Economics Lesson

We think THIS is correct. Goldman Sachs is being charged with selling a financial instrument which permitted one side of the transaction to lose -- and lose big -- while the other side of the transaction won -- and could win big:

First, because the instrument used here was a synthetic CDO, all parties knew that by definition there was someone holding the short side of a position that had been custom made for this trade. That’s what a synthetic CDO is for. A synthetic CDO has no existence outside the trade and there is always a long and a short party.

So it’s not like Goldman hid the fact that there was a short seller. It hid only the fact that the short seller was the legendary John Paulson, who wasn’t a legend yet because he became a legend only by doing these sorts of trades.

What was Goldman supposed to disclose: that the guy on the short side was smarter — like way, way, way smarter — than Goldman’s clients on the long side?

Perhaps the Government should require warning labels on investment transactions, like all those stickers that are now put on ladders: "CAUTION: Gravity is a force determined by the Federal Trade Commission to cause objects to fall; falling may result in embarrassment, injury, or death." We propose that every broker, when confirming the purchase or sale of a stock, bond, or other investment, be required to include the following warning:

NOTICE: THE GUY ON THE OTHER SIDE OF THIS TRANSACTION THINKS YOU ARE AN IDIOT.  IN FACT, HE'S SURE OF IT.

CAUTION: HE MAY BE RIGHT -- ONLY ONE OF YOU IS.