The NY Attorney General wants to know whether banks withheld information about the complex instruments which they sold to other financial companies. According to The New York Times, the investigation "centers on how the banks bundled billions of dollars of exception loans and other subprime debt into complex mortgage investments."
News is also emerging that Magnetar Capital, a hedge fund, helped create some of the most dangerous mortgage-backed instruments and then made money by betting the subprime crisis would get worse. According to The Wall Street Journal Magnetar "facilitated the creation of a few of the worst-performing collateralized debt obligations."
The bizarre twist in all of this is that financial and math geniuses who make millions of dollars a year created and sold financial instruments to firms which employed equally talented people. The NY Attorney General is accusing firms of not sufficiently explaining the risks of their products. It would be like Copernicus explaining astronomy to Sir Isaac Newton.
Whether the government or money-losing banks are pointing the finger, it is beyond imagination that any institution would take on billions of dollars in risk without reading the instruction manual. That appears to have been what happened. The smartest people on Wall St. sold the second smartest people some paper that was likely to blow up.
The lesson is not that financial instruments should be more regulated. It is that someone needs to pay attention to deals that look too good to be true. They usually are.
Douglas A. McIntyre
Top Gaining Stocks
Top Losing Stocks