words mean recognizes that the content is nonsense.

[nl]

See footnote 5 and 6 in https://scholar.google.com.au/scholar?client=tablet-android-... and the diagram on pg 196 in https://books.google.com.au/books?id=jD-LAgAAQBAJ&pg=PA196&l...

[forgetsusername]

>They mixed mortgages which were extremely unlikely to be repaid

This is an easy claim to make after the fact.

>However, these bonds would be valueless if any of the securities that made them up defaulted.

Not true at all. The bonds didn't become valueless. In fact, many of these bonds were purchased by the Fed, who made money off them. The issue was CDS' being triggered on defaulting mortgage bonds.

>They sold the packaged bonds a AAA-rated securities without disclosing the likelihood that they would default.

Did they not? Have you read the prospectus'?

Look, I'm sure there were many criminal actions here. But the uninformed, populist overreaction to the financial crisis by people who are unwilling to take personal responsibility is sad.

[forgetsusername]

>As a quick refresher

Maybe this topic isn't fit for "quick" refreshers. Some problems are more nuanced and complex.

>these guys sold CDOs that they knew weren't priced correctly, obfuscated the mispricing

What does that even mean?

>then profited on short positions against the securities.

What is the crime?

[javajosh]

The remarkable thing is that people still do business with Goldman. Why didn't the CDO debacle undermine people's trust in that firm? Isn't this a complete failure of the market?

[rhino369]

The problem is that depending on banks roles, they are supposed to be trustworthy or not. In arms length negotiations, the banks aren't even supposed to have your interests at stake. But if they are managing your money, they are supposed to have a fiduciary duty to you.

Brokers don't owe you shit other than not lying to or defrauding you. But people don't realize this. Brokers are salesmen, pure and simple.

Worse, now brokers often have bullshit titles that hide their nature. For example, financial advisers sound like someone who has a fiduciary duty to you, but really they are just brokers. Trying to sell you on investments.

You should treat anyone who doesn't have an explicit fiduciary duty to you as you would a car salesman.

[ksar]

Partly because this wasn't Goldman specific behaviour. Those participating were systemically important financial institutions. In 2008, credit markets/money markets completely froze up and banks wouldn't lend to one another, precisely because trust had been eroded. No one had a clear view on the extent to which financial counterparties were exposed.

[marklgr]

> Still the Wild West out there.

Strangely enough, it is both a kind of freedom ideal to some, and an unfair, immoral and violent dog-eat-dog society for other.