In a bit of an ironic twist, Goldman Sachs was, until recently, urging its best clients to make bets against bonds from the state of California, according to the Los Angeles Times. The ironic part of the whole thing is that Goldman was the underwriter on many of these California bonds. So basically, on one front they were packaging these bonds to be sold to investors, while on another front they were telling their big clients that they should bet against the bonds that they themselves were packaging to sell. There is nothing illegal about these actions, but in looking at them, I think we can see why there are so many problems on Wall Street.
I’m wondering how is it that a company can take a contract to sell these securities, and actually sell them to some investors, while telling their best investors that the investment is crap and they should bet against those same securities? Shouldn’t there be some sort of conflict of interest, or failure to disclose? It just doesn’t seem right that the company could take two opposite positions on the same investment offering depending on who they were talking to.
I’m typically against government regulation, but I can definitely see why so many people are fighting for regulation of Wall Street. It seems to me that these brokerage houses should be required to at least disclose that they are recommending to some clients to bet against these bonds. This disclosure should be made to both the state of California and to potential investors in the bonds. If I were the state of California, I know I wouldn’t want them selling my securities knowing that they are advising clients to bet against them. As a potential investor in these bonds, I want to know that the same company selling the bonds is advising against the bonds, too. We require that publically traded companies disclose practically everything so that investors can make informed decisions, so why not the brokers selling these investments?