Are All Banks and Bankers unethical? Are pigs greedy? Answer is the same.

It is not everyday that you wake up knowing exactly what would happen for the day in the market. Tomorrow is one of those days. Sad to say its not going to be a good day thanks to the news that the Securities Commission sueing the Great Goldman Sachs for fraud. Ironic is the word I would use to describe for this whole affair. For those who are not familiar to what happened here is the lowdown.

First of all I need to explain the instrument which this whole fraud is revolving around.

Synthetic CDO is a portfolio of credit default swaps (CDS). Each CDS is a form of insurance on a bond or other obligation (the "reference security"). The CDS seller provides protection (insurance) in the event of a default or specified "credit event" related to the reference security. The CDS buyer pays a premium in exchange for this protection.

In simple layman terms, Goldman Sachs structured a synthetic CDO and sold it to its investors. However in every synthetic CDO there are two parties to the trade. One will be the seller of the credit default swaps which means they are willing to provide the insurance and to the underlying bonds within the synthetic CDO portfolio. The other is the buyer of the credit default swaps which means the ones that are buying the insurance on the bonds.

So imagine this. If the people buying the credit default swaps were the ones that determined the bonds in the portfolio. What if they abused it by deliberately choosing the bonds that will be defaulting and not actually doing it for hedging but actually betting on the fact that the bonds would default and get paid for the credit default swaps. Would that be fair? Basically, that is what happened and the SEC is accusing Goldman Sachs for allowing it to happen and not fully disclosing it to the sellers of the CDS.

Goldman has issued a statement that they felt there was no truth to the accusations made. Goldman stock fell 12% on Friday night, pulling along the whole market with it. 90% of the constituents within the S&P500 fell on Friday and thanks to this piece of news, it is reasonable to expect the market to be in fantastic shape tomorrow. Of course, I am being sarcastic here.

So what do I think of this? Will this hurt the markets over the long term? My answer is a clear no. In the short term, the market will definitely be going through a short term correction as the market tries to make some sense of the Goldman affair. Personally, I feel that the market reacted the way it did on Friday was due to 2 reasons. 1) Finding an excuse to take some money off the table after that great run. 2) Investors are wondering whether there will be other banks brought to court by the SEC.

For the second reason, I really do not think that there is a problem of that happening because if they wanted to take unethical practice lawsuits to the banks, I will quit my job and go into law. Law will be the next boom industry. Every single bank in the world do not operate on the basis of ethics and I believe any investor knows that. It is like saying that only one politician is corrupt or there is only one liar in the world. Lets face facts here. Life is a zero sum game. One has to suffer losses for someone else to gain. That is a fact of life. When a person wins so many times, they become rich while someone else becomes poor.

So what do I really think? I think that the SEC is full of bull and are just making an example of Goldman Sachs. Why Goldman? Because they are probably the only one that can take the hit. Other banks are still too weak to take such a blow. JP Morgan probably is the other, but if Citi takes a hit like this, they are so dead.

I believe the world is a place full of propaganda and private vendettas, nothing is done for the good of all men but more for the good of a few men. Trust me when I say, there will not be many more repercussions to this Goldman debacle but short term weakness is a sure thing.

Take this opportunity, to buy into quality and accumulate more. Try to have a good week ahead.

Best,

SVI