Where Are the Customers’ Yachts?

One of my all-time favorite books about Wall Street is Fred Schwed, Where Are the Customers' Yachts? or A Good Hard Look at Wall Street (1940).

It begins with the wonderful old tale of the visitor to New York who admired the yachts that the bankers and brokers had in the harbor. Naively, he then asked where the customers' yachts were. Naturally, there were no customers' yachts.

I'm reminded of this story by today's bit of front-page boosterism in the New York Times. Goldman Sachs Rakes in Profit in Credit Crisis is all about how the boffins at Goldman were smart about the mortgate crisis, and got out of the dangerous securities a year ago, or if they didn't then insured them like crazy. So they're coining it this year, while competitors are hemorrhaging.

But in a classic case of totally missing the real story, we find the following down in paragraph nine:

Even Goldman, which saw the problems coming, continued to package risky mortgages to sell to investors. Some of those investors took losses on those securities, while Goldman’s hedges were profitable.

Goldman hedged, but its customers didn't. Were the investors so sophisticated that they have only themselves to blame? Were they properly advised, and ignored the advice? Or has nothing changed since the Roaring 20s?

Well, one thing has changed: We re-wrote the securities laws. And if I were a Goldman customer who had been sold radioactive sludge as a security in the past few months without a very stern warning about the unusual risk, risk so great the G-S itself wouldn't hold the securities without insurance, I'd be calling my lawyer about now to find out what my options were.

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5 Responses to Where Are the Customers’ Yachts?

  1. Robert Bennett says:

    I agree wholeheartedly! What follows is my action plan for restoring justice to America.

    First, let’s send all the investors who lost money in the mortgage crunch to Milberg Weiss, a well-known security plaintiff’s firm whose next address will be the federal prison system because they’ve run a racketeering operation extorting over USD 45 billion from US corporations since 1965, skimming 30% of that sum off the top for themselves. That will certainly set matters aright, won’t it?

    Then, let’s get back to work with “our” legislation pen and ban sellers from buying shares, buyers from selling shares, and advisers from doing both. This way, no one will be buying or selling shares without proper advice or taking advantage of any two-sided transaction. Of course, this will kill the capital markets, but those are nothing but cesspools of greed serving no useful economic or social purpose or goal.

    Finally, let’s appoint a committe of lawyers to decide for everyone who gets what capital and how it shall all be used, the prevailing standard for which decisions shall of course be “the common good”. This way, no unjust ecomomic disparities will arise from the application and ownership of capital because it will be applied to “the common good”, and social justice will finally prevail in our great nation.

    Let’s get started immediately!

  2. Michael says:

    Well, I think there’s an important difference between people who lost money aping the bad bets of their advisers (who also lost their own money, and thus presumably didn’t know any better) vs. people who lost money while their advisers used smarter strategies for themselves. And even in the latter category, those who really should have known better (e.g. institutional investors), or ignored good advice, have no one else to blame unless they were actively misled. There is an issue in the first category as to whether the advisers should have known better, but as it is clear that so much of the industry did not know better, it will be hard, I think, to argue as a legal matter that an ordinary adviser applying the routine standards of the trade objectively should have done better. (Even if that’s what I sort of believe.)

  3. SEO says:

    It’s also hard to fight back when the radio active sludge burnt out your wallet.


  4. arthur says:

    Hedges don’t indicate that Goldman saw something in particular coming, only that it wanted to avoid risk in this market. This is typical of a broker. It is also typical of a broker to sell its own inventory to its customers. Goldman’s customers include Merrill Lynch, Deutschebank, and Citigroup’s SmithBarney group, which have lost billions, but still have their own yachts and don’t lack in sophistication.

  5. wcw says:

    If you can sue Goldman, you can sue the whole sector.

    That’s $3 trillion (with a ‘T’) in capitalization waiting for pillage.

    Are you a lawyer, or are you a mouse?

    [Note: snark entirely intentional]

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