They recommended to various customers to invest in all sorts of CDOs while at the same time betting against them having internally decided they were going to fail.
This is caused by legally mandated chinese walls, designed to give banking customers confidence that the bank is behaving in their best interest.
The sales/structuring desk is legally obligated to structure/sell CDO's after agreeing to do so. They are also obligated to maintain a fair bit of internal secrecy. They structure the CDO, write the contracts, package and sell it. That's all they do, and they do this because the loan originators paid them to do so.
Meanwhile, probably in a different building, the prop desk is shorting the CDO because they think it's a bad bet. The prop desk knows nothing about the CDO except what is contained in the sales prospectus sent out by the sales desk (which is usually quite a lot).
It's highly illegal for either of these groups of people to talk to one another. Their computer systems don't talk to each other and compliance will fire people if they send each other email. By law, the left hand can't know what the right hand is doing.
So sales produces a prospectus that suggests this is a bad investment. Then they continue agreeing to package and promote these securities. Were there some information excluded from the prospectus which suggested to the sales force that they were actually a good investment, I might still be able to see them as honest. Otherwise, this sounds like an attempt to apply the Nuremberg defense where remaining in the situation of having immoral rules to follow was voluntary.
So sales produces a prospectus that suggests this is a bad investment.
The prospectus presumably described the security being sold as long on housing. If housing went up, it would have increased in value. Since housing went down, it decreased.
The security did what it was supposed to do. The fact that the people who bought it made an incorrect bet doesn't make the people selling it evil.
This is caused by legally mandated chinese walls, designed to give banking customers confidence that the bank is behaving in their best interest.
The sales/structuring desk is legally obligated to structure/sell CDO's after agreeing to do so. They are also obligated to maintain a fair bit of internal secrecy. They structure the CDO, write the contracts, package and sell it. That's all they do, and they do this because the loan originators paid them to do so.
Meanwhile, probably in a different building, the prop desk is shorting the CDO because they think it's a bad bet. The prop desk knows nothing about the CDO except what is contained in the sales prospectus sent out by the sales desk (which is usually quite a lot).
It's highly illegal for either of these groups of people to talk to one another. Their computer systems don't talk to each other and compliance will fire people if they send each other email. By law, the left hand can't know what the right hand is doing.