The 2008 Crash - What Did Goldman Sachs Know ?

[chimper]

The Crash of 2008 - Part Two - What Did Goldman Sachs Know ?

http://www.youtube.com/watch?v=ISBVeSxdP74&feature=user

[Ghost Dog]

1. Sobering, thanks. And quite clearly expressed:

Part 1: http://www.youtube.com/watch?v=pw8R_QFK_Uw
Part 2: http://www.youtube.com/watch?v=ISBVeSxdP74
Part 3: http://www.youtube.com/watch?v=-AXdjfdi6Rg

[Joanne98]

2. OMG! These are MUST WATCH videos! K&R

[Lochloosa]

3. K/R

[Narkos]

4. Thanks for the links...good stuff

[chimper]

6. You're welcome. eom

.

[unblock]

5. always a challenge to know what someone's thinking when you only see one trade

it's natural to think that, because goldman was taking the position that major banks would fail, that they were hoping, in fact, for that result. it almost seems like, well, duh!

but that's not necessarily the case at all because we're not seeing ALL their trades.

as an example, say i sell lehman brothers short. perhaps you might think that i am betting that lehman will go belly-up. but perhaps i took the proceeds from the short sale and went long goldman sachs. now my overall bet is more subtle: i'm betting simply that goldman will do better than lehman. both could go up, both could go down, i don't care; i'm betting on the spread.


and so it might well be with goldman. they have other positions that we don't know about. say they have arrangements with these other banks that require them to repurchase securities if these other banks plummet (something like what happened to bear stearns when carlyle capital defaulted). well, they will need to have profits and liquidity elsewhere to offset this. hence the trade in question.


i'm merely guessing that this might have happened. it could be that the trade stood on its own. but let's just say that investment banks take offsetting or hedged positions FAR more often and with FAR more money than outright naked bets.

[Hannah Bell]

7. huh?

first you short a.

then you take your proceeds from that trade, and make a different trade. you go long on b.

where is there anything that links these two trades?

[sergeiAK]

8. The gains from one are offset by the other

He's presuming that say, Goldman will do ~5% better than Lehman. If Lehman holds steady, and GS goes up 5%, he made 5%. If Lehman tanks, and GS tanks 5% less, he still makes 5%. If Lehman doubles, and GS triples, he makes 100%. He's betting on the difference between the two, no "link" necessary.

[Hannah Bell]

9. to bet on the spread, don't the bets have to be simultaneous

not sequential?

[sergeiAK]

10. If you're only betting on the spread, yes

For example, I do the same type of trade with options, frequently going long one option early in the day, and shorting another option against it later in the day (so as to get a better price). After I've sold the short option, I'm betting on the spread, but while I'm only holding the long option, I'm betting that it (the long option) will increase in value. I take more risk than I would by making a simultaneous trade, but I get better prices on each side of the spread. I could trade both simultaneously, but I choose not to.