Thursday, December 24, 2009

Wall Street Ethos

This excerpt from today's NY Times to my mind captures the core values of Wall Street:

..."The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson"...

Finally someone other than myself is using "arson" as a metaphor in describing the role of Wall Street. I long ago complained that those "masters of universe" and friends of Geithner and Summers and Paulson most cleverly played the victims of a firestorm when they were in fact accessories to arson. See my article here.

The NY Times article here (from which the above excerpt came) focuses on how Goldman Sachs as well as Wall Street firms in general knowingly packaged and sold inferior quality mortgage related derivates and then bet against these products expecting them to fall using the firms' own capital.

Normally when a financial intermediary bought or sold a product the traders would immediately hedge in part, seldom in whole, the underlying value of the product. If the market progressively moves against the firm, the hedge size gets bigger and bigger until it is fully hedged.

However, if this report is accurate which seems highly likely, then it raises not just a question of business ethics, it may have been illegal.

Do I believe something like that happened during the bubble or even as part of an ongoing process of proprietary trading on Wall Street? You bet I do.

Ah, yes. Notice the role of a Princeton graduate.

No comments: