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Goldman's Biggest Sucker

The SEC's fraud complaint raises lots of questions, including this one: Why are Germans such lousy investors?


Germans may be great engineers, but they sure look like lousy investors.

The SEC's complaint against Goldman Sachs alleges that it defrauded clients by conspiring with hedge-fund manager John Paulson to create collateralized debt obligations on subprime mortgage bonds that were almost certain to go bad. Paulson made $1 billion shorting these toxic assets. And who was foolish enough to buy them? The German state-owned bank IKB was one major victim, promptly losing $150 million, according to the SEC. The Wall Street Journal's David Wessel calls IKB "hapless." Apparently nobody ever thought "Achtung!"

This isn't the only example of Germans getting suckered into buying subprime mortgage bonds by big Wall Street firms. In Michael Lewis's new book, "The Big Short," about a handful of investors who anticipated the crisis and, like Paulson, bet against subprime mortgage bonds, one major source of bafflement is who is on the other side of the bet. They wonder, what investor would be foolish enough to buy this junk? Greg Lippman, a Deutsche Bank bond trader who made a fortune by placing himself in the middle of these deals, eventually reveals the answer: Germans. Says one of Lewis's characters:

"Whenever we'd ask [Lippman]  who was buying this crap, he always just said, 'Düsseldorf.'" It didn't matter whether Düsseldorf was buying actual cash subprime mortgage bonds or selling credit default swaps on those same mortgage bonds, as they amounted to one and the same thing: the long side of the bet. 

And of course they got pounded flatter than a Wienerschnitzel. What is it about the Teutonic psyche that made them such easy marks? If they're not careful, "German investing" could assume a place alongside "Yugoslav auto manufacturing" and "English cooking" as things to be avoided at all costs.

(Image source: The Language Institute)