Monday, December 28, 2009

Goldman Profits Twice on Mortgage Sales

Here are the basics:

Goldman creates a mortgage back security or CDO and sells it to you - knowing that it is a worthless piece of junk because they had to convince (and probably pay off) their friends at the rating agency in order to get it a decent rating. Goldman knows its junk and just a matter of time before this junk explodes - thus they help create securities that allow them to profit when this junk does explode (or choose).

So Goldman makes money selling junk, then makes leveraged bets to short the junk it just sold you and makes a mint when the junk goes bad......does this sound like a healthy financial system?

Scott Dauenhauer CFP, MSFP, AIF