Saturday, January 19, 2008

Tell it to the boss

Guambat is glad to see more comment follow the lead taken by Kate Kelly in a WSJ story back in mid-December, particularly kicked along by a recent Michael Lewis column in Bloomberg, and for a pithy reprise of those comments see Felix Salmon.

Guambat had "read with interest" as they say that Kate Kelly piece and meant to spread it around here but twas the silly season and things just got away from him. He thought the story too stale to go back to, but it has been revived and it is good that it did. Now Guambat can have his say without it being too stale.

The story examined how it was that Goldman seemed to dodge the silver bullet that caught all the other Werewolves of Wall Street.

Lewis points to the idea that if you truly want inside risk management in an organisation, you can't embed it with the departments you intend to risk manage. As Felix points out, "One can argue about whether Goldman was lucky or whether it was smart. But I don't think it's fair to say that it was overruling its own traders."

The part of the Kate Kelly story that stayed with Guambat was the unanswered question:

Goldman's success at wringing profits out of the subprime fiasco, however, raises questions about how the firm balances its responsibilities to its shareholders and to its clients. Goldman's mortgage department underwrote collateralized debt obligations, or CDOs, complex securities created from pools of subprime mortgages and other debt.

When those securities plunged in value this year, Goldman's customers suffered major losses, as did units within Goldman itself, thanks to their CDO holdings.

The question now being raised: Why did Goldman continue to peddle CDOs to customers early this year while its own traders were betting that CDO values would fall?

A spokesman for Goldman Sachs declined to comment on the issue.


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