I'm having a little trouble following the Goldman Sachs controversy that cropped up last week. If you are following this issue, could you please comment or clarify things?
It is my understanding that Goldman is being sued by the SEC for failing to disclose adequate information to investors in a collateralised debt obligation (CDO) that they were arranging. That CDO was partly arranged (or advised) by Paulson & Co., which was intending short the CDO in the hopes of profiting from the collapse in value in residential property. Paulson & Co. helped pick which sub-prime mortgages would underlie the CDO. This point was not disclosed to investors. Of course, the rest is history.
While I can understand that regulators and investors are upset about the asymmetric information and weak disclosure issue, this does not appear to be why people are so bothered by this situation. I think that people are more upset that Goldman had a hand in arranging CDOs, period. People may also be bothered by an investment dealer appearing to collude with a short seller.
Negligent information disclosure aside, I'm not convinced that it was morally indefensible to arrange CDOs, or to facilitate short sellers for that matter. As an investment bank, it is Goldman's job to bring together parties that supply and demand capital. Structuring the CDO was part of this job. In this situation, I'm not clear whether it was Goldman's job to protect the investors (ignoring the information disclosure issue). Goldman was not really acting as their agent. And I think the investors in this case were supposed to be pretty sophisticated financial institutions and investment funds.
Maybe I'm missing part of the story here. From the perspective of the devil's advocate, aside from the information disclosure issue, what was it that Goldman Sachs did that so terrible?