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Hedge funds: Who paid for their profits?

Robert Peston | 08:43 UK time, Tuesday, 20 April 2010

Goldman Sachs's results today will be a further opportunity for the world's most successful investment bank to respond to the civil fraud charge it has received from the US watchdog, the Securities and Exchange Commission.

Goldman Sachs signGoldman is accused of creating an investment, a so-called collateralised debt obligation or CDO called Abacus 2007-ACI, so that a giant hedge fund, Paulson, could bet that the CDO would collapse in value, without telling those who bought into the CDO that they were the suckers on the end of this bet.

Goldman denies it has done anything wrong. And points out that those banks which lost money were sophisticated financial institutions which should have known what they were doing.

But apart from the potentially serious ramifications for Goldman, the case also shines a light on the behaviour of hedge funds during the euphoric years of 2006 and 2007 when the bubble in markets reached its peak.

Now it is important to point out that Paulson has not been charged with breaking any rules or laws.

But its behaviour in this deal - and the actions of other hedge funds in similar deals - may increase the determination of politicians, especially in Europe, to curb hedge funds' activities.

Because what Paulson and other hedge funds did in these boom years was not simply to bet on a slide in the value of investments that already existed and were being traded.

These hedge funds encouraged investment banks to create brand new collateralised debt obligations to be sold to other banks and investors - so that they, the hedge funds, could then speculate that the price of these CDOs would shrivel.

Both Goldman and the SEC agree this is what happened in the Abacus 2007-ACI case.

Why does this matter?

Well it means that the hedge funds were - for example - spurring the investment banks to manufacture these CDOs, which bundle together other securities made out of low quality or sub-prime loans to home buyers. And the effect may have been to increase the supply of cheap finance to homebuyers.

In other words, the hedge funds can be seen as having pumped up America's unsustainable housing bubble with the intent of maximising their winnings as and when that housing bubble burst.

In some cases, hedge funds - though not Paulson in the Goldman case - are said to have provided risky equity, the essential ingredient to allow the collateralised debt obligations to be created, and then took out insurance against the risk of default on the very same CDOs.

The allegation is that they put up money knowing that it could be lost, so that they could then make even more money from the insurance claim when the investment went belly up.

A number of hedge funds made billions of dollars in 2007 and 2008 having astutely placed bets that investments made out of US sub-prime housing loans would collapse in value.

Now, if this was their reward for pointing out that - in an investment sense - the emperor had no clothes, who could quibble with that?

And if - prior to that - they encouraged investment bankers to sell CDOs to gullible professional investors, thus perpetuating the myth for a convenient period that the emperor was magnificently attired, weren't they just being entrepreneurial?

On that view, today's moans about how some hedge funds profited at the expense of these gullible investors is surely just the sour grapes of the foolish against the smart.

Except that it wasn't just deep-pocketed professional investors - banks and insurers - who were on the other side of the hedge funds' bets. When the hedge funds picked up their winnings, it turned out that some of these banks and insurers didn't have the moolah. And the bill landed on taxpayers' doorstep.

To put it another way, the painful flip side of hedge funds' huge profits from betting on the collapse of sub-prime was billions of dollars of losses for banks and insurers. These losses were a major contributor to the meltdown of the banking system in 2007 and 2008 - which in turn led to a global recession and the biggest taxpayer bailout of banks that the world has ever seen.

Some will argue therefore that what a few hedge funds did was not an example of markets doing what they do best, which is to allocate resources to where they can be used most efficiently.

Instead hedge fund critics will see it as a justification for imposing significant new constraints on how hedge funds operate, on the basis that the billions of dollars in profits they made were not blameless profits.

Or to put it another way, the determined manner by which some hedge funds maximised their riches may have contributed to the impoverishment of the rest of us.

Comments

  • Comment number 1.

    I don’t think it can come as a surprise that investments banks were defrauding their own investors and that this was a main factor in the creation of the financial crisis.

    What baffles me though is that politicians think some of those investors i.e. our bankers who got suckered in to these dodgy sub-prime derivatives are so talented that they need to be paid millions in bonuses to stop them flying off to Switzerland as well as bailing them out to the tune of hundreds of billions and virtually guaranteeing they will never allow their banks to fail

    Hardly a discouragement is it ?

    Pick the mug out of this lot
    The investment bank helps to create the derivatives and suck in the punters
    The Hedge fund shorts the derivative
    The politicians bail out the investors with taxpayers’ money
    The taxpayers re-elect the politicians

    Nick Clegg says drop Goldman Sucks as a government advisor

    I agree with Nick

  • Comment number 2.

    Robert, this And if - prior to that - they encouraged investment bankers to sell CDOs to gullible professional investors...

    Why are they making so much money if they are gullible? Can you truly describe anyone as both gullible and professional? You were being polite, I suppose.....

    We paid for it. Every last penny. Those who have been convinced to give p their little bit of land to create farms in Africa used to feed us, anyone who bought anything (inflated prices?) right through to the planet stripped at lightening speed to produce buckets of profit, all paid.

    Whyd did you ask? Can we claim it all back now or do we have to look for compensation for suffering an act of crime against us?

  • Comment number 3.

    It's stating the obvious when you say that the extreme riches made by this tiny minority were at the expense of the many, or us. We know that. The question at the moment is, will this stop? Since the Labour administration are intensely relaxed about this sort of behaviour, and it's the Tories bread and butter, that 3rd horse is looking more and more odds-on...

  • Comment number 4.

    DevilsintheDetail wrote: drop Goldman Sucks
    ---------------
    I wrote Goldman Sucks once and got censored, you're lucky the moderator hasn't got the coffee yet.

    In 100 years, in history books, it will be written:

    People in the noughties would spend hours and hours in forums, blogs and chat rooms "discussing" the problems and trying to offer a solution without realising that the Matrix had them.

    The opportuinity to express their voice "freely" was part of the restrictions on their liberites as it took the steam off their frustration and their never took any REAL actions.

    None are more hopelessly enslaved than those who falsely believe they are free.

  • Comment number 5.

    Why was it that our regulators did not understand the role of CDOs in creating credit? (I am taking it as read that we all understand the CDOs actually create money as this has been expounded elsewhere.)

    Did it not occur to the regulators and setters of interest rates that their mechanisms for the control of the money supply had been almost completely subverted?

    If the Bank of England (or Treasury) understood what was going on why did it not insist that the excess credit created should be damped down by raising interest rates as they would have done in former times?

    On the other hand if they did not understand - they are incompetent.

    Either way they (the Bank and the Treasury) are an abysmal failure. They failed to protect the public from the bubble economy. They should have done so, and they failed. They should be sacked for incompetence.

  • Comment number 6.


    > it turned out that some of these banks and insurers didn't have the
    > moolah. And the bill landed on taxpayers' doorstep.

    Again, that's why we are breaking them up. They must be so small that we don't give a hoot about little banks or insurers and all the other cash-slobs.

    Look, the taxpayers have decided that the lib dems will do the work, and the Labservatives are on the way out. Good riddance to bad rubbish!

    Good old Vince Cable - let's get cracking...

  • Comment number 7.

    #1 Spot on,

    Only I would add:

    'The politicians bail out the investors with taxpayers’ money' ....

    a decision based on advice from said investors.


    Robert,

    'And the bill landed on taxpayers' doorstep'

    No it didn't.

    The current Government offered to pay the bill on our behalf. There was an alternative decision which many bloggers have pointed out and it required a quick decision way back in 2007 with Nothern Rock before the brown stuff hit the proverbial fan...



  • Comment number 8.

    I've never understood why they are called an investment bank cos of course they don't really do investment.

  • Comment number 9.

    4. At 09:22am on 20 Apr 2010, plamski
    Thanks alot for highlighting that plamski but I am using it as a play on the word suckers which I have used elsewhere in the post and ties in with the story in the sense that Goldman 'sucks' in the investors so hopefully good sense will prevail.

    You sound a bit depressed so heres a bit of Fleetwood Mac just for you
    'Open your eyes and look at the day. You'll see things in a different way'

  • Comment number 10.

    The more you here about the business of investment banking the more insane the whole thing looks.

    So far it’s the private sector working Joe and Jane that have taken the hit.
    But they don’t really have a voice, or a strong union to give them a voice.

    But the fall out from them is the real ‘elephant in the room’ namely a significant drop in tax revenue, made good thus far by the Bank of England printing money.

    And unless the public sector is going to take an equal hit in the near future, the Bank of England is going to have to carry on printing more money.

    But the BOE can’t print it for ever. Sooner or later it will have to stop.

    Which in turn means that the full price for our hopelessly flawed banking system, has yet to be paid.

  • Comment number 11.

    #6

    I agree we need to split the banks up.

    Not just splitting retail from casino but also just making them all smaller. Won't happen under Labour who have spectacularly painted themselves into a corner, and would look foolish if they admitted Lloyds Banking Group is too big.

    Darling has been asked about this repeatedly and he keeps pointing to Northen Rock (retail only) and Lehman Brothers (investment only) both of which went bust and insists splitting banks up won't prevent the next crisis. He fails to understand that it is about preventing taxpayers getting involved and is only part of which needs to be done.

    Many have blamed the crisis on Labour, (some even on Thatcher) and it would have happened anyway had the Tories been in power, but you certainly can't pin it on Clegg.... Or Cable - the only politician who spotted the whole thing coming!!

  • Comment number 12.

    > it turned out that some of these banks and insurers didn't have the
    > moolah. And the bill landed on taxpayers' doorstep.

    Trouble is the taxpayer doesn't have the money either.

    A lot of debt is going to have to written off in the end, if only because the next generation (who are not responsible for it) probably won't like paying for it.

  • Comment number 13.

    #1 good point, glad you got in at no 1

    IMO, Okay Paulson may have bet on the CDO going down in value but it seems nobody has evidence that this bet was based on anything other than seeing that the unsubstainable boom had come to an end. The signs should have been clear to anyone. The hurd mentality is all these guys know, i've said it many times and imo its the reason having a a greater number of smaller players will not self regulate. The blind gulliable leading the blind gulliable would proberbly get worse.

    Like any other casino, its not technically rigged, but its very much weighted for the few. For the punter, let them have a small win then go for everything they can get

    If you want the publics money protected, regulate properly.

  • Comment number 14.

    ALL THE WORKERS DID

    All the brains at the BBC still can't work it out - they must be addled with too much strictly - or they're simply paid not to see the truth. This little story is one about the sympton and not the cause and true source of profit.

    Workers who took those mortgages out to make the CDO were on a path to disaster - their (real) diminishing wages could never keep up with the payments demanded by the lenders (wage inflation is usually below interest rates). The lenders are using their accumulated capital to accumulate more, but crucially not producing anything by doing so

    This is one of the seven blunders of the world - and for good reason. How do you think it will end if we have earnings from nothing - nothing except the loan of natural resources from those who lay claim to it - a claim for which they have no grounds - which is evidenced by the need to have a law to eforce ownership of those natural resources (I mean how can anything naturally occuring being 'owned'?)

    You cannot have half the population sitting on their backsides living off the work of a diminishing working population - and yet that is what the Capitalists dream is - and it is just that, a dream.

    The fact that this little scam was put together doesn't surprise me - but do we really care which snake bit another one?

    It's time to release a mongoose - then we will sort the men from the boys.

    Fortunately the US citizens are far less forgiving than the British slaves - they have already started their revolution - and it's going to be messy. We have to wait until the election is over and the local hosptials start closing before we have ours....

  • Comment number 15.

    Well, we've all learned our lessons - I just hope we elect a Government who will pay attention and take some action against these leeches. Maybe it's time for some fresh thinking. The 'greed is good' ethic has been shown up for the hollow lie that it always was.

    All banks are guilty of using the complexities of the financial world as a smokescreen for robbing us blind.

    You can't trust the bankers with our money. It's like asking Count Dracula to look after the nation's blood stocks. They're only interested in helping themselves to as much of our money as they can possibly get away with.

    The banks (and the Government) have tried to convince us for years that if a company is making massive profits, then it is good and successful. Why? Massive profit is NOT an indicator of success. A food company that makes massive profis could have been selling food more cheaply, upping the quality, or paying its staff and suppliers a bit more. A bank could be offering lower interest rates or better returns, instead of paying a greedy few massive amounts to carry on fleecing their own customers. When a company like Goldman declares such massive profits, we should be asking ourselves 'why?' and how?', rather than automatically slapping them on the back and hailing them as heroes. Clearly they have either been charging too much, or returning too little. Clearly they have been profiteering. Clearly our Government doesn't need to be lining GS's vaults with its taxpayers money, because clearly GS is only interested in taking as much of it off us as possible.

    Despite years of a nominal 'Labour' government, we still haven't managed to get companies working for US, rather than enriching themselves. We've had 30 years of money-worship in one form or another, and it's time for it to end before these greedy charlatans destroy us all.

  • Comment number 16.

    Any form of gambling is rigged in favour of the 'house' - if you do not understand this you ought to stay out of casinos and the bookmakers!

    Is it the case that whatever the outcome of the CDO, Goldman Sachs still stood to make money, with either the people who invested in it or Paulson losing out?

    What exactly is the issue in the SEC's eyes? Did Goldman Sachs themselves think that the CDO would fail even before they started selling it to investors? After all, that's what Paulson thought when they took their position. And if Paulson had in any way influenced Goldman Sachs, surely THEY are the ones culpable? Why are they deemed innocent?

    I'm getting confused.

  • Comment number 17.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 18.

    One of the consistent lines I have read is that 'Hedge Funds didn't cause the crash'.

    I have always wondered who the £billions of losses that the banks made went to - it's a zero sum game and for every loser there is a always a winner.

    This has exposed the lie of the blameless Hedge Funds. It is an absolute scandal.

  • Comment number 19.

    9. At 09:42am on 20 Apr 2010, DevilsintheDetail wrote:
    You sound a bit depressed so heres a bit of Fleetwood Mac just for you
    'Open your eyes and look at the day. You'll see things in a different way'
    -----------------

    Depressed? Not at all. I'm in fact having a laugh watching this Théâtre de l'Absurde and enjoying the inevitable collapse of the monetary system right in front of our very own eyes.

    It even fills me with hope that the more Goldman Sucks the life out of it, the sooner we might be lucky to witness a WORLD WITHOUT MONEY!

    P.S. Thanks for the song, any way!

  • Comment number 20.

    I worked at a Hedge Fund, trading FX, so nothing to do with CDOs or CDSs. I am no longer employed because this was prior to my university studies.

    The SEC's accusations of fraud look to me to be rather baseless. They are designed to frighten people and ignite public anger in order to necessitate financial reform. Let me make this clear, financial reform is not necessarily a bad thing. It should focus without doubt on making the banks able to collapse without bringing everything else crashing down.

    In this case however, Goldman Sachs actually lost money, so accusing them of fleecing investors is a bit rich. Also the people who lost initially are so called 'institutional' investors, this was due to ridiculous risk management. Goldman did not sustain further losses because they insured against the investments turning sour, like the investors who bought the product should have! Further to this you cannot say that it is fraud simply because John Paulson is betting against you. Remember if no one had been willing to buy the product, he could not have sold it to you. Blaming Goldman is just the easy way to make a scapegoat, I learnt at age 18 about protecting a position, it is a simply rule of hedging to limit your losses, something that these institutional investors got horribly wrong.

    I cannot see how the hedge funds are to blame for this, if the products had carried on, he would have lost out and rest assured no Hedge Fund was rescued by public money.

    This is more an issue of the investment banks failing to trade properly, which believe me if it occurred in the Hedge Fund world, the traders would be fired in a second.

    It is just unfortunate that in this instant the banks had such ridiculous risk management that they couldn't cope with their trades going sour. Unfortunately this did affect the public as well all know, but would limiting the activities of Hedge Funds stop this ever occurring, probably not. Perhaps asking John Paulson about his positions against the sub-prime market would have indicated he thought there was a huge bubble and some pre-emptive action may have been useful!

    Also a side point that many hedge funds also went bust throughout 2008-2009 so Paulson was not necessarily symbolic of the whole industry. Reform and regulation needs to focus more on the banks than necessarily on the hedge funds, as the banks effect the entire economy whereas hedge funds do not pose such systemic risks.

  • Comment number 21.

    Agree with Robert Peston's last paragraph - in addition hedge funds are still operating in the same old way with our pension contributions and our 'consumer investments' which, sadly, are still a source of cash flow for 'computer 'spot' gambling?

    Golden rules for all 'average consumer' wage earners:

    1) Try to build up, in cash ISAs, more than 3months' income 'emergency funds'.

    2) If your investments have too much small print - be afraid?

    3) If your investment is too complicated to understand - then it's obviously NOT designed for you to understand - be wary of any financial adviser reassurances? Many financial advisers STILL don't understand them either?

    4) Pensions are 'sold' as tax-efficient. However, unless you have a 'golden pension' you are 'vulnerable. Plus, even if that pension doesn't crash and disappear - you will pay tax on it if you live long enough to benefit.

  • Comment number 22.

    I got censured yesterday for describing in detail,what i personally would do with Mr Paulson , what i forgot to add was IF he is found guilty and for that i apologise.

    This whole system of betting on failure has to stop,debt should never be seen as an asset, and a system of accountancy HAS to be introduced that reflects the true state of a company.The problem is we the tax payer have no say in this, apart from who we elect to represent us, i have no faith in any of the major parties to tackle this, it must never be allowed to happen again, ever.

  • Comment number 23.

    #16

    Paulson and Co are a Hedge Fund and are therefore not Regulated by the SEC!

  • Comment number 24.

    I had tried to figure out how the system was rigged. It's a bit clearer to me now to see who benefitted from this whole roulette wheel.

  • Comment number 25.

    4. At 09:22am on 20 Apr 2010, plamski wrote:

    "I wrote Goldman Sucks once and got censored, you're lucky the moderator hasn't got the coffee yet."

    I agree the consistency of moderation is absurd.

  • Comment number 26.

    Indeed, the so-called bankers of the last 30yrs have increasingly turned everyone's salaries and wages forced into bank accounts - have spawned and delivered - the worst exploitation of ordinary people? A decade at the Races by hedge-funds AND all their affiliates?

  • Comment number 27.

    Robert, I am reminded of your column March 16 2009 where you wrote

    "UPDATE, 17:30: Goldman Sachs has pointed out to me that it had taken out insurance against its AIG exposure - in the form of yet more credit default swaps - with other substantial financial institutions.

    So in the event that AIG had collapsed, in theory its net losses would have been zero, because it would have been able to claim on these contracts."
    I was surprised then that you didn't question this further, afterall who would take out that insurance unless they knew something the rest of us didn't? We now have a much better idea.

  • Comment number 28.

    Those Americans eh? Just find more and more ways to dup anyone. After the lack of trust in the banks do the American banks, auditors, accountants and funds come above or below?
    These last few years must tell use all that trust in the bigger companies must now be placed lower than the banks. But the credit agencies say not...... I think I am right in saying that they are based in America.

    Time for the stranger theories to be aired.
    And time for our bankers to learn and act in a more rational manner with our (the tax payers) cash..

  • Comment number 29.

    If Brown gets in again how many of you that complain will join the protests? I don't think there's much more that we can say on these forums, the damage is done and if the politicians aren't able to give us a better future then we must do it ourselves.

  • Comment number 30.

    18. At 10:27am on 20 Apr 2010, ltfcunited wrote:

    "One of the consistent lines I have read is that 'Hedge Funds didn't cause the crash'."

    It's very interesting isn't it - the media is dominated by people claiming they were not responsible for the crash - and yet nearly every 'man on the street' can see who has their hands dirty. The media smokescreen is penetrable by logic and truth.

  • Comment number 31.

    24. At 10:45am on 20 Apr 2010, More debts than Gordon Brown wrote:
    I had tried to figure out how the system was rigged. It's a bit clearer to me now to see who benefitted from this whole roulette wheel.

    Me too. It's probably just the tip of the iceberg.
    All you need is ignorant or bribeable investors who control other peoples money

  • Comment number 32.

    Robert,

    Railing against the hedgies is like King Canute complaining about the waves. If you want an example, look at Greece and the euro-zone. French and German politicians want to preserve the euro; most of us can see that continued Greek membership carries a significant risk of default; all that a hedge fund does is calculate the probabilities and place the appropriate bets. Done properly, there should be little chance of losing money. The cumulative effect of lots of funds betting a particular way is to place politicians in awkward positions, and they don't like it. Unfortunately, these awkward positions reflect the way the world is, rather than the way politicians would like it to be.

    (And no, I'm not a hedgie, I'm a low-grade academic avionics engineer, with an interest in hazard and risk analysis.)

    However, on to the substantive point...

    Even the hedgies couldn't have made this work without the help of AIG's London-based CDO insurance division.

    The questions that really need to be asked are:

    (1) What did this division know about the reality of CDOs? (my hunch: not much)

    (2) Why were they permitted to take on so much of the risk? (my hunch: they were showing a profit; standard insurance practice is to insure and ratchet up premiums if things go bad. Against this there's a well-developed theory for the level of risk that imperils an life-insurer; why wasn't this used?)

    (3) Is there any significance in the fact that AIG used London for this business? (One would have thought that New York would be closer to the action; was London's regulatory regime more lax?)

  • Comment number 33.

    # 20. At 10:36am on 20 Apr 2010, al2975 wrote:

    > It is just unfortunate that in this instant the banks
    > had such ridiculous risk management that they couldn't
    > cope with their trades going sour.

    It's not unfortunate for Sir Greedie Goodwin and his chums - they
    got out with a chunk of change. It is rather unfortunate for the
    half million public sector workers who must be sacked because of Sir
    Greedie's egoistic antics.

    It's clear that we put boneheaded macho-men in charge of things that
    require quiet intelligence.

  • Comment number 34.

    @ DevilsintheDetail & plamski. I take it you are being ironic, quoting Don't stop, the campaign song of the man who brought us Alan 'light-touch'Greenspan?

  • Comment number 35.

    20. At 10:36am on 20 Apr 2010, al2975 wrote:

    "In this case however, Goldman Sachs actually lost money, so accusing them of fleecing investors is a bit rich."

    ...have you never seen the 'find the lady' trick where 'the mark' is always encouraged by the loss of a fellow competitor (who is actually in on the scam)? If you worked in FX and you think it's acceptable to bet against client money - then you are as crooked as they are - money losing or not.

    "Also the people who lost initially are so called 'institutional' investors, this was due to ridiculous risk management."

    ...that would be the pension funds, ISA's and other 'normal peoples' investments.

    "Further to this you cannot say that it is fraud simply because John Paulson is betting against you. "

    ...it's not that Paulson comitted fraud, I don't think he's on trial - he was merely a player in the game. However had Paulson not been in charge of a hedge fund - and consequently it would have been known the position being taken - the institutional money may have got suspicious.

    ...now do you see why Hedgies like to keep it all quiet? - They're setting us all up to bet against us. Even bookies change the odds when there is heavy betting against a single horse - so why should hedge funds be allowed to keep it from honest investors?

    "Blaming Goldman is just the easy way to make a scapegoat, I learnt at age 18 about protecting a position, it is a simply rule of hedging to limit your losses, something that these institutional investors got horribly wrong."

    ...because they were ill-advised by Goldman - or do you think paying a fortune for financial advice shouldn't mean it's in any way accurate?

    "I cannot see how the hedge funds are to blame for this, if the products had carried on, he would have lost out and rest assured no Hedge Fund was rescued by public money."

    Not in this crisis (yet) - but one was saved as recently as 1998. What most hedge fund supporters are in denial of is how much institutional money is in fact pension fund investments. When the hedgies blow up - who do you think carries the can?

    "It is just unfortunate that in this instant the banks had such ridiculous risk management that they couldn't cope with their trades going sour."

    ...and how to hedge funds manage their risk? - VaR is it? - a failed measure badly interpreted by idiots.

    "Perhaps asking John Paulson about his positions against the sub-prime market would have indicated he thought there was a huge bubble and some pre-emptive action may have been useful!"

    ...yes especially if Goldman had just advised you to buy into that market!

    "as the banks effect the entire economy whereas hedge funds do not pose such systemic risks."

    ...except ones which rack up trillion dollar losses and have to be bailed out by the Fed Strongarming banks into position - or does your financial history not go back that far?

    Hedge fund apologists are truly sad - never have there been a set of more deluded people in history.

  • Comment number 36.

    Robert, your suggestion that

    "Well it means that the hedge funds were - for example - spurring the investment banks to manufacture these CDOs, which bundle together other securities made out of low quality or sub-prime loans to home buyers. And the effect may have been to increase the supply of cheap finance to homebuyers.

    In other words, the hedge funds can be seen as having pumped up America's unsustainable housing bubble with the intent of maximising their winnings as and when that housing bubble burst."

    may well hold true for other cases of CDO construction, but this was a SYNTHETIC CDO, which would not have provided any sort of finance to your average person.

    If the allegations are true Goldman are in a lot of hot water, but the claim that this CDO provided people with dubious credit ratings cheap finance is false.

  • Comment number 37.

    20. al2975

    yes Goldman lost on the front deal, but they gained by betting against their own deal as well, this goes against the whole point of hedging, all it does is steal money from more regulated investors like our pension funds etc etc however it is dressed up it is morally wrong.

  • Comment number 38.

    Yes, indeed, Mr Peston. Furthermore, it makes no sense that certain commentators for Conservative |Party are complaining about Gordon Brown not 'saving for this rainy day' - while those 'hedge-funds' made no 'visible' set-aside for their rainy day.

    Who knows? Until hedge-funds open their books - the taxpayer has no idea where all the money went? Hmmmm?

  • Comment number 39.

    The prosecution of Goldman by the SEC looks to me like an insider job. After all, the US government has long been in cahoots with Wall Street to keep the dollar number one and the American Dream in the world's eyes.

    Whatever the outcome, do we genuinely expect any changes to come about?

    There has been no sign so far that regulation will prevent these financial gangsters from coming up with yet another scam to fleece the world. Only 'revolution' will achieve that - when enough people say "enough!".

  • Comment number 40.

    4 & 25

    You can't mention the J word either!

  • Comment number 41.

    A deal was set up knowing it could only go one way. This is opportunism taken to the point of madness. People get sent to prison for less.

    It is not good enough to argue that the people sold these dodgy instruments were fellow sophisticates. This is to argue that drug dealing is quite acceptable as the customers know what they are doing. Presumably the regulators who allowed these instruments through were also sophisticated in financial matters.

    It is about time that government auditors (HMRC have some very good ones)were allowed to pick through what has been going on in the money markets both here and elsewhere. There is a lot more to find and the beleagured taxpayer has every right to expect a rigorous inspection of all transactions.

    There is plenty of evidence to show that the Theft Act can be applied to over-optimistic financial statements. Also ordinary traders are subject to Trading Standards so why don't these rules apply in the City?

    It is no use people asserting that they have done nothing wrong. If something looks like a duck, waddles like a duck and quacks like a duck then usually it is a duck. We have no time and no money to entertain dissimulation.

  • Comment number 42.

    If Goldman Sachs (and any of the other big US investment banks) end up having to pay out big claims for their CDO activities and can't meet them, who do you think will pick up the tab? Meantime, will this affect the bonuses payable to their employees? You have to doubt it.

    Increased regulation is not the answer - you only have to see how inventive these banks are at getting around regulation (think repo 105). Instead, we need to split out the investment banking functions. The investment banks can then go off and "invest" funds for the wealthy and if they are unsucesful, then tough. The taxpayer won't be bailing them out. Will this happen - not a chance. We need some braver politicians.

    Here's my plan. Instead of the Tories' idea of some sort of national volunteer scheme, why don't we make all the investment bankers making make more than, say, £1m per year, spend each alternate year working in the public sector so it can benefit from their considerable talents. This would allow the bankers to i) give something back to society; (ii) understand what contributing to society actually feels like; and (iii) understand the strains on public sector workers which will arise from the autserity caused by the banking crisis. Maybe they can work as debt counsellors for the CAB (although there is a risk that they might roll up their clients debt and sell it on to gullible investors). If the scheme works, perhaps we can roll it out to cover government ministers as well (of course, working as a peace envoy would not qualify as working for the public sector).

    By the way, I read recently that Paulson is worth about US$12 bn.

  • Comment number 43.

    #21 those are very sensible rules but I would add a further one which I think was created in the 1970s (not sure who but Slater seems to ring a bell)

    Never invest in anything where the annual report has a picture of the chairman stepping out of a helicopter because it means the directors are more interested in their well being than shareholder's returns

  • Comment number 44.

    Some of the losses were borne by other hedge funds.

    Lets not forget a large number of hedge funds have lost huge amounts and been wiped out by betting the other way in the recent past (see below).

    http://news.bbc.co.uk/1/hi/business/7270389.stm

  • Comment number 45.

    25. At 10:47am on 20 Apr 2010, writingsonthewall wrote:
    I agree the consistency of moderation is absurd.
    ---------------------

    The only consistency the BBC censorship shows is when the J word is mentioned as in post #17. by DebtJuggler.

    Here the removed link again:
    http://www.huffingtonpost.com/vicky-ward/senior-goldman-exec-is-ma_b_542154.html

  • Comment number 46.

    So, if I understand this correctly, the hedge fund managers are somewhat extravagant on the moral bankruptcy front, the investment bankers are complicit in this extravagance to the point of conspiracy and I have NO CHOICE but to pay for it? And in order that these megaliths of entrepreneurial mastery don’t all dump us mere mortals and leave the Country to ply their ‘skill’ elsewhere we are supposed to dish out vast quantities of dosh in the form of bonuses?

    Dump on I say!

    Grubbby morals, propped up by a grubby system and a grubby government and paid for by people who have no choice but to fork out. – And we will all, no doubt, get the chance to buy back shares in banks we already own, at an inflated price, so that these armpits get even more dosh.

    I wish to resign my tax-payership.

  • Comment number 47.

    34. At 11:07am on 20 Apr 2010, JA wrote:
    @ DevilsintheDetail & plamski. I take it you are being ironic, quoting Don't stop, the campaign song of the man who brought us Alan 'light-touch'Greenspan?

    I don't believe in the guilt of good music by association.

  • Comment number 48.

    Hedge funds: Who paid for their profits?

    Robert Peston | 08:43 UK time, Tuesday, 20 April 2010 Wrote:

    "Goldman denies it has done anything wrong."
    _________________________________________________________________

    Ahem! Surely Goldman is denying it has done anything illegal?

    Apparently all that Goldman has done wrong is not make it clear they were a counterparty? Is this illegal?

    Weren't the buyers of the deal, other banks! Other banks regularly partake in transactions like these - or they were doing. Apparently Goldman's favourite target was Lehmans! These bankers seem more akin to actors role playing Looney Tunes cartoons or like kids playing with matches!

    The shocking part for the rest of us is that the Government and Regulators chose to ignore that fire spreads quickly! (And instead took bankers at their word who claimed "don't worry we won't let things get out of hand!")

    They're all as mad as a two and half boxes of banana's!

  • Comment number 49.

    You forget it takes two to tango. It is very difficult to force someone to borrow too much and that is what is ultimately behind the economic mess. An excess of demand sucked up all available supply for credit and too little attention was given to the borrowers' ability to repay that debt. That was not the hedge funds' doing and the whole reason for their existence is to make money for their investors. It would have been irresponsible for them to ignore this opportunity, created by the public clamour for debt. Don't try to blame this on anyone but those who spent money they couldn't afford to borrow, as the very same politicians who now point the finger of blame at anyone who works for a bank were encouraging the very lending they now criticise.

  • Comment number 50.

    # 43. At 11:27am on 20 Apr 2010, Justin150 wrote:

    > Never invest in anything where the annual report has a picture of
    > the chairman stepping out of a helicopter because it means the
    > directors are more interested in their well being than shareholder's
    > returns

    All directors are more interested in their own well being than
    shareholder's returns. The return to any other stakeholder is
    always a lesser goal, for the cash-slobs that they hire to be
    bosses... That's why "money is the root of all evil".

  • Comment number 51.

    # 23 newblogger wrote:

    "Paulson and Co are a Hedge Fund and are therefore not Regulated by the SEC!"

    Thank you - so it's a matter of jurisdiction rather than any assessment of their guilt or innocence in the affair. Now I understand at least that bit!

  • Comment number 52.

    #49

    WAFFLE!

  • Comment number 53.

    49. At 11:49am on 20 Apr 2010, Ally Gory
    So it's the poor American underclass that are to blame for the Financial meltdown. How dare they accept loans offered to them if they are unable to guarantee repayment.

    Maybe we should demand compensation from them ?

  • Comment number 54.

    35. At 11:09am on 20 Apr 2010, writingsonthewall wrote:

    20. At 10:36am on 20 Apr 2010, al2975 wrote:

    "In this case however, Goldman Sachs actually lost money, so accusing them of fleecing investors is a bit rich."

    ...have you never seen the 'find the lady' trick where 'the mark' is always encouraged by the loss of a fellow competitor (who is actually in on the scam)? If you worked in FX and you think it's acceptable to bet against client money - then you are as crooked as they are - money losing or not.

    The hedge fund I worked at did not have any clients as per an investment bank, so no I would never bet against client money, if my clients were ever to go down, I would be on the same ship, rest assured. Goldman are also a market maker, so they were asked by a client to create a product, which they sold on, this scratches more at the issue of a role of a market maker. In flow trading in particularly, you have to take positions, often against client money, i.e you are selling something to them, or buying it off the client.

    And perhaps for this instance I ill defined 'institutional' investors, because as far as I am aware, (apologies if this is not correct) the main 'losers' were deutsche and RBS (deals left over from ABN Amro) and AIG who wrote the CDSs against the positions. To me they are different from the everyday pension fund etc, although as I'm sure you will, rightly, point out pension funds do have large stakes in these banks, and well we all do in RBS.

    However, at the source, i.e the banks who made the trade, I still think they should have had suitable risk systems to prevent the losses, why did they not take out a CDS? For AIG who kept writing these contracts there is a far greater issue, they should have realised a problem.

    As far as the point you make about the bookmakers, the same happens for CDS, look at Greece, the price is sky rocketing because everyone is betting one way!

    Sorry I was unaware about the 1998 bailout, that was a decade before my time, so appologies. It does raise an interesting point, we had investors who were county councils, pension funds, but they chose the FX hedge fund because in FX it is somewhat more difficult to lose the amounts that can be on more risky products. It is part of how you choose appropriate risk, you either hoard the money under the mattress, or you invest it with the risks that come with it.

    I'm not saying Goldmans are whiter than white, there was a very interesting article in the Rolling Stone magazine a few years ago, which displays there guilt in numerous bubbles. For me this has far more of a political implication than actual fraud.

    Fundamentally, they were long of Abacus, but took out a CDS against the position, and if the Abacus had carried on rising, they would have made money, it didnt and they lost, but even with the CDS payout, they still lost.

    Oh and just seen there 1Q results, ahead of expectations... Cue more bank bashing.

  • Comment number 55.

    From my perspective, I see the following. I use the name Goldman but this could refer to any of the large investment banks:
    1) Goldman plays both sides - they will create a product for you to buy or sell, and will find people to play the other side. Their only goal in this is to reap the commissions. Ethics or Morals don't come into play here.
    2) There are times when Goldman will take the opposite side to a trade. Their goal here is, again, pure profit.
    3) Goldman will buy insurance, through companies such as AIG, if it looks like their investments are at risk.
    4) In order to sell the products, or to buy the insurance, they will probably get the ratings agencies to give the product the highest ratings in order to keep their insurance premiums low.
    5) Either the ratings agencies are in bed with Goldman, or they are dumb, or they are incompetent or they are also committing illegal acts. *This is something that needs to be explored thoroughly because none of the "gullible" investors would have bought the product if they were rated correctly*.

    Finally, just because everything that Goldman did is eventually considered "legal", that does not mean that we should leave them alone. We, the taxpayers, paid for the bailouts. We should have the final say in any future bailout, and also in minimising our risks. After all, when the Bank of England prints money, the taxpayers and the future generations have to pay that back.

  • Comment number 56.

    49. At 11:49am on 20 Apr 2010, Ally Gory wrote:

    "You forget it takes two to tango. It is very difficult to force someone to borrow too much and that is what is ultimately behind the economic mess."

    Ok - lets analyse that shall we? 2 different scenarios.

    1) Lender - "Want to borrow 100 grand?"
    Borrower - "yes, ok then"
    Lender - "Here you go"

    Result - Money lent, default occurs

    2) Borrower "Can I borrow 100 grand please?"
    Lender "no"

    Result - no money lent, no bad debt.

    ...so do tell me how does your theory work? Did the borrower send out advertisments to lenders to request money? - or was the truth in fact that everyones letter box is rammed with offers of credit?

    Your ideas are poppycock - it's for the lender to assess the borrower - not for the borrower to assess themselves (as we know what the result will be)

    Another banking apologist tyring to blame the people for taking the handd offered, not realising what they were comitting too - because all the details were in the small print.

    ...now you try and explain why there is small print - if it's not to con people into borrowing? - Borrowers don't send letters to lenders requesting money and then right at the bottom write....."oh by the way I might not pay it back" - do they?

  • Comment number 57.

    # 43. At 11:27am on 20 Apr 2010, Justin150 wrote:

    > Never invest in anything where the annual report has a picture of
    > the chairman stepping out of a helicopter

    unless, say, the company makes helicopters?

  • Comment number 58.

    #53 We are. Currently 'worthless' homes are being repossessed.

  • Comment number 59.

    54. At 12:15pm on 20 Apr 2010, al2975 wrote:

    I was fascinated until I saw this line...

    "Sorry I was unaware about the 1998 bailout, that was a decade before my time, so appologies"

    Which I presume makes you 2 years old???

    ...and then I realised you worked in FX trading but have no idea about the history of finance. I wasn't around in 1929 - but it doesn't mean I am not aware of the causes and arguments of causes around it.

    So is there any wonder that finance is in such a mess when someone like yourself who talks so authoratively about the workings of finance isn't even aware of the biggest hedge fund bailout ever of LTCM?

    How can finance 'learn from it's mistakes' if the people who work there aren't even aware they have occured!

  • Comment number 60.

    It's a relief to see that many people posting here have the wherewithal to quickly walk past Mr Peston's limited hangout and focus on the larger issues. Unfortunately I can't tell you precisely what I mean by that statement as I'll be censored.

    It's enough to say, this latest issue certainly isn't isolated and if you look at all the other cases of ALLEGED fraud (mentioning no company NAMES) brought to date and do a little background digging a clear pattern quickly emerges. We then easily see the (how shall I put it?) LESS THAN HONOURABLE (is that okay censors?) gentleman of the banking "profession" in their true light. And this has ALLEGEDLY been going on for decades.

    Obviously I'd give you all some links to support what I'm saying but, well, you know... this post would never see the light of day.

  • Comment number 61.

    Some mug had to believe the CDOs were a worthwhile investment to put money in, and you have to ask, who were those mugs and on what criteria were they using to judge that subprime mortgages were a safe long term buy for a pension fund? They used ratings agencies, who were still rating them as AAAs.

    It's akin to someone selling land to build a skyscraper, and the surveyor says OK, but a hedge fund bets they'll find sand underneath. Difference in this case is that the hedgie is pretty sure there is sand underneath in contradiction to the surveyor, and asks a land seller to sell the land at a high price to a pension fund who is required to hold it for the long term, so that he borrow it and short it.

    In a way, the hedgie simply has spotted an opportunity that noone else has spotted yet, or more likely that noone else had the guts to do anything about. Isn't this how most fortunes have been made in the past: being slightly ahead in information before the rest of the world catches up? This is the inherent flaw in markets: they say that markets self correct, but there is always a gap between information being limited and it being universally available that allows money to be made.

    We've made our capitalism bed, now we have to sleep in it.

  • Comment number 62.

    57. At 12:33pm on 20 Apr 2010, JA wrote:

    "# 43. At 11:27am on 20 Apr 2010, Justin150 wrote:

    > Never invest in anything where the annual report has a picture of
    > the chairman stepping out of a helicopter

    unless, say, the company makes helicopters?"

    ...or unless the helicopter is at 50,000 feet over a shark infested pond?

  • Comment number 63.

    GS Was a market maker - they introduce buyers and sellers and do not let either side know who is on the other as are the rules.

    The hedge fund bet on housing bubbles bursting. Investors bet against this.

    Hedge fund won this time. Investors were, as others have said here, not using appropriate risk management and so got their fingers well and truly burnt.

    The taxpayer in the UK only picked up the bill because of the knee-jerk reaction of government over NR and so they have prolonged the pain for us all.

    So before government bodies start more knee-jerk reactions and pass laws which are badly written and badly thought through, how about looking at the the whole system from government downwards - governments because they started the debt fuelled society with their own massive borrowing

  • Comment number 64.

    58. At 12:38pm on 20 Apr 2010, spur22 wrote:
    #53 We are. Currently 'worthless' homes are being repossessed.
    --------------------------------------------
    The homes exist so can be possessed. Money turns out to be an abstract construct so how can it be possessed?

  • Comment number 65.

    #56 wotw "it's for the lender to assess the borrower - not for the borrower to assess themselves"

    Are saying that is okay for the borrower to accept no responsibility? That they could not see the print on the forms that say things like "your home is at risk of if you do not keep up repayments". Are you saying that the general public are too uneducated to take care of themselves and that they need to be treated like little children?

    There used to be a saying that you can't fool all of the people all of the time, yet you are suggesting this may now be possible and that the only way to prevent it is greater regulation and laws. This will achieve nothing other than making it easier to fool people in the future for they will think that the law is there so it must be ok.

  • Comment number 66.

    45 plamski

    Thanks!

  • Comment number 67.

    50 Jacques Cartier wrote:

    'All directors are more interested in their own well being than
    shareholder's returns. The return to any other stakeholder is
    always a lesser goal, for the cash-slobs that they hire to be
    bosses... That's why "money is the root of all evil".'

    ----------------------

    often misquoted....it's 'the love of money is the root of all evil'

  • Comment number 68.

    #61

    'We've made our capitalism bed, now we have to sleep in it.'

    It stopped being capitalism when Alistair Darling put his hand in my pocket to pay for it!

    'Isn't this how most fortunes have been made...'

    This is how con tricks are made.

    I am not a banker, but I am learning fast.

  • Comment number 69.

    What is needed is action, not just more talk. Nick Clegg is right - the first step is for the UK Government to stop doing business with Goldmans. Next step is to persuade the rest of the EU to do likewise - shouldn't be hard for Gordon Brown, after all apparently he is a leading figure in the International stage when it comes to handling the financial crisis...and besides, political sentiment everywhere would be with him.

  • Comment number 70.

    #58 Yes, paper money, or credit and debt, are abstractions too.

    http://legal-dictionary.thefreedictionary.com/Abstract+concepts

  • Comment number 71.

    Why does the media expend all this effort discussing the rats tail of problems involving the financial crisis without spending any time on the root cause? Interference of government in the free market! In this case shelling out hundreds of billions of taxpayer dollars to rescue and sustain failed enterprises. And please, stuff the "too big to fail" nonsense. That is a bunch of self-serving BS perpetrated by useless managers and government officials clinging to their boni, pensions, campaign finances and college buddies.
    Let capitalism run its course, lazy and hapless idiots like the "professional investors" you mention will vanish.
    If you doubt my words, just compare the boni that are paid to Lehmann and Goldman employees.
    Lehmann = Capitalism.
    Goldman = Corporate socialism and government cronyism.
    This would also have turned "hedge fund's huge profits" into huge losses soon afterward and you wouldn't have to waste a single line on them.
    It is also worth mentioning the US Governments role in inflating the real estate bubble. For decades the US pumped billions of taxpayer dollars into the real estate market through Freddie Mac and Fanny Mae and assorted other institutions (and still does!). A few months ago I read an article on Bloomberg that close to 90% of the private (non-commercial) real estate market in the US is now financed through these companies. In effect the US Government has a "Department of Real Estate". Easy government money led to deteriorating lending standards and created the bubble that hedge funds were happy to speculate with.
    Taxpayers were taken to the cleaners twice. First to finance housing to people that had no chance or intent to service the loan. Second to cover the losses of "professional investors" on Wall Street after the speculation bubble burst. Both times the government forced them into this untenable situation.

  • Comment number 72.

    The hedge funds may have profited from the sub-prime collapse but they did not cause it. If there had been no hedge funds there would still have been a sub-prime crisis because the sub-prime mortgage market was not viable. Perhaps without hedge funds the sub-prime bubble would have pumped up even more, who can tell. Yes we all hate the rich and greedy, but what about the not quite so rich but still greedy? Oh that's us so let's get indignant instead.

  • Comment number 73.

    #65

    Are you saying that the general public are too uneducated to take care of themselves and that they need to be treated like little children?

    Do you really want an answer to that?

  • Comment number 74.

    Well it means that the hedge funds were - for example - spurring the investment banks to manufacture these CDOs, which bundle together other securities made out of low quality or sub-prime loans to home buyers. And the effect may have been to increase the supply of cheap finance to homebuyers.

    In other words, the hedge funds can be seen as having pumped up America's unsustainable housing bubble with the intent of maximising their winnings as and when that housing bubble burst.


    Surely its the opposite? As this was a synthetic CDO, it didn't provide any additional funds to the housing market. In fact, the purchasers of the CDO clearly had an appetite for housing market CDOs which weren't being provided by the market in sufficient quantity, otherwise they wouldn't have had any interest in the security sold by Goldman Sachs.

    By allowing them to buy the synthetic CDO, Paulson prevented those funds from reaching the housing market, presumably slightly deflating the market.

  • Comment number 75.

    “… thus perpetuating the myth for a convenient period that the emperor was magnificently attired. weren’t they just being entrepreneurial”. ===Robert Peston

    I take issue with the terminology - after all words and their implied meaning define the boundaries of our thoughts and even social norms. The word “entrepreneurial” does carry a positive camouflage meaning of forward thinking and willingness to take risks, and from this it acquires its social legitimacy. But as implied in the same paragraph it also carries a meaning of deception and fraud. Cleverly, the entrepreneurial wrapping somehow makes this justifiable and socially acceptable.

    The lexicon of capitalism abounds with such examples of social justification. The gambling activity of banks is called “investment”. The first duty of companies is to their “shareholders”, whoever and wherever they may be - mostly not in or of the country of residence. The duty of companies to their customers and workers comes very low down the list.

    The use of these words subconsciously defines the limits of any debate, and it is our duty to peel this camouflage before we can even begin.

  • Comment number 76.

    Not the "experienced investors'" faults for actually buying the worthless CDOs then? Whatever happened to "caveat emptor"?

  • Comment number 77.

    The problem is that the financial system as a whole, and also many individual institutions, are "too big to fail" and de facto underwritten by the taxpayer. All these games of hedge funds trying to make profits at the expense of banks and insurers would not matter if they were zero-sum games, but they are not. The use of derivatives like CDSs and CDOs has a big multiplier effect, like magnifying the sun's rays with a lens, causing a fire.

    The hedge funds are not evil, but following the crisis there is no justification for any regulatory or supervisory gaps. Regulators and supervisors must be able to oversee the entire financial sector. There must be total transparency on derivative use and the possibility for public authorities to limit their use, to prevent a nuclear-style chain reaction.

    I sometimes wonder if the financial institutions are actually happy at all the focus on pay and bonuses, as it takes attention away from the real issue, which is their ability to invent nuclear weapons and play with them, knowing that somebody else will clean up the battlefield afterwards.

  • Comment number 78.

    “… thus perpetuating the myth for a convenient period that the emperor was magnificently attired. weren’t they just being entrepreneurial”. ===Robert Peston

    I take issue with the terminology - after all words and their implied meaning define the boundaries of our thoughts and even social norms. The word “entrepreneurial” does carry a positive camouflage meaning of forward thinking and willingness to take risks, and from this it acquires its social legitimacy. But as implied in the same paragraph it also carries a meaning of deception and fraud. Cleverly, the entrepreneurial wrapping somehow makes this justifiable and socially acceptable.

    The lexicon of capitalism abounds with such examples of social justification. The gambling activity of banks is called “investment”. The first duty of companies is to their “shareholders”, whoever and wherever they may be - mostly not in or of the country of residence. The duty of companies to their customers and workers comes very low down the list.

    The use of these words subconsciously defines the limits of any debate, and it is our duty to peel this camouflage before we can even begin.

  • Comment number 79.

    #73

    The only reason I want an answer to that is to see if that is really what people believe.

    If that is what they believe, then surely the answer is to have parents educate that if you do not have it, you do not spend it. Or perhaps if it sounds too good to be true, then it probably is. Or any other number of sayings regarding this sort of thing.

    Or we could perhaps just let GB and AD decide how to spend our money as they obviously know best how to use it wisely.........

  • Comment number 80.

    #35
    ""I cannot see how the hedge funds are to blame for this, if the products had carried on, he would have lost out and rest assured no Hedge Fund was rescued by public money."

    Not in this crisis (yet) - but one was saved as recently as 1998. "

    LTCM was bailed out by other banks and investment houses, so what was originally said by at 10:36am on 20 Apr 2010 by al2975 was correct in that it was not rescued by public money.

    Please feel free to apologise anytime......

  • Comment number 81.

    Just to be clear about above post, the Fed Reserve did also participate but it was not using tax payer money

  • Comment number 82.

    76. At 4:08pm on 20 Apr 2010, scrchngwsl wrote:
    Not the "experienced investors'" faults for actually buying the worthless CDOs then? Whatever happened to "caveat emptor"?

    The issue is that some of those experienced investors (NOT) are using retail deposits and pension funds to gamble with.

    If you are going to apply 'Caveat emptor' you would need to apply it to savers and those contributing to their pensions who have no idea what risks their fund managers are taking.

    Perhaps that is the right argument to make. Anyone with spare cash needs to be more careful about who they give it to. In fairness though they have little choice in the matter.

  • Comment number 83.

    The strange thing is that RBS knew that the world was overborrowed, that risky lending was a problem in America, and that property prices were going to crash.
    I saw its own inhouse reports on this before the crunch happened.
    It was in so deep and was terrified of the crunch happening and it could see it was going to happen.
    So why on earth did it allow itself to punt £841m on these dodgy deals?
    The answer seems to be that it inherited this from ABN AMRO.
    Which begs the question .....did the vendors of ABN AMRO make the extent of their liabilities known to RBS,in good faith, and when did RBS find outwhat they had bought?
    Is there a Dutch FSA governance issue here.....is this where there was also some Shenanigans?
    Because I never ever met a reckles RBS lender, but ABN AMRO was known for its tendency to lend to people no-one else would look at.
    Pigs in pokes loans being sold on as pigs in pokes CDFs to banks, which were taken over as pigs in pokes by banks funded by shareholder money in rights issues that were also pigs in pokes, and those banks then bought by the government as pigs in pokes.
    And this government is facing electoral challenge from 2 pigs in pokes parties, ,one of which was discredited in the 1990s and the other which became irrelevant in 1918.
    Oink oink!

  • Comment number 84.

    14., 35. & 36. Good posts. I'm a regular reader so enjoy the blog.

    Quite a punchy bit of news!

    Are Hedge fund managers regulated by the FSA (or anyone). How about the Banks for creating the CDO's to sell on. There's so many vested interests here. I understand that the CDO's were packaged in such a way that their content was largely opaque (like the Bible says "A little leven leventh the whole lump" Gal. 5:9) this problem has spread and spread around the world (I take the point that these may have been SYNTHETIC which perhaps lessens the consequences of this crime, if crime it is). This must be quite an iceberg so hopefully more will come to light.

    At the very least the regulators should control the descriptions for all investment products so investors gullible or not have the information they need to make sound decisions. Goldman or Paulson or the fabulous Fab more culpable - more will come out I'm sure.

    As for the election how can we pay off 0.5 billion pounds being added every day to our UK deficit. 6 billion of savings whichever Party gets elected is wiped out every 12 days - all because of these products did the poisonous loans of the greedy lenders.

  • Comment number 85.

    Not sure of the logic that hedge funds selling CDOs increased the source of cheap finance Robert - I think it's the opposite. In order to bet on the fall in value of the CDO the hedge fund needs to either (i) borrow the security from an exisiting owner, then sell it or (ii) utilise a synthetic CDO which is a bet between two parties on the value of already existing securities. In neither case does more lending need to occur to house buyers. Indeed if an end buyer buys the synthetic CDO (as in this case) lending to house buyers doesn't occur where it would of done for a traditional CDO product.

    The buyer in this case knew it was a synthetic product - eg there had to be a seller on the other side that was betting against it. Looks like the hedgies are not guilty on this one. Though the issue of fair disclosure from GS is worthy of investigation.

  • Comment number 86.

    @ No 59 Writings on the Wall

    "Sorry I was unaware about the 1998 bailout, that was a decade before my time, so appologies"

    Which I presume makes you 2 years old???

    No i am actually 20 thank you, I was simply remarking that I had not heard of the bailout of LTCM, so thank you for being so condescending. I am sure as you are so evidently the God of Financial markets, I should bow to your infinite wisdom. Ironically on my first day I didn't get a sit down lesson in the history of Hedge Funds, it was more to do with how to trade and make money.

    So if you are so knowledegable about finance, why are you wasting your time on here and not running your own hedge fund? If you knew of every bailout to ever occur, I hope you longed every bank share under the sun in March 2009, hope it worked for you!

 

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