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Lok Sang Ho
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Lok Sang Ho is professor of Economics at Lingnan University in Hong Kong. He holds a PhD in Economics from the University of Toronto and has worked in the Ontario Government as well as academia. Much of his research has focused on housing and the macro economy, with articles published in World... More
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Lingnan University
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Life of Fulfilment
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Public Policy and the Public Interest
  • Asymmetric Information and Conflict of Interest in Deals 2 comments
    May 5, 2010 11:33 AM | about stocks: GS


    Coming to the defense of Goldman Sachs, Warren Buffet says investors should make their investment decisions based on the quality of the securities.  Who helped put them together or who else was betting for or against them were irrelevant.

    But this ignores the fact of unfairness in a deal with asymmetric information.  In the case of the collateralized debt obligation called Abacus 2007-AC1, John Paulson put together the securities and knew the product better than anyone else.  In a substantive sense he had an insider knowledge and was therefore in a better position than anyone else to bet against it.  Other investors were lured by triple A ratings given by the rating agencies and the fact that Goldman was the underwriter.  Other than this, they had little access to information about the composition of the portfolio underlying the securities.

    It appears obvious that there is a clear conflict of interest in the role of John Paulson in selecting what goes into the securities and in taking a short position against these securities.  Goldman Sachs should never have allowed a short-seller of the product put together the securities, and should never knowingly sell such a product.  The SEC also should never allow a company sell such a product.

     




    Disclosure: No positions
    Stocks: GS
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    I disagree - it hasn't been shown that Paulson had any insider knowledge. He simply chose to perform a thorough amount of due diligence. The others chose to rely solely on ratings.

    All parties had the same access to the underlying portfolio. Paulson chose to run numbers. Others chose to their detriment to rely on ratings. Where's the informational asymmetry?
    5 May 2010, 12:28 PM Reply Like
  •  
    If you were betting against a bag of securities, what would you choose? You would certainly choose the ones that you think had the highest chances of falling flat. This is the conflict of interest I am talking about. The turnout in terms of performance appears to confirm the problem. So both theory and evidence are in support of the conflict of interest thesis.
    26 Mar 2011, 02:30 AM Reply Like
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