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Bo Peng
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I run a fund based on automated trading and technical analysis. But my favorite pastime is thinking and talking about political economy. I guess I'm George Soros. Writing helps clarifying my thinking. All opinion expressed here is mine, wholly mine, nobody's but mine. And all trading/investment... More
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  • A Perfect Mini-storm for GS and Financials? 0 comments
    Apr 19, 2010 2:18 AM | about stocks: GS, FAS, SPY, USD

    Bloomberg has an excellent opinion piece on some details of SEC's GS lawsuit. This is helpful in light of GS' response Friday and some free defense offered by the blogosphere. It's definitely worth a read if you have any interest in this matter. But here's one piece of new info to me, Paulson & Co's response as contrasted to GS':

    Paulson, which wasn’t named as a defendant because the SEC said it didn’t make any misrepresentations, didn’t venture quite so far (BP's note: as Goldman flatly saying ACA "selected the collaterals"). The fund, founded by John Paulson, said ACA “had sole authority over the selection of all collateral.” However, it didn’t say that ACA actually selected the collateral. Nor did it say anything about ACA’s independence.

    The question of who selected what, and whether the answer may be different in substance than in form, would be one for a jury should the SEC’s lawsuit ever get to trial. It might be years before the case makes it that far. Meantime, Goldman has a lot more explaining to do if it wants the public to believe its side of the story. At stake is nothing less than its reputation.

    I have one more question: if Paulson & Co didn't make any misrepresentations, yet ACA didn't know Paulson & Co was shorting the credits they handpicked for them, then who withheld that crucial piece of info?

    GS may have legitimate defenses. But one offered on the blogosphere is decidedly lame, one that says well but every trade must have an opposing side. It matters hugely who is the opposing side. If the one who short the credits picked them, it'd be a criminal neglect of fiduciary duty on their part not to pick the shittiest names that meet the minimal rating requirements. On the other hand, if they did, then it'd be a criminal conflict of interests. Simple logic seals any possibility of a win-win scenario. Somebody has to lose here.

    Add on top of this, you have UK and Germany taking up the matter on their own hands and SEC broadening the probe to other big banks who did similar deals. This could get a little ugly.

    I don't share the populist moral objection against big bad banks, though I strongly believe TBTF poses a structural weakness that Volcker Rule only begins to address. But I do think financials have gotten ahead of themselves and have been due for a correction.

    And Greece concern is rising again. And the potential damage to Eurozone economies from Iceland, this time from a different kind of blow-up. I'm looking forward to unwinding of currency carry trades, increase in USD and JPY and decrease in EUR in the coming week. But since the bull market has been stretched for months in my opinion (and VIX below 16 was just plain stupid), I would not venture to put a more definitive timeline on the correction. Instead, I'll be on the lookout for the suckers crowd reemerging and get out of the way.

    Disclosure: Short FAS, SPY, EUR.
    Stocks: GS, FAS, SPY, USD
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