Why investors trade with Goldman

Goldman Sachs CEO Lloyd Blankfein testifies before a Senate investigative committee on Capitol Hill in Washington, D.C.

TEXT OF STORY

Tess Vigeland: Hopefully Goldman Sachs CEO Lloyd Blankfein and Senator Carl Levin got to sleep in this morning, after yesterday's 11-hour marathon grilling of Goldman execs on Capitol Hill. As we reported yesterday, Senators took turns asking whether the investment giant had an obligation to tell clients when they were selling them a shoddy product. Blankfein responded that Goldman's sophisticated investors knew what they were getting into.

LLOYD BLANKFEIN: People lost money in it, but the security itself delivered the specific exposure that the client wanted to have.

But if Goldman is so right why would anyone want to bet against them? Marketplace's Jeremy Hobson has that story from New York.


JEREMY HOBSON: Let's start with the basic premise that in every trade there's a winner and a loser.

MEIR STATMAN: If I think that this stock is going to go up and therefore I buy it, who is the idiot who is selling it to me?

Meir Statman teaches behavioral finance at Santa Clara University.

STATMAN: So there is an idiot in every trade and if you don't know who it is, it's you.

He says people who think Goldman is the idiot are either overconfident, or they're just looking for some adventure with a firm that seems to have a track record similar to that of the annoying blackjack dealer in the movie "Vegas Vacation."

Chevy Chase as Clark Griswold: 19.

Wallace Shawn as the dealer: 20!

Randy Quaid as Eddie: Oh, he's good, he's good.

Hugh Johnson of Johnson Illington Advisors doesn't dispute Goldman's record. But he says sophisticated investors are attracted to Goldman because of how the trades there are crafted.

HUGH JOHNSON: Goldman Sachs is real good at putting together synthetic securities that will appeal both to the buyer and the seller in a transaction.

So everyone thinks they're getting a fair shot, and the house doesn't always win.

JOHNSON: Goldman isn't always right. Sometimes Goldman is wrong. But the institutional investors that enter into transactions have a very strong belief that they're right.

Johnson, by the way, doesn't count himself in that group. He says he doesn't trade with Goldman.

JOHNSON: I'm not that sophisticated, I guess.

Or, as Professor Statman might say, he's no idiot.

In New York, I'm Jeremy Hobson for Marketplace.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.

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