A comment on Goldman and Levin's panel
From previous posts here it is no doubt obvious that I did not enjoy Senator Levin's persistent and repulsive bullying at his panel yesterday. Goldman Sachs is by no means any group of saints and CDO's were broadly a poor product and should without question be regulated if not banned. Nevertheless the unwillingness of the panel, Democrats and Republicans alike, to make any effort to understand the investment banking business, to understand the difference between market making and investment advisory, or between hedging and market manipulation, between short succinct internal statements and those meant for posterity, was deeply troubling. This grandstanding for political purposes with a pseudo populist message based on a lack of any intellectual effort is dangerous stuff that has the potential to be destructive in ways that cannot be foreseen at this point.
Rather than belabor that comment with paragraph upon paragraph of explanation from this viewpoint, this comment will focus on one issue. That's the pervasive suggestion that Goldman somehow hoodwinked investors, had more information than others, and took advantage "of the American people and their clients" by profiting from its hedging activities. The information to understand what was happening in the housing market was all available to everyone and investors chose to make their "bets" based on their particular point of view and desire to profit based on their assessment of risk.
How can I say that. Here at this blogspot creation, a totally independent writer, unconnected to any firm or any network of investors or "insiders', barely able to work a calculator beyond basic arithmatic, and working solely from reading the financial press and insights gained from having worked in financial services prior to 2004(all this describing myself), wrote the following in a post on 2/17/06:
"In 2004 37% of all consumer mortgages were adjustable rate and of that 88% of the lower credit scores were adjustable with predominantly two or three year resets... credit cycles always come around. It's been awhile. They always result from excess. It may be months or it may be a year or more but its hard not to see significant consumer credit defaults in mortgages..."
On 8/24/07, eighteen months later, this blogger wrote:
"Why have the significant issues in the subprime mortgage market been such a shock to regulators, media, politicians, and investors. With publicly available information it was not hard to see that there was danger unless the economy roared ahead in an unprecedented way."
The question is not whether Goldman "tricked" the market but why other investors, and importantly the regulators, failed to acknowledge the likelihood of the coming crisis at that time. While Goldman was far from being the leading underwriter of CDO's, this can also raise the question as to why Goldman continued to play in this market at all and did not take the opportunity to demonstrate the responsibility of industry leadership, pull back and sound an alarm(see prior post). They did not need the money.
Rather than belabor that comment with paragraph upon paragraph of explanation from this viewpoint, this comment will focus on one issue. That's the pervasive suggestion that Goldman somehow hoodwinked investors, had more information than others, and took advantage "of the American people and their clients" by profiting from its hedging activities. The information to understand what was happening in the housing market was all available to everyone and investors chose to make their "bets" based on their particular point of view and desire to profit based on their assessment of risk.
How can I say that. Here at this blogspot creation, a totally independent writer, unconnected to any firm or any network of investors or "insiders', barely able to work a calculator beyond basic arithmatic, and working solely from reading the financial press and insights gained from having worked in financial services prior to 2004(all this describing myself), wrote the following in a post on 2/17/06:
"In 2004 37% of all consumer mortgages were adjustable rate and of that 88% of the lower credit scores were adjustable with predominantly two or three year resets... credit cycles always come around. It's been awhile. They always result from excess. It may be months or it may be a year or more but its hard not to see significant consumer credit defaults in mortgages..."
On 8/24/07, eighteen months later, this blogger wrote:
"Why have the significant issues in the subprime mortgage market been such a shock to regulators, media, politicians, and investors. With publicly available information it was not hard to see that there was danger unless the economy roared ahead in an unprecedented way."
The question is not whether Goldman "tricked" the market but why other investors, and importantly the regulators, failed to acknowledge the likelihood of the coming crisis at that time. While Goldman was far from being the leading underwriter of CDO's, this can also raise the question as to why Goldman continued to play in this market at all and did not take the opportunity to demonstrate the responsibility of industry leadership, pull back and sound an alarm(see prior post). They did not need the money.
posted by John Borden at 8:41 AM
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