CheapIV.com

Goldman – Counter-Party Risk

admin on 04 23, 2010

As we all know by now, the SEC is investigating Goldman.  Some call it a witch hunt to make the SEC look better.  Some take the opposite side where they are calling Goldman the devil.  Well I have to agree that they make a ton of money day after day, month after month, quarter after quarter.  Is it just luck that they can trade these positions with such expertise.  If we had tomorrow’s newspaper, I know we could make some money too.  The SEC has opened a can of worms with this investigation.  Unfortunately, the SEC will will probably fall short of proving anything of value.  Goldman is operating in the world the we have allowed them to create.  They are both advisor and counter party.  This has to be the deadliest combination there is.  For the most part the people asking for Goldmans advice are either incredibly wealthy or institutional investors.  Either way it is hard to feel sorry for them since they should know who you are getting in bed with.

I am sure as Goldman is getting more press, more stories about how they screwed one of their clients out of money will come out.  For the most part though, they did it legally.  They were allowed to be the counter party.  If you know that Goldman is willing to be the counter party, wouldn’t you think twice about doing the trade.  Sure they can hedge off their risk, but some of the contracts they lock their clients into are so complex that the client did not have a clue on how they worked.  They just agreed because it did what Goldman said it would do.  Take Ashanti Gold for example.  Ghanaweb.com posted an article on how Goldman was both advisor and counterparty and who do you think got hurt in the deal? You can read the article here.

Goldman is not the only company that does this.  This is a product of what we have let happen.  There is the reason we had the Glass-Steagall Act and we are now trying to reform the financial industry.  We will see which lobbyist have the most money.  My bet would be on the banks.  They make more money without the wall between their commercial and investment banks.  This is just plain and simple.  When the two can communicate they work better to screw clients out of money. We wish the SEC some luck for their case, but most likely will only result in a slap on the wrist in an attempt to save face.  Goldman’s CEO was at the White House 4 times while the SEC was preparing their investigation.  That is just coincidence  though.

Every institution should know their counter party risk… who they lose money to and why.

For those of you who are jumping into a shark tank, don’t be surprised when you get bit!