I'm blogging for a second day about the Goldman-Sachs hearings.
NEWS BLOG (WSAU) My lack of outrage over Goldman Sachs comes from my love of horse racing. A racetrack creates ‘the market’ where people who have different opinions place their bets. Goldman creates the market where people invest. The debate in Congress is whether Goldman manipulated the market, and what the rules of the marketplace should be.
How might the rules be different if the racetrack owner also owns a horse that’s going to race there? What would constitute an unfair advantage?
Richard Duchossois is a horse owner and breeder. He’s also the owner of Arlington International Race Course near Chicago. Many of his horses race at his racetrack, so often they are referred to as ‘house horses.’ Is it unfair if the distance of the race were altered? That happens all the time. If the house horse is better at one mile than a-mile-and-a-sixteenth, the race would be run at a mile. If the ‘house horse’ is better on turf than on dirt, the race would be moved to the grass. All of this is perfectly within the rules. In the end, the conditions of a race are known days in advance, and the house horse still has to actually run and win.
But what if the owner also placed a large bet on their horse? That the stable was willing to back their horse’s chances would be valuable information. But betting is anonymous, so you don’t know if the owner has an additional $10,000 in the game or if they’re just cheering from the stands.
Goldman Sachs didn’t disclose how their large investors bet on the housing market. Nor does the racetrack disclose who’s made the largest wagers.
Some will complain that Goldman encouraged their smaller clients to invest the other way; to take a position opposite their large institutional investors. They were acting as touts. And there are dozens of touts at the racetrack too… and they’re just as likely to steer you towards a losing horse as they are to a winner.
What do the two situations have in common? In the end, it’s your money and your judgment. If you want to short the housing market, then go against the advice of your Goldman Sachs broker and invest accordingly. If you think the house horse won’t win today, bet on another steed that you think will.
The best horse bettors (and I am not among them) pass up more races than they play. They wait for the right horse, racing under the right conditions, and then make their wager. An investor doesn’t have to buy into a Goldman Sachs credit default swap vehicle. Don’t like the way Goldman plays the game? Then buy some shares of IBM, or park your money in a t-bill.
Operations Manager, Midwest Communications-Wausau
Robert Samuelson, a financial columnist for the Washington Post, has a less charitable view of Goldman. Read him here: http://tinyurl.com/27ns63r
I am simplistic and inaccurate, according to Brad Schjoth at Citizen Wausau. I concede that defending Goldman Sachs is the minority view. Read his opinion here: http://citizenwausau.com/ Perhaps Goldman should have managed their mortgage securities like Lehman Brothers did... and go out of business?