According to today’s Wall Street Journal, Goldman Sachs made bets against the subprime market ($) and made lots of money:
The group’s big bet that securities backed by risky home loans would fall in value generated nearly $4 billion of profits during the year ended Nov. 30, according to people familiar with the firm’s finances. Those gains erased $1.5 billion to $2 billion of mortgage-related losses elsewhere in the firm. On Tuesday, despite a terrible November and some of the worst market conditions in decades, analysts expect Goldman to report record net annual income of more than $11 billion.
That’s pretty incredible. Of course, there is some controversy involved because while Goldman was underwriting colateralized debt obligations (CDOs) that were sold to investors, they (Goldman) were shorting the market. The WSJ article asks:
Why did Goldman continue to peddle CDOs to customers early this year while its own traders were betting that CDO values would fall?
My answer: money! Goldman Sachs’ goal is to make money. They were simply insuring against losses. Call me crazy, but I don’t really see anything wrong with what they did. I do think that people should realize that just because a brokerage firm will sell something to you doesn’t mean it’s not crap! In other words: don’t expect the brokerage firm to look out for your best interest.