> By nature of buying a Synthetic CDO the buyers had to know someone was short, why should it matter who it was?
Because the party who was short on the product was the same party who created the product, and Goldman did not inform investors of this fact. It's not a matter of just buying and selling. The RMBS's underlying the CDO were packaged by a party who had significant interest in seeing the package blow up.
An Oversimplified Analogy:
Imagine that I come to you and say, "I have a document that represents 100 mortgages and I'd like to broker a sale. If you buy this document, as long as less than ten of these mortgages go into default, you make money. If more than ten of them go into default, your counterparty in the sale (not me) will make money."
"Okay," you say, "that sounds interesting. So where did all these mortgages come from?"
"Oh, we got an independent company to pick a bunch of mortgages that they consider fairly safe and that they believe are a good representation of the overall U.S. mortgage market."
"Great!" you say, and you buy a billion dollars worth. More than ten mortgages end up defaulting and you lose a shit ton of money. Imagine your dismay when you learn that the mortgages were not packaged by some third party as I claimed, but hand-picked by the very counterparty you were betting against. OBVIOUSLY if they were going to benefit from more than ten mortgages defaulting, they would have filled the entire document full of mortgages they expected to fail! This is fraud in its most basic form!
That's an excellent explanation of the underlying issues. Now let's hope the prosecution does as good a job as you just did of explaining this to the jury, and that they make it a criminal case in stead of just a civil one.
Because the party who was short on the product was the same party who created the product, and Goldman did not inform investors of this fact. It's not a matter of just buying and selling. The RMBS's underlying the CDO were packaged by a party who had significant interest in seeing the package blow up.
An Oversimplified Analogy:
Imagine that I come to you and say, "I have a document that represents 100 mortgages and I'd like to broker a sale. If you buy this document, as long as less than ten of these mortgages go into default, you make money. If more than ten of them go into default, your counterparty in the sale (not me) will make money."
"Okay," you say, "that sounds interesting. So where did all these mortgages come from?"
"Oh, we got an independent company to pick a bunch of mortgages that they consider fairly safe and that they believe are a good representation of the overall U.S. mortgage market."
"Great!" you say, and you buy a billion dollars worth. More than ten mortgages end up defaulting and you lose a shit ton of money. Imagine your dismay when you learn that the mortgages were not packaged by some third party as I claimed, but hand-picked by the very counterparty you were betting against. OBVIOUSLY if they were going to benefit from more than ten mortgages defaulting, they would have filled the entire document full of mortgages they expected to fail! This is fraud in its most basic form!