fi-cri fallout

All Investors Think They’re Sophisticated Until They Start Losing Money

Like people who bought homes they couldn’t afford by signing on to impossible adjustable-rate mortgages, the investors who purchased said loans in the form of the financial instruments known as collateralized-debt obligations are now saying they had no idea what they were getting themselves into. Some of these claims, like those of Basis Yield Alpha Fund, the Australian hedge fund that went out of business after buying into Goldman Sachs’s “shitty” Timberwolf CDO, are ludicrous. Picking securities to invest in is a hedge fund’s job— clearly, they just picked badly. But the smaller investors, like Michael Slomak, a member of a Cleveland family that invested $2.65 million in CDOs created by Merrill Lynch and lost all but $16,500, seem more sympathetic. “We were just lambs being led to the slaughter,” Slomak lamented to the Journal today.

He says these structured securities, typically based on a pool of debt such as mortgages, had a level of risk that was never adequately explained.

Poor Slomak. Clearly, he is not a “sophisticated” investor. But then again, if he didn’t feel he understood them, why did he buy them? Well, he explains, back in spring of 2006, he felt sophisticated.

Former Merrill Lynch Vice President Jason Lamin visited from the New York office “This was a great chance to participate with the big boys”’ and to act fast, Mr. Slomak said. “We felt flattered.”

Oh, man. It’s so tempting to see the whole financial crisis as a scam perpetrated by Wall Street, and in a lot of ways, it was. But it’s worth remembering that they didn’t sell anything people weren’t willing to buy. People thought they were sophisticated enough to flip their houses for easy money, and they thought they were sophisticated enough to do big deals for easy money, and that is no one’s fault but their own. Slomak should have known, when a little guy signs up to play with the big boys, there’s a good chance he’s going home scuffed and bruised.

Didn’t See Risk, and Got Stung [WSJ]

All Investors Think They’re Sophisticated Until They Start Losing Money