Posts Tagged ‘market maker’

Market maker should indeed be the catchphrase of the day in the Goldman testimony. Is it an adequate defense?  Does being a market maker for a financial product absolve one of all responsibility for the quality of that product?

Goldman was doing business as market maker for CDOs while its proprietary trading took positions against some of the products it was working with on the other side. Are the evident conflicts of interest in this situation outside the norm for an investment bank? These kinds of conflicts must be commonplace, and the ability to work with capital in these ways are part of the attraction to risk that is a hallmark of investment banking. Fees alone are not enough to support outsize bonuses and average salaries that push into the high six-figures.  The line between investment banks and hedge funds is very blurred with one frequently doing the other’s bidding, as was evident in Abacus.

The unfortunate problem of investment banks offering highly complex investment vehicles as institutional investments is that nearly everyone—including those averse even to the risk of fixed income—ends up becoming an unwitting investor.  Yes, IKB is a large and sophisticated investor, but they are investing with the money of many small and unsophisticated (and probably risk-averse) investors.  While Goldman’s legal responsibility is solely with IKB, its moral responsibility extends to the millions who invested in leveraged subprime debt because of the market that Goldman made.

They say: “We make the market.”  Investors at all levels should demand: “Make our market grow.”  When these markets are for products so abstract that even “sophisticated” investors (not to mention the people packaging them) are baffled, one must ignore the prestige of the market maker and turn to investments that are truly analyzable.  That’s the recipe for making the markets grow.


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