A toxic loan is one that is likely to default via a foreclosure. Goldman Sachs allegedly packaged these toxic loans into securities, than somehow got a high rating for the securities and sold then. After selling the securities to unsuspecting investors, Goldman Sachs allegedly used the stock market to hedge bets that the securities would lose value. Effectively whenever a security crashed meaning its value dropped to zero, Goldman Sachs earned much more money than the security was originally worth because of the bets.
Goldman Sachs is claiming that while the bets were taken, it wasn’t a deliberate effort to deceive the investor. Another words, Goldman Sachs was not promoting and selling securities that Goldman Sachs believed would loose their value on the market. The two actions (selling securities and buying bets), according to Goldman Sachs were not made together. The bets were in response to a falling sub-prime market. But when Goldman decided to go short (i.e. betting the securities they sold would lose money), should they have informed their investors? And did they? Should they promote and sell securities after they went short on those very securities? Or should they be acting in the best interests of their clients?
The same type of market action happened prior to the 1929 depression although it is arguable how much it contributed to the depression.
In view of this, why are the Republicans blocking financial reform? Should it be against the law for an investment firm to promote and sell an investment and then bet against the investment via CDOs on the stock market? CDOs are instruments created so that people can bet on them.
Is that an ethical violation that deserves redress by the investors?
Given the response of the stock market and the money lost not only by the purchases of securities and derivatives, but also the losses incurred by people who had no knowledge that those securities exist. The stock market crash resulted in a loss of over 50% of the value of my IRA and it still has not fully recovered the value it was worth when I first invested in it. Many people are in the same position. Yet the Republicans refuse to contribute any amendments to the finance reform bill and are preventing it’s passage is the US Senate. They created 400 amendments to improve the finance reform bill. 400 amendments! But they refuse to submit any amendment for a vote. Is this acting in the best interests of the people?
Why not act to improve the finance reform bill and then give it a chance to work? If it isn’t effective, modifications to make it better are possible. Are Republicans biased so heavily against big government that they are willing to risk another recession?
I think the Republicans are making a big mistake. I think they are so blinded by their mistrust in big government that they are going to the other extreme which leaves the investors vulnerable to investment firm actions that are not always visible in the firm’s quarterly report. And that leaves the investor and the whole economy vulnerable to another recession.