The Big Short

I’m not a Wall Street lawyer, so I’m asking a novice question here, but I would like to know why the synthetic CDOs created by Goldman Sachs aren’t considered “wagering contracts” void under New York state law?  Before I read Michael Lewis’s fantastic book “The Big Short” I had never heard of synthetic CDOs.  Lewis explained how Goldman Sachs and other Wall Street firms created synthetic CDOs to allow investors to place a bet on the probability that subprime mortgages would pay off.  The synthetic CDOs allowed investors to bet on the mortgages without having any ownership interests in the mortgages themselves.  It was purely and simply a gamble.  Investors who believed the mortgages were healthy could go “long” on a synthetic CDO, while investors who thought the mortgages would default could go “short.”  If the mortgages defaulted (as they did), the shorts made fortunes, while the institutional longs lost fortunes. [click to continue…]

Tagged as: derivatives, gambling contracts, Goldman Sachs, Michael Lewis, subprime mortgages, synthetic CDOs, The Big Short, wagering contracts

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