Goldman Sachs Uses Synthetic Instruments to Gamble

Rick Sanchez on CNN today showed some of the clips of today's proceedings with the SEC and Goldman Sachs.

Jessica Yaellin, his co-reporter said "Tora (one of Goldman Sach's representatives) is like Fawn Hall, because he is a junior guy that got dragged into this big public scandal. You can be confident that his bosses knew what was going on. And watching Karl Levine was a YouTube moment.

Senator Levin said to Goldman Sachs, " You profited by taking advantage of its client that it would not sell product that it did not want to succeed, and that there is no conflict of economical interest that it had pledged to serve. Those were reasonable expectations. But Goldman's actions demonstrated that it saw its customers as objects for its own profits. Goldman Sachs did well when it's clients lost money. They continue to deny this against the evidence."

Senator Claire McCaskill D - Missouri

My best estimate is that the firm cannot successfully as working on its behalf of its clients if it is selling mortgages to those clients, and betting against them.

The financial reform movement is about to happen on Wall Street and it seems that the SEC has the perfect opportunity is using this to make the case for Wall Street reform.

What is a Synthetic Instrument?

It's Air - was Rick's conclusion.

Senator McCaskill told everyone, "Synthetic CDO's are instruments that are created so people can bet on them. It is the la la land of ledger increase. It is not an investment in a good idea, it's not investing in infrastructure, it's simply gambling. Pure raw gambling. It's like you are the bookie, and you are the house. You have less oversight, and less regulation than a pit boss in Las Vegas. What you worried about the most was a bad article in the Wall Street Journal. You were trying to make a killing! You think you're smart and this is so complicated.

Ali Vellshi was pointing out that the real issue is whether this poker match shut down the financial industry.

Wall Street Regulation for Reform failed for the 2nd day in a row

If the public favors legislation on Wall Street, these companies on these exotic synthetic instruments will be curtailed.

Maybe hedging against price of oil or a crop is real, but derivatives need to be regulated on open exchanges.

Matt Taibbi from the Rolling Stone says, " If nobody knew what the prices on the wall street are, no one would join in. Hopefully this bill will address the problems.

Did Goldman Sach's actions this trigger an International credit freeze? Because of that, companies cut costs and then laid people off. Now those folks can't pay their mortgages. If the company was hedging against this bet, who should be paying for the bailouts?

My question is on oversight? Where do the CEO's take responsibility for this under Sarbanes Oxley rules?

What is a Derivative:

SOS Math says, "The concept of Derivative is at the core of Calculus and modern mathematics. The definition of the derivative can be approached in two different ways. One is geometrical (as a slope of a curve) and the other one is physical (as a rate of change). Historically there was (and maybe still is) a fight between mathematicians which of the two illustrates the concept of the derivative best and which one is more useful."

Wiki Pedia says under derivatives, "A common misconception is to refer to derivatives as securities. This is erroneous, since a derivative is incapable of having value of its own. However, some more common place derivatives, such as swaps, futures, and options, which have a theoretical face value that can be calculated using formulas, such as Black-Scholes, are frequently traded on open markets before their expiration date as if they were securities."

Hedging is essentially betting against a risk. Just like the insurance companies do with your life and their actuaries when they sell your life insurance.

Other industries have popped up that hedge against your death and will loan you money against the insurance policy. These are called life settlements.

It seems that the gaming industry, and the insurance industry has been regulated. Why not Wall Street and the hedges, the shorts, the derivatives and the synthetic CDO's?