Wednesday, May 25, 2011

The weird world of Goldman Sachs


William Cohan, a former Wall Street insider, was on the May 24 Diane Rehm Show, talking about the history and culture of Goldman Sachs. How the firm came to dominate global markets, influence the federal government and play a controversial role in the mortgage meltdown. He explained some financial stuff, which I totally didn't understand.

Goldman Sachs, among other financial firms, dealt in those weird mortgage things that everyone in the business knew were bad news, and which lead to the financial collapse. That was the first thing I didn't understand. The best image I could envision was throwing all these mortgage papers in a financial meat grinder, grinding them up together and then making something like mortgage hamburger patties out of it. But, with all that mixing, who decided where people sent their house payments? And for the people who invested in these things, what exactly did they purchase?

Another thing Goldman Sachs did was after telling their investors what good investments these things were, they put their own money in some kind of bet that these would fail and that the investors who trusted their advice would lose a fortune. Apparently, they were right, and they made billions while their investors lost. That brings up a couple more questions that boggle my mind.

How in the world do you invest money in something in such a way that if it loses money, you make a profit. If I loan the neighbor's kid fifty bucks to help start up his lemonade stand, I make money if he is successful. If he goes out of business, I lose my fifty. So, the more they lose, the more I make, doesn't make a bit of sense to me, but then I'm an idiot when it comes to finance.

Apparently, these big investors aren't much better. They invested in very risky weird mortgage thingies, while Goldman Sachs was betting they'd lose, and then when they did lose, they kept on investing with Goldman Sachs. That kind of makes people who keep buying lottery tickets look a bit less clueless.

Normally I wouldn't trust Goldman Sachs any further than I could throw their corporate headquarters, but in the interest of getting a story, I went to them with my life savings, $213.49, and asked them to invest it for me. Well, they wouldn't even give me the time of day, literally. After telling me they weren't interested, I said I had a plane to catch and wanted to know the time. They wouldn't tell me.


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