FOR IMMEDIATE RELEASE
January 25, 2023
SEC’s Finally Tackles Conflicted Trades Featured in “The Big Short”
Washington, D.C.— The Securities and Exchange Commission’s proposal to prohibit conflicts of interest in securitizations, though a long time coming, will finally address the problem of Wall Street arranging bets in which financial institutions effectively rip off their own clients.
Many Wall Street banks and hedge funds made enormous profits by betting against pools of fraudulently written mortgages at the expense of unsuspecting investors, such as pension funds, university endowments, and others.
“These blatant conflicts of interest allowed people working at banks and hedge funds to become wealthy,” said Andrew Park, senior policy analyst at Americans for Financial Reform Education Fund. “These fraudulent financial practices made Wall Street giants rich at the expense of millions of Americans who ended up losing their homes—including millions of retirees and investors who collectively lost trillions of dollars.”
Investors in structured products, such as Collateralized Debt Obligations (CDOs) were buying them, unaware that banks selling them CDOs may have also been secretly betting against them using credit default swaps (CDS). This practice was dramatized in the movie “The Big Short.”
Notorious instances of this behavior were well documented. Goldman Sachs, Citigroup, UBS, J.P. Morgan, and Merrill Lynch (now, Bank of America) allowed hedge fund Magnetar Capital to bet on its CDOs collapsing, but never once disclosed that arrangement to their own clients. The most famous example of this involves hedge fund manager John Paulson of Paulson & Co who got to select the portfolio of assets for Goldman Sachs, while simultaneously betting against it to fail. Paulson ended up making about $15 billion from this sort of behavior.