Goldman Sachs case rolls dice on disclosure

BEIJING, April. 25 -- The securities fraud case against Goldman Sachs in the United States involving certain mortgage bonds has once again cast a spotlight on financial derivatives.

Journalists make reports at the headquarters of Goldman Sachs in Manhattan borough  in New York April 16, 2010. (Xinhua/Shen Hong, File Photo)

Critics charge that these products of synthetic collateralized debt obligation (CDO) serve no real purpose in the financial markets. Trading in derivatives is similar to rolling the dice, some say.

Others contend that synthetic CDO was just a kind of financial derivative that could help facilitate the flow of capital by allowing a wider spread of risks among mortgage lenders, investors and speculators.

Indeed, such arguments can apply to almost all derivative products, including the more common varieties such as index futures. At issue in the Goldman case is not the product itself but the way it was being sold to what Goldman described as "knowledgeable" investors, including banks in the US and Europe.

The crucial question is whether it's wrong for Goldman to have failed to tell investors that the hedge fund manager they were betting against was involved in picking the bundles of mortgage loans they were betting on. The decision of the court can help further clarify the definition of material information whose importance has been greatly magnified in the aftermath of the subprime mortgage credit crisis.

In the early-1990s when the derivative wave began to hit the shores of the Hong Kong financial market, private banks were keen on designing specially structured derivative products to help their clients generate income from their assets, which were, at that time, mainly shares of stocks. The concept of these products was similar to that behind the instruments that have been brought into question in the Goldman case. Both parties are betting on the price movements of the underlying assets they may or may not own.