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Thursday, April 29, 2010

Defending Goldman Sachs

Goldman Sachs has officially become a pinata and used for politicians of all sides. The events this week on Capitol Hill were brilliant political theater. Senators from both sides took turns roasting Goldman Sachs executives. Democrats think they've found a perfect symbol and foil to use to create just the right public perception against Wall Street and pass financial reform. Since everything is political in D.C., many conservatives have gone to defending Goldman Sachs.

The absurdities of its case are evident from the SEC complaint. Paulson, ACA and Goldman knew exactly where each other stood. Indeed paragraph 30 of the SEC complaint states that ACA rejected some of the subprime reference positions that Paulson had proposed for inclusion in the mortgage reference pool and substituted others in its place. As such, the SEC claim’s of Goldman deception looks utterly groundless given ACA’s active role. Unless it was brain dead, ACA knew that it was negotiating with a party on the opposing end of the agreement.

At this point the mysteries only deepen. If Goldman committed fraud, then so did Paulson, who was mysteriously not charged. Even more notably, the SEC complaint makes no mention that Goldman actually took the same side of the deal as ACA, which puts it in the unique position of defrauding itself. In light of Goldman’s business decision, it is odd for the SEC to fault Goldman’s efforts to enlist ACA’s aid in selling the new round of CDOs to other sophisticated investment banks. So long as ACA knew what was going on, Goldman adopted a sensible marketing strategy that helps other investors.


As self-righteous Senators grill Goldman Sachs about their role in the housing bubble, it would not be far fetched to request that the Senators switch seats with the Goldman executives.

After all, it wasn’t Goldman that passed the Community Reinvestment Act that forced banks to make loans to people who could never pay them back. It wasn’t Goldman that created and supported Fannie Mae and Freddie Mac. And it wasn’t Goldman that drove interest rates down to a below market level to cause a housing rush not seen since gold was found in them thar’ hills in the mid-1800s.

In our hyperpartisan world, if your opponents hate you must defend. It's the only way to explain Republicans' continued defense of big oil. So, it's important to look again at what Goldman Sachs has been accused of.

hey got together with this guy Paulson. Paulson wanted to bet against the housing market but he wanted to have an extra safe bet. So, he handpicked the worst of the worst mortgages and told GS to package those into a Collateralized Debt Obligation. Then, he bet against it through a Credit Default Swap (it's very complicated but that's the layman's explanation). GS did this and then sold the CDO to their clients without disclosing the deal they made with Paulson to those that bought it.

Now, I am not a lawyer and so I don't know if this is illegal. I do know that it should be if it isn't. I also know that it isn't merely that this guy bet against it. He and GS created it and it was designed to fail and GS never disclosed that to their clients. That's not behavior you want to defend.

Yes, their behavior has been politicized and so be it. Let's also not lose sight of what they've done.

1 comment:

David Leach said...

Read this article on the guy who actually came up with this angle. I wish I had been an investor in his fund!

One view is that the folks that were selling these really didn't understand what was going on and it really took someone who understood that mortgages were in trouble to take advantage of the situation.

I personally don't have a problem with this guy since the melt-down in mortgages was going to happen anyway... he just figured out how to make money on it.