Nobody is actually in the dark about the fact that firms like Goldman Sachs are the primary culprits in the financial collapse of 2008.

I’d like to say that what is a mystery is why no one from these firms has been held accountable in any meaningful way for what they did to the country, and even the world. But the truth is that we all know why: moneyed special interests own the country, including the government.

A favorite argument by these financial bandits is what’s called the “sophisticated investor” defense. In this article, Heidi Moore describes what that means and why it’s a specious argument.

Big Money: Debunking the myth of the ‘sophisticated investor’

by Heidi Moore

As part of their defense in a messy SEC investigation, Goldman Sachs and investor John Paulson have trotted out a classic Wall Street defense: Their customers were “sophisticated investors.”

So buyers, beware — this is just how the big boys roll. It’s a high-stakes game for experienced players; they all know the real rules; the public shouldn’t care. Don’t fret over the higher workings of the princes of finance, because it’s not as though Mom and Pop lost money in their deals. Goldman’s Fabrice Tourre told the Senate on Monday: “I was an intermediary between highly sophisticated professional investors — all of which were institutions. None of my clients were individual, retail investors.”

Wall Street loves the “sophisticated investors” argument, and little wonder: It could generate infinite financial fees if only the populace could be convinced that it’s okay to fool some of the people all of the time. The problem is that even when only some of the people get fooled, all of us are paying all of the time.

Let’s examine what happened with Goldman and Paulson. Goldman Sachs stands accused, in part, of giving favored financial treatment to Paulson’s firm, allowing him to advise on the creation of a security, Abacus, that he wanted to fail; Goldman later sold it to investors who wanted the security to succeed, but it didn’t tell them Paulson had played a role in creating the thing and shorted it to bet it would fail. To sell the deal, Goldman apparently withheld information about Paulson’s involvement from the buyers, including Royal Bank of Scotland and Germany’s IKB Deutsche Industriebank. The buyers lost about $1 billion on the deal, according to the Securities and Exchange Commission. ad_icon

Telling the whole story

Economists call this “informational asymmetry.” Everyone else calls it “not telling the whole story.” The hitch is that America’s securities laws require disclosing all warts to potential buyers, and banks pay lawyers millions of dollars every year to comply.

Informational asymmetry is also contagious: Once it’s started, it becomes easier and easier to withhold information that buyers need in order to make decisions. And if it’s done to one client, it can be done to any. Most of those clients can put 2 and 2 together and recognize that what happened in the Abacus deal is probably not an isolated incident; in Wall Street parlance, there’s never just one roach. That’s why Goldman and Paulson started assiduously groveling to their other clients after the SEC announced its case, hoping to ease those clients’ predictable fears that the bank and the hedge fund could have treated them the same way they treated RBS and IKB.

It’s not just the big clients, however, that get hurt. What Wall Street would like to ignore when it is taking bets in its casino is that a big pile of chips on the table come from regular consumers — from their bank deposits, retirement accounts, credit-card balances, car loans and mortgages. That’s why the distinction between these sophisticated investors and everyone else is nonexistent. When Wall Street banks omit information and draw profits from “institutional investors,” that means they are taking money from your pension funds, your school endowments, and your city and state governments. Other sophisticated investors include hedge funds, which take money from those pension funds, or private-equity funds, which own companies that employ 10 percent of all Americans.

Pension funds, for instance, are considered “sophisticated investors” on Wall Street. But those are just pools of retirement money owed to workers. The pension funds, looking to expand their stash, invest in stocks and bonds sold by Wall Street. These pension funds also give their money to other funds, such as hedge funds and private equity funds, that invest that money in riskier investments, perhaps troubled companies or distressed mortgages. Pension funds play the Wall Street game to score a healthy return — but when they lose, the money lost belongs to regular people.

Consider synthetic collateralized debt obligations — which describes bets made on a bundle of securities tied to home loans — like Abacus. Banks would need to lend $50 billion of mortgages to regular people in order to create a $1 billion CDO like Abacus, according to Michael Lewis in “The Big Short.” These deals didn’t cause the greatest financial crisis since the Great Depression; what they did was far worse.

They took the basic subprime losses and magnified them to a point at which no one — not banks, not investors, not entire governments — could bear the cost of the massacre that followed. It cost only $35 million a year to buy protection against the failure of billions of dollars of assets. When these assets failed, the insurance holders didn’t get $35 million a year; they received many multiples of that. Banks nearly collapsed trying to scrounge together the money to pay back these insurance policies. The two banks that bought the Abacus deal both received multiple bailouts from the taxpayers of Germany and Britain. Yet Goldman and Paulson insist their deals concerned only sophisticated investors. Tell that to the foreign governments.

All in it together

The truth is, there are no real lines dividing Wall Street and Main Street and Washington. They are all interconnected. Promiscuous federal subsidies to homeowners and low interest rates made mortgages and refinancing very popular. Unethical mortgage lenders wrote these terrible, no-money-down, no-documentation deals because they wanted the fees. Wall Street seized on the popularity of those products and churned out more bundles of mortgages to be packaged and sold to big investors. Goldman and other banks sold some of these securities and took some of them onto their own books, and many banks turned around and insured themselves against the failure of the deals by buying policies from American International Group. AIG loaded up on contracts to protect the investments, and when the housing market collapsed, AIG came up short without enough money to pay the contracts.

The banks were caught empty-handed. To save them, the Federal Reserve cut interest rates to zero and ate the banks’ poison: It bought with its own money $1.4 trillion of the remaining mortgage dreck; as a result, the Fed is now the least-capitalized bank in the United States and would not pass one of its own stress tests, although there isn’t enough money in the world to bail it out if necessary. Besides that, the banks got the law changed so that they could keep optimistically boosting the value of these toxic mortgage securities still on their books, making their financial positions today look far stronger than they are.

So while Wall Street is swearing up and down it was dealing only with sophisticated investors, in reality every single part of the financial system, from high to low, was involved. Taxpayers and investors lost money in the bailouts while the banks made a killing: They were paid by clients to do sloppy deals, then paid again by the government to clean them up.

It’s a top-to-bottom mess. So here’s a radical idea: Instead of buying the notion that there’s a difference line between sophisticated investors and the mom-and-pop variety, banks should tell the truth. To everyone. Wall Street is the factory for all the financial products in the United States, and you can’t allow a factory to put out some poisonous products and claim the rest are healthy.

Heidi N. Moore, a financial journalist in New York City, is a former reporter for the Wall Street Journal. Her work has also appeared in New York magazine, Institutional Investor and the Financial Times.

Original post on The Washington Post

46 Responses to “The Sophisticated Investor: An Apocryphal Tale”

  1. langel sill says:

    I’m scared, very scared! We weren’t here for the great depression, but we’re here for this one. This outcome will be the world will be shared between Europe, China, America as far as Governments go. Or in other words NEW WORLD ORDER. At first I was skeptic, but not now. I guess we will live with it for awhile, but then will rebel against it. Small wars first, then growing to become global. Stock up on food…heaven help us. AND ammo. 2012 the end of the world! As we know it.

  2. mcniff moon says:

    Lost Meltdown – Neon Red (34): Lesser men may have Meltdowns on the waves when they’re having a rough… [16:08:32] –

  3. sha bergenniss says:

    empty”/nnPayday cash Tampoco Faxing Speedy budgetary release prague turn into taken from while not hustle and bustle Due to the payday loan conclude among the leeevans monthly, payday loans uk if you want established savings are worldwar2 the majority of usurped, accomplish work posses to travel a difficult time, despite the fact that having your individual coming would like your house will take. Through the disorders, if you ever obtain access to attaining some of budget, and after that it is considerably easy-to-implement igp so that you can beaten you see, the finance meltdown. Only deriving time frame budget will be definitely aiming to if you…

  4. LISBON (Reuters) – Austerity measures brought in to tackle Europe’s economic crisis may cause a rise in drug-related HIV infections as stretched health services struggle to cope, the EU’s narcotics agency said on Tuesday.

  5. BAHAHAHAHAHA nuff said don’t wanna spam ya xD loving how up front you are with offending them in a way it’s funny

  6. How many banks have gone under due to the of liberal social policies in the housing market? Every month is a new record.

    Seriously. Is this really Austan Goolsbee?

  7. walcesler jama says:

    OECD figures suggest UK economy will fall back into negative growth in first six months of 2012 due to euro crisis.

  8. ruto guist says:

    6 months of ‘mild’ recession in 2012. Can Jaluch help you cut more staff costs this side of Xmas so you are prepared?

  9. ploes pellma says:

    The Truth Of The Modern Recession – Root Causes & Reliable Solutions: The reader should expect to learn more on …

  10. After hearing this dribble, I am still voting Conservative. This piece is very biased and has inaccuracies that are not correct. YES Harper spent money, but it was paying the previous Liberal debt before it crippled our economy ! He put most towards our deficit!! That is NOT a waste of our money, it is he paid the bills. And stop saying he is makes every decision like a dictator, yes he is a guy, but he also has a strong team of advisers to assist him.

  11. drigiann math says:

    Oh wait, I was just listening to the instrumental version. During the Matryoshka bit, the instrumental plays the beginning PoPiPo and during the Butterfly on the Right Shoulder is Hato

  12. This country was built from entrepreneurial spirit -the same will pull us out of a recession… Teach kids to create!

  13. tini nagan says:

    only a “lifetime crutch” because of low wages and absence of full employment – Bev’s system designed for different economy

  14. “And all agree as to what constitutes a profit…in other words, all people have the same goals, priorities, interests….this is not the real world.”

  15. Italian Premier Mario Monti has scrapped Rome’s bid for the 2020 Olympics, saying the country’s government can’t supply the required financial backing at a time of economic crisis.

  16. bri demayer says:

    Are you retarded? The USA would get murdered by the UN, never mind Korea and other countries. You also have thousands of nukes just lying around in the States. I was thoroughly impressed by the stupidity of this comment.

  17. eversley says:

    Ok then, one last question. If your someone that doesnt like getting into political debates, then why voice your opinion in the first place?

  18. Nowadays, who isn’t looking for ways to save extra dime? The economy has been giving difficult times to us, so it is only right to think of savings in each expense adventure that we do everyday. And when it comes to auto insurance savings, what measures do you make? As we all know, auto insurance can be one’s most expensive expenditure decision… –

  19. stefano says:

    45 Signs That America Will Soon Be A Nation With A Very Tiny Elite And The Rest Of Us Will Be Poor

  20. thuyvernef rigley says:

    Obama Says March Job Numbers are ‘Welcome News’ – MyFox Dallas

    Obama Says March Job Numbers are ‘Welcome News’ – MyFox Dallas
    (NewsCore) – President Barack Obama reacted to the March job numbers Friday, saying they signaled “welcome news” for the economy. The president spoke at a Women in the Economy forum at the White House after the Labor announced that …

  21. makishiguc que says:

    just woke up must have needed that! Don’t feel like i’m having a meltdown anymore! How’s your day going? x

  22. jurgenitt macl says:

    Its a good thing he doesn’t have Hockey caps along with baseball caps. Priss had another O’s hat meltdown

  23. UN Wants to Stabilize Global Economy With One World Currency …: By Susanne Posel / Occupy Corporatism The UN C… –

  24. At a time when the entire country is being tested by the economic crisis, some people are quite literally on the verge of destitution and hunger. At a time when the empty state coffers can not any concept of a welfare state, with “frozen” financing towards education and health, the prison system could not be an exception.

  25. margrizawa says:

    What Effect Is the Economic Crisis Really … – Ninth Level Ireland: What Effect Is the Economic Crisis Really H…

  26. “Fascism should more properly be called corporatism because it is the merger of state & corporate power” – Mussolini

  27. gon ger says:

    All these cuts due to recession caused by bankers supposed to be regulated under system supervised by Gordon Brown and Bank of England.

  28. just went into mobil nd the guy was having an emotional meltdown cuz one of the pumps wasnt working. funniest thing ive ever seen

  29. mran bruth says:

    According 2 attack ads the Harper minority govt budgets they voted 4 lead to the recession. Odd campaign strategy.

  30. domironi bordyck says:

    the day all five boys are no longer single is the day our whole fandom will have a massive meltdown.

  31. visidarrel netting says:

    not even have sex asked nowadays have to ask these mercenaria pay only think about money in a role that economic crisis

  32. kley samarca says:

    when sing “make it rain” again ima pour a bottle of water on her head..its still a recession and gas prices way too high for all that

  33. straybrons svm-bnrein says:

    Because they could be doing better if they weren’t trapped in a irredeemably broken system. The fact that most people survive just shows how resilient people are, not how great the schools are.

  34. Breaking!! Israel Lobbyist – We Need a False Flag to War with Iran!

    “NeoCon At Globalist Think-Tank Says Use False Flag to War With Iran”
    Occupy Corporatism
    Susanne Posel
    September 26, 2012

    Patrick Clawson, member of the globalist-controlled think-tank and neo-con influenced Washington Institute for Near East Studies (WINES); recently spoke about the use of false flags as a necessary way for instigating a war with Iran. Clawson remarked that Obama has had a difficult time “getting the US into a war with Iran” and advocating the use of conventional means (i.e. using a false flag to provoke a military strike).

    read more

  35. Members of Occupy DC and their have held a protest march in the streets of the US capital to kick off a Week of Resistance marking the first anniversary of the anti-corporatism movement in Washington DC.

  36. Obama has been right on the Economy all the way down the line, now all we need are people who will help him in Congress and the Senate…

  37. There really are no countries any more, we’ve all been absorbed and our cultures have been flattened by corporatism + so called free trade

  38. streath tutzsimont says:

    first time I see EXO-M get business class for their airline trips~ usually they always take economy class. Good SM! LOL …

  39. nada theafezio says:

    Despite the looming triple dip recession and the doom and gloom of economic woes, Lee on Solent in thriving, with…

  40. As Britain has shown, inflicting austerity on a weak economy leads to deeper recession, rising unemployment and increasi … –

  41. giovaalf ola says:

    By Dave Shedloski HONOLULU – Pat Perez is now a happy golfer. No, not because he fired a second-round 63 Friday in the Sony Open in Hawaii, though that’s a pretty good reason. He’s happy because he wants to be. It is his choice. He is in the process of becoming a changed man, which isn’t easy when you play golf for a living. Golf will make you crazy. Golf will make you weep. Mostly, golf will make you angry. Of course, there’s a range of anger simmering beneath the seemingly composed façade of every player, from low boil to cosmic meltdown. Perez is from the Tommy Bolt and Tom Weiskopf school of Vesuvian extirpation. Or at least he used to be. He has bought into the power of positive thinking, and he’s positive that his golf will be better because of it. With the help of Chandler, Ariz., psychologist Chris Dorris, who bills himself on his website as a “mental toughness trainer and personal transformation coach,” Perez is seeking to conjure his inner Yanni. Two rounds into 2013, the…

  42. After falling behind the Denver Broncos 7-0 on a 90-yard punt return by Trindon Holliday, the Baltimore Ravens nearly had a full meltdown similar to the one they had against the Broncos in their regular season meeting. On the ensuing kickoff after Holliday’s touchdown, Ravens wide receiver/return specialist Jacoby Jones bobbled Matt Prater’s kick, setting the Ravens up at their own six-yard line. A two-yard run by rookie Bernard Pierce was followed by an incomplete pass attempt from Joe Flacco to tight end Ed Dickson. Another incomplete pass attempt from Flacco to wide receiver Tandon Doss was negated by a 25-yard pass interference penalty on Broncos cornerback Tony giving the Ravens new life. [Also: Tim Tebow facing after Jaguars snub] Baltimore would not squander the With a new set of downs, Flacco hit Boldin for eight yards and then Boldin and tight end Dennis Pitta would serve as decoys, running intermediate crossing routes to freeze free…

  43. dico teau says:

    “Fascism should more properly be called corporatism because it is the merger of state & corporate power.” – Mussolin …

  44. Cyprus jobless turn to illegal songbird trapping Associated Press Copyright 2013 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. Updated 12:53 am, Thursday, January 31, 2013 of trapping ‘ambelopoulia,’ as the blackcaps, robins and other warblers are known locally, ruefully reminisce about how until recently the practice was widely considered an ingrained of local culture, one so lucrative that it sustained entire livelihoods and put countless kids through college. […] Andreas Antoniou, the head of the special police anti-poaching unit, said songbirds, hares and protected mouflon sheep have been at the center of a surge in illegal hunting island-wide that he blames on the economic crisis. Hellicar, a spokesman for conservationist group BirdLife Cyprus, says locals have confirmed that trappers who had given up the practice have been drawn back because of money problems, noting a “dramatic rise” in…

  45. baum waidunklap says:

    JZ elected 2007 – in 2008 world hit by worst ever economic crisis which led to 1.17m job losses in 22 months. We still …

  46. laenneheal says:

    Scarlett saw me picking her clothes out and now we are in meltdown mode because she wants to leave RIGHTTHISSECONDOMG

Leave a Reply

Your email address will not be published. Required fields are marked *