Global Update

Sean Hannon submits:

Money magazine recently published an article where some of the nation’s leading business owners offered advice to readers. With a diverse list of experts and many nuggets of wisdom, at times the advice starts blending together.

However, one piece of information caught my eye and separated itself from the rest. The wisdom came from Dallas Mavericks owner Mark Cuban and addressed investing. Cuban has a long history as an entrepreneur and famously sold Broadcast.com to Yahoo! for $5.9 billion. His advice centered on investors’ need to perform adequate research before investing. He rhetorically asks, "Unless you think you have better insight on a stock…why are you trading?"

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Hickey and Walters (Bespoke) submit:

It’s no surprise that Financials are the worst performing sector since the SEC announced that it was suing Goldman Sachs (GS) for fraud. However, a look at the performance of other sectors since last Thursday’s (4/15) close highlights some puzzling trends. If GS was really the cause of the sell-off, why would sectors like Materials, Industrials, and Technology be underperforming? Concerning Materials, there is one convoluted theory going around that GS’s involvement in commodities has caused an exodus out of Material-sector stocks, which would be adversely impacted from weaker commodity prices. Even if that reasoning had any validity to it, how are we supposed to rationalize the underperformance of Industrials and Technology? Was GS manipulating the pricing for semiconductors and networking gear too?

A more likely explanation for the the weakness is simply that with markets as overbought as they were, investors were looking for any potential excuse to sell, and on Friday they got it. Since then sectors that led the rally have underperformed, while sectors that lagged are outperforming. GS’s news has been billed as a harbinger of tighter government oversight in the financial sector, but like other "groundbreaking events" in the past, this news too will likely fade to the background.

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Charles A. Smith submits:

Why does the market for synthetic CDOs exist? Is it because we ran out of deadbeat borrowers in early 2007? In other words, were the bears (Paulson, Magnetar, etc.) in the same position as an equity short determined to press a winning trade - unable to borrow any more shares - so they decided to create more out of the whole cloth of credit default swaps? It sure looks like it.

Synthetic CDOs have no mortgages directly backing them, a fact which (as the Wall Street Journal pointed out today in its lead editorial) the SEC seems blithely unaware. Instead, from the perspective of the buyer of a synthetic CDO, they’re exactly like writing an insurance contract. They’re a bet that the purchasers of the insurance (in this case the hedge funds), will continue to pay their premiums, and that the mortgages underlying the swaps won’t default.

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Tom Armistead submits:

As the situation around CDOs, CDS and synthetic CDOs develops, and with the SEC’s suit against Goldman Sachs (GS) in the headlines, I have been thinking of an old legal doctrine: uberrimae fidei. Briefly, it’s a Latin term, translated as “of the utmost good faith.” A contract is said to be uberrimae fidei when it requires a high standard of honesty - unprompted disclosure of all material facts: absent good faith at this level, it is voidable.

The thesis presented in this article is that financial innovation has outpaced the development of legal principles to control fraud, abuse and manipulation. The solution: CDS are contracts of insurance, and like insurance, contracts uberimae fidei. Further, the concept can be extended into the entire area of securitization: MBS, CMBS, ABS, CDOs of ABS etc. should all be accorded the status of contracts uberrimae fidei.

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TechCrunch submits:

By MG Siegler

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