Friday, April 16, 2010

Goldman-Sachs subprime "aggregation" scandal affects ordinary people and retirees

MSNBC and NBC Nightly News have a diagramed explanation of the SEC complaint of subprime fraud against Goldman-Sachs, which sounds like an answer to an essay question of a B-school final exam. In general, the scheme has a lot to do with how securities were aggregated and packaged and then deliberately shorted.

What followed was an explanation of who gets hurt: Bond holders in general, fixed income security holder, largely retirees, and public employee pension funds.

Some of these concerns show up, at least indirectly, in an AARP Magazine (May June 2010) article by Lynn Brenner, “How bonds can bite”, link here. The article explains the three components of bond risk: (1) default (2) interest rate (3) inflation risk, and how interest rates are inversely related to prices. Arguably, the Goldman-Sachs fiasco can affect the stability of many previously safe bond funds.

Check the New York Times, Business Day, April 17, Joe Nocera, "A Wall Street Invention that Let the Crisis Mutate" (link). He describes "investment structures -- synthetic CDO's, they were called -- that were primed to blow up. They did so, reportedly, because some savvy investors wanted to go short on the subprime market" especially as mortgage companies started to run out of new customers to sell to (even before existing loans started to balloon out of control).  Totally unsustainable.

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