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The following paper is the summary of the article Goldman Wasn’t Alone dated 23 April 2010 prepared by Matthew Philips and published online by Newsweek. The article primarily focuses on the market for synthetic collateralized debt obligations that have been becoming increasingly popular in the US resulting from the rising trends in the housing industry. The article also refers to the response made by Goldman Sachs CEO Llyod Blankfein in response to the recent case lodged against the company by the US SEC about the securities fraud involving top management of the company.
The US SEC filed a civil case on April 16, 2010, suing Goldman Sachs for concealing information from other long-term investors about the assets offered to customers as part of the fund offered by the company referred to as Abacus. Abacus is a synthetic collateralized debt obligation (CDO) that was backed by assets that were considered of very poor quality. As a result of the fund collapsing its value fell drastically and two other investors German bank IKB and Dutch bank ABN AMRO lost more than $1 billion. The company responded to the charges by stating that the company itself lost more than $100 million on the risky product and the fund was in no way aimed for a failure (Philips).
However, the article suggests that Goldman Sachs was not the only company that has repackaged assets as synthetic CDOs. After 9/11 the Fed reduced the interest rates that attracted millions of dollars as an investment in the housing mortgage market. However, the demand for mortgages soon exceeded the available funds and financial institutions worked on developing synthetic CDOs by repackaging credit default swaps or insurance contracts to inject a stream of liquidity back into the system for more funding of the mortgage market. The idea was picked up by banks and the market flourished significantly. The CDO market reached new heights of US$386 billion however despite expectations for it to slow down the market continued to grow (Philips).
The market was fueled up by rising housing prices and more banks and other financial institutions embarking on the idea of developing synthetic CDOs to include riskier loans and then betting against these CDOs that eventually failed. This way financial institutions did not lose much and investors putting their money into these funds lost millions and billions of dollars in some cases. This strategy of synthetic CDOs was first employed by the Chicago-based hedge fund Magnetar Capital and a series of CDOs sponsored by the company resulted in 95% of the $40 billion worth CDOs defaulting and the strategy became known as Magnetar Trade (Philips). Similarly, many other financial institutions including Merrill Lynch and UBS were also involved in developing their strategies for synthetic CDOs that eventually failed and investors lost on a huge amount of their investment values. This strategy was not only practiced by banks but also by non-banking financial institutions that benefited from such arrangements. Such misleading synthetic CDOs caused millions of individuals to lose on their investments.
The article, therefore, highlights the extent of frauds similar to that of Goldman Sachs suggesting that as the housing industry of the US approached towards it eventual turnaround most of such synthetic CDOs failed to perform and financial institutions offering these funds pulled out without incurring any significant loss compared to that incurred by investors.
Work Cited
Philips, M. Goldman Wasn’t Alone. 2010. Web.
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