Busted: Bankers and The Global Economy

April 16, 2008

The Politics of Selling Short

Filed under: banking, investment, money — Tags: , , , , , — digitaleconomy @ 11:10 am

Doubtless, hedge funds and mutual funds are going to be one of the future pivot points in investment banking, but in a different way from the past.

Goldman Sachs made billions of dollars last year by shorting the sub-prime mortgage bonds that its bankers were selling out in to investors in large volume. WaMu (Washington Mutual), Fannie-Mae and Freddie-Mac short calls made their investors money since all of the short calls made money for those that listened. Shares in these companies has fallen since the short calls.

Goldman Sachs has been perfectly willing to play both sides, first by recommending bonds and then, by recommending the selling of the same bonds. That is called playing both sides. Brokerage firms are usually wary of the legal headaches associated with short-sale recommendations. Publicly traded companies have sued brokerages recently accusing them of conducting profiteering conspiracies.

Wall Street sees a distinction between a standard sell call and a short recommendation. According to traders, a “sell” or “avoid” rating implies that the company’s stock is sharply overvalued or is facing some trouble that investors need to avoid. Advising clients to short a stock is tells their clients to save themselves and get out.

Goldman recommended selling struggling Seattle thrift Washington Mutual, which is also a client. Goldman earned millions in fees for a $7 billion recap of WaMu and then turned the tables. Who said that bankers and brokers can’t make money by playing financial politics?

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