Recently, I've been reading the Warren Buffett's thoughts on investing. And, he said that "be greedy when others are fearful, and be fearful when others are greedy." In my opinion it's very true statement about investment. But, is it true about the banks?
The Security Exchange and Commission has launched investigation of fraud against the Goldman Sachs. The Goldman misled the investors/clients by not revealing all available information and risks of complex investment tool, Collateralized Debt Obligation(CDO). The bank has engineered with help of John Paulson, owner of John & Co Hedge Fund, and Mr.John had bet against collapse of CDO and took short position. Moreover, Mr.John payed USD15 million as fee to assemble the deal and find investors. Those investors were IKB, German institution, AIG and others. The IKB has lost USD150 million, the AIG was insurer of those CDOs. Nevertheless, the Goldman Sachs also lost $100 million due to inappropriate hedging. But, the Paulson & Co earned around USD 1 billion.
As we can see clients and partners of the bank had to carry a huge amount of losses. The bank didn't disclose the stake of the hedge fund, and the "clients" were sophisticated investors who relied on the bank.
What about other banks and institutions of the Wall Street? Are they operating ethically? These questions are subject to think and research.
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