Wednesday, April 28, 2010

Thanks, Tim - I did not Know how to Say It - Goldman Sachs Edition

Watching the Congressional hearings with Lloyd Blankfein as witness, I developed very sour feelings, but did not quite know how to articulate my problems with Goldman executives trying to explain the simplest financial risk management concepts to an intellectual pygmy like Carl Levin, but Tim Worstall hit it:
The very act of selling something to someone is a bet against that product.
If I were convinced that BP shares were worth more than £5 then I wouldn’t sell them to you at £5 would I? That I am willing to sell them to you at £5 means that I think £5 is worth more than a BP share.
I am, by the very fact that I’m undertaking a transaction with you, showing that I think you’ve over valued the item. This is as true of apples, houses, bales of hay and stocks, bonds and collateralised debt obligations as it is of anything else.
And hey, maybe one might play both sides of this at the same time, because, err, you don't know what is going to happen!


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