Can you zig when everyone else zags?

I love hearing about people or companies who are not afraid to zig when everyone else or the market is zagging. Independent thinking, especially in large corporations, is often valued or encouraged until it actually needs to be put into action. At which time, the power hierarchy and the ‘save my ass’ mentality usually prevents the independent thinkers from ruling the day. A ‘follow the herd’ strategy is often the inevitable end result.Enter Goldman Sachs and an interesting story published today on Bloomberg. When just about every major financial services company in the U.S. is getting killed by the subprime mortgage crash, Goldman Sachs has singularly made billions.

When almost the entire market was taking a ‘long’ position on subprime mortgages, Goldman Sachs stood alone and ‘shorted’ it. It’s a fascinating story filled with no shortage of intrigue and conspiracy theories. Nonetheless, here’s a rare example of a company that wasn’t afraid to plot its own course despite everyone around them moving in one clear direction.

What’s odd about the subprime crash is Goldman Sachs Group Inc. A single firm took a position contrary to the rest of Wall Street. Giant Wall Street firms are designed for many things, but not, typically, to express highly idiosyncratic views in the market.By the end of 2006, the people creating and selling subprime mortgages and other so-called CDOs (collateralized debt obligations), had put Goldman Sachs in exactly the same position as every other Wall Street firm. Left to their own devices, traders in subprime-mortgage bonds would have sunk Goldman just as they sank Merrill Lynch, Citigroup Inc., Bear Stearns Cos. and every other major Wall Street firm.

Enter two smart guys who trade Goldman’s proprietary books to argue to the CEO and chief financial officer that the subprime market feels soft and that Goldman should short it. This they do, in such massive quantities that they more than offset the long positions in subprime held throughout the rest of the firm, leaving Goldman short the subprime market and in a position to make billions when it crashes. End of story.And it’s a good story. But consider what it implies. Their own traders and salespeople in subprime mortgages and related securities had put Goldman in exactly the same position as every other Wall Street firm: long subprime mortgages. The only difference between Goldman and everyone else was that Goldman had, in effect, an entirely separate enterprise, sitting on top of the firm, with the power to reverse the judgment of its own supposed experts in various markets. They were able to do this, apparently, without ever saying a word about it to their own traders. Instead of telling the fools trading subprime mortgages that they are wrong, and that they should unwind their positions, they simply offset their trades.

source: Bloomberg