Reading the Fine Print in Abacus and Other Soured Deals - NYTimes.com
A common refrain from the financial crisis is that poor disclosure was a big contributor, if not the cause, of the financial crisis. Buyers of even the most complicated financial instruments were misled or were not provided full information concerning their investments. The results were catastrophic when the mortgage market crashed...
I always wonder why Very Serious People hammer Goldman Sachs and friends with their lack of disclosure as a market maker. The last time I checked, market makers buy and sell products/services at approximately "fair value". What does fair value mean?
Fair value means liquidation value at a certain date. Now, if an investor is offered a home to purchase at a $100 price, but a similar house nearby is being offered at $90, what is the fair value of the asset? The fair value is the actual price paid for the asset. Period.
So, why are people mixing market makers with advisers? Advisers are retained to walk in their clients shoes, while market makers make a living by buying AND simultaneously selling assets - to ensure that they are always involved in the trade.
Now, if a sophisticated investor read the Abacus pitch book, invested in the CDO, and lost a substantial amount of capital, who is at fault?
It's time to allow IB's do what they do best, which is market making and advising. Both can lead to sticky conflicts of interest, but hey, caveat emptor...