Slander Goldman To Avoid Scrutiny

Those are YOUR Junk Mortgages, Senator

April 27, 2010  The Senate Permanent Subcommittee on Investigations

Comedy Gold as Senators (Levin, Collins, Kaufman,McCaskill,Coburn,McCain) pretended to be conducting a serious inquiry into the market practices of Goldman, Sachs.  They obstinately refused to recognize that the mortgage CDO managers were not, in fact, financial advisers to their clients.  Goldman’s  job is to engage parties on both sides of future transactions in assembling a package on which they agree to…yes, bet.  If Goldman subsequently decides to take a position on the CDO, it is not in regard to either supporting or betraying a client, but to managing their own risk regarding that deal, their current inventory of other instruments, and the market environment as it changes.  Their function is to create an instrument that can be used by both buyers and sellers, without regard to the quality of the underlying assets or the intentions of the investors on each side of the market.  (There is a price at which even the worst assets will be attractive to some professional investors – cheap enough for the longs and overpriced enough in the opinion of the shorts.)

Our elected heroes were not about engaging that idea, i.e. ‘reality.’  They had already assembled a narrative that must be supported:  that Goldman and its operatives were betraying the trust of their “clients.”  This clash between the fantasy political agenda – (aimed at bolstering a Democrat financial reform bill)  and technicians calmly explaining how their roles were not supportive of those assumptions – would have been more amusing if it were not a cynical attempt by the Senators to divert responsibility for the financial collapse from themselves (government creating the housing bubble) to Wall Street.

It’s probably worth noting that most Senators are lawyers who operate in a different mental paradigm than business or financial people.  In the lawyers’ world, transactions are about warrantying merchantability, the seller honestly representing the good or service sold, otherwise a fraud has occurred.  It’s an adversarial world in which such matters don’t come to their attention until the fraud is at least suspected.

In the business world, fraud occurs occasionally, but most transactions are necessarily cooperative and mutually beneficial or the buyer would stop buying and the seller would go out of business.  Some businesses, like finance, sometimes act only as intermediaries in a dynamic situation in which two or more parties will interact in the market, but need a predicate action performed by a third party before this can happen.  The intermediary is not recommending or predicting the outcome of any market actions taken by the other parties.  The intermediary could decide to take one side or another of any bet on the performance of the instrument they compiled from existing assets, and they – like their clients – could win or lose that bet.  Disclosure is not an issue.

Note that the lawyers, and many voters encouraged by their elected representatives, speak scornfully of derivatives – esp. Synthetic CDO’s, as just “casino gambling,” which, because of the lack of an actual trading of assets, ought, in their opinion, to be outlawed.  That’s crap.  The whole stock market is a casino, individuals and institutions with individuals’ money, betting on the outcome of just about anything that can occur in a complicated, dynamic world marketplace.  All of that – and the instruments used to make it happen – was just fine until everybody decided to bet that housing prices could rise indefinitely.  A bad bet, that would have caused a problem eventually, but not as bad as dropping the underwriting standards on the loans that made those housing transactions possible.

Nothing wrong with bundling mortgages into securities and selling them to a world market in large quantities – even via exotic instruments – providing the mortgages were made to people who could repay them.  So, our Senators and other congress-creatures can be smug about condemning Wall Street, and banks, for doing what they do well and in trillion dollar quantities, but let’s not forget that the government’s enthusiasm for cheap home ownership and government-guaranteed  lending was the tinder that allowed this blaze to be set.  And, not incidentally, that the officials righteously screaming J’accuse! at the Wall Streeters could have – along with the regulators they failed to oversee – nipped this whole thing in the bud years before the collapse.  Have they no shame?

The More Things Change...Senator Joseph McCarthy