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Citigroup In Trouble For Being Smart

November 4, 2011 Leave a comment Go to comments

It looks like Citigroup is now facing legal action for selling securities to customers and then shorting them, just like Goldman Sachs last year. Never mind that the act of selling something is the same as shorting something you already have and no one objects to a regular trade, or the surprising fact that Citigroup did something which didn’t end up getting nationalized. It looks like a lot of people are over-reacting to this. And the funniest part is that people are now up in arms about how evil corporations caused poor defenseless hedge funds to lose money.

It could be a fraudulent transaction if they promised it was one thing and it turned out not to be that. But anything short of that is not a crime and maybe not even that unusual. How much do they have to promise anyways? Are they only allowed to sell securities that will never default? In some ways this sounds similar to blaming banks for issuing mortgages to people who couldn’t afford them without asking who applied for the mortgage.

Investors need to learn that nobody sells you something out of the goodness of their heart. Anyone who buys any type of securities, from individual investors buying stocks to institutional investors trading derivatives, needs to understand that (1) they are buying it from someone else and (2) that person no longer wants it for some reason. Anyone who expects otherwise shouldn’t be spared from their mistakes. A good market exists when one person wants to acquire something and another person wants to get rid of it. If you only think one side of that is valid, you don’t have a market and everyone loses.

Maybe the security you’re buying is being sold by a pension fund that has changing liabilities and needs to shift its assets, or maybe it’s being sold by someone who knows some bad news will come out tomorrow. If you can’t confidently judge its value on your own or get a written guarantee from someone else who specifically warrants that it meets certain criteria and will cover your losses if it doesn’t, don’t bother buying it.

We’re now seeing many examples of people who didn’t have the guarantees they expected. It’s painful but it’s cheaper to learn the lesson than to insure everyone for everything. I hope no one comes after me for buying lots of stocks when other investors were forced (by themselves) to sell at low prices. Or what about selling bonds that were at an all-time low yield and had high probabilities of declining in value, to unsuspecting investors who were tricked (by themselves) into buying? I think I should plan my escape now!

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  1. November 5, 2011 at 4:33 pm

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