WALL STREET BETTING: IN SHORT & LONG

The Goldman Sachs so called fraud case filed by the S.E.C. helped bring a very thin layer of understanding to what goes on behind the scenes on Wall Street. It's called betting. At least the average person calls it so, but if your bets are made within Wall Street, the word is hedging.

Hedge funds take high roll casino like chances with billions of dollars that straddle both sides of financial risk taking. If a catastrophe is avoided, money is made and if a catastrophe occurs, money is made. Covering both sides has another word we're coming to hear more of. It's called leveraging.

We've heard words like derivatives and credit default swaps (CDS), which are pseudo-insurance policies that pay billions when borrowers stop paying their mortgage. When the mortgages default, derivatives kick in and someone becomes astronomically wealthy...once again.

Other words like collateralized debt obligations (CDO's), mortgage-backed securities (MBS), and triple-B or triple-A rated bonds are now much more familiar concepts making us even more conversant about these mortgage and financial times.

But perhaps at the core of these casino-like bets is the "short & long" position of risk taking. We know what "long" means. If you ever sat with a financial planner, those mutual bonds they sold you were long because they had the expectation of maturing and performing over the long haul.

But wait a minute. What if you are on the traditional long side and your financial planner still has a reasonable expectation that an adverse event will diminish your investments?

If your financial planner told you, "these bond funds are not the greatest so we have to sell them before they begin to tank". What would you do? Some may say, hold them just long enough to make money but sell them before it's too late. That's exactly what investors do with the less desirables.

This short term expectation changes things. Goldman is more loosely accused of not telling their investors that someone in the background had a more rigidly "short" expectation.

Clearly defining short & long may not be the focus behind Obama's reform push. It's certainly the main ingredient behind the Goldman Sachs controversy.

Goldman's investors had no expectation that they would hold those triple-B (low-grade) securities until maturity. It simply defies logic. The triple-B fund pool was on its face too risky for any appreciable expectation of longevity. The investors knew that it would simply be a matter of time before those triple-B tranches begin to cascade.

In fact, those risky type of securities get sold and resold multiple times and within a relatively short period of time. They're sold on the long side, with the anticipation that there is a not so long window for performance.

It's a game within a game. A game of hot potato within the game of hedging and ultimately someone is caught holding the proverbial bag. There comes a point when those triple-B's can't be sold anymore because the default curve is either too high or simply catastrophic.

If safety and longevity is what those Goldman investors desired, triple-A bonds would be more fitting. But they specifically chose triple-B securities which supports the idea that they also had short expectations.

I doubt we'll even hear the resolution of this case. The SEC's filing of the lawsuit is dramatically symbolic on its own. It resonates with what people perceive and that is that something needs to be done about Wall Street. Exactly what should be done is another question. A dissertation of what's in the SEC lawsuit may not have the populists attention right now.

Both the right and left side of the political spectrum have little sympathy for Wall Street. In fact, House and Senate republicans have recently quailed their health care reform-like opposition to the financial reform push, because of overwhelming public opinion sustained against Wall Street.