The greater fool theory states that you needn't worry about buying high during a bubble, because there will always be someone else willing to buy even higher.
The SEC case against Goldman Sachs hinges on whether Ikg, the German Bank that was a buyer of the cdo portfolio called Abacus 2007-AC1, knew that the short seller had a hand in determining what bonds were included in the portfolio. IKG eventually lost $150MM on the Abacus portfolio.
They obviously didn't want their investment to be a total bust. If they didn't know, then there was wrongdoing. If they did know and invested in the portfolio anyway, then their arrogance betrayed them.
The insinuations that Goldman Sachs' shorts on the housing market were unethical or unpatriotic disregard the fact that institutions and individuals short the U.S. Dollar and U.S. Treasury Bond every day. Is that any less unethical or unpatriotic?
Did Goldman mislead in it's offering statement by implying that it's interests and those of prospective buyers of Abacus were incentively aligned? Similar to the old bait and switch, when you state that you are buying for example $10MM or $20MM of a security, and in the small print also state that you will be decreasing your risk exposure, but not stating exactly what the offsetting amount is, this brings into question a possible deception. As was the case with this portfolio Goldman shorted housing cdo's by many times what it's long position was.
Did Goldman Sachs short the stocks of investment banks Bear Stearns & Merrill Lynch after they sold them large amounts of these cdo's? If so is that unethical or a conflict of interests? Should their stock traders be aware of the activity of their bond traders?
Firms and institutions want to play with the big boys. Especially European and Asian financial companies want to be considered as sophisticated as their counterparts in the U.S.. This has brought them a lot of grief throughout the financial meltdown of the past few years. The greater fool theory does not differentiate between sovereign states, giant banks or individuals. All are guilty of the same greed, misplaced trust and lapse of judgment. Excesses and particularly market bubbles thrive on the greater fool theory.
Taken from the perspective of a thirty-year industry veteran there were no new revelations disclosed, however the hearings did help to shine a light on the underbelly of international finance.