The Real Issues Concerning Goldman Sachs

I finished yesterdays piece with,

My next post will be on the real issues and questions  Goldman Sachs should be asked.  What was their  real role in the economic crisis.  Who is responsible and Why?  Who should be accountable to the millions and millions devastated?

 There seems to be quite a bit of elation and hoopla over the recent SEC charges of fraud against Goldman Sachs as well as that new reality TV show - 10 - the real time Senate sub committee hearings starring Goldman Sachs.  Both events, the more I think about them are just PR events.  For the SEC action, the PR is to let Americans know that "our" government is on our side working hard to protect us from evil wrongdoers.  (insert laugh track).  As to the Senate Hearings, the PR effort is to ram through some sort of financial regulation to fool the people into thinking "our" governmnet is on our side working hard to protect us from evil wrongdoers.  (insert laugh track).

As I was composing my thoughts on this post, Bnet, a CBS affiliate, published a post of their own which closly resembled some of myl very own thought for this column.  As such, I felt it would be appropriate to share it with you before expanding on my thoughts.

In Defense of Goldman (Kind Of)   By Cait Murphy  click here to view

Okay, it’s easy and fun and often appropriate to dish - or in Senator Carl Levin’s (D-MI) mellifluous phrasing, “crap” — on the fat-cat bankers. Believe me, I have no sympathy for the people, flush with fabulous paychecks and an inflated sense of entitlement, who did so much to destroy the nation’s wealth, housing market and self-confidence.

My sentiments exactly.  But the real key words and what I feel very strongly about is when he says, "who did so much to destroy the nation's wealth, hosing market and self-confidence".  This is what I talk about when I say "The Real Issues".

But there are good reasons to crap on the financial industry, and bad ones. And what we have been seeing in the hearings by the Permanent Sub-Committee on Investigations is a lot of emphasis on the latter.

Again, my sentiments and feelings exactly.  What we are seeing and hearing are all the wrong or as Carl puts it, "bad" reasons to "crap" on the financial industry and Goldman in particular.

This matters for two reasons. One, if you do not identify the right problems, you are not going to come up with the right solutions. And two, the ignorance betrayed in so many of the questions and commentary has to give pause.

Once again, I whole heartedly agree with Carl.  "If you do not identify the right problems, you are not going to come up withthe right solutions" nor will you ever have justice served which will in turn act as a deterrent for future actions of wrongdoing.

Carl's article continues by talking about needing "new forms of regulation".  He talks about financial institutions and mortgage brokers being mandated to keep a piece of each mortgage they sell.  Financial institutions should as this is a partial return to the way mortgage lending was always done which worked.  Brokers on the otherhand, are just a sales and marketing force with no decision making powers as to who does and does not get a loan nor do they fund them.

Carl does say that "hedging" is OK, which it is but you should only be able to hedge on something yo actually own or control not something you have fabricated 0 synthesized - on paper only.  In other words things that do't really exist should not be bet on or against.

And I don’t think any of this needs to be complicated. It’s not a matter necessarily of more rules, but of smarter, more consistent ones. Given the spectacle on Capitol Hill, I am not confident that this crew can deliver them.

No new rules need not be complicated nor shoulld there necessarily be more new rules.  I believe that enforcing rules we have now and perhaps bringing back Glass-Steagal could put us all back on track.  Enforcement of rules however, must contain a consequence factor - some form of punishemnt other then monetary.  "More consistant ones" (rules) are definitely needed and I am not too sure that "this crew" can deliver - period.

Skipping down, Carl now gets to where I want to be:

It wasn’t just the bankers. If our esteemed members of Congress would yield the microphone for a moment and look in the mirror — in other words, if pigs flew — they would recognize their own culpability. Senator Levin has compiled a litany of blame derived from the committee’s hearings so far; Congress does not appear on the list. And I don’t see anyone giving back Goldman’s generous campaign contributions, either.

No, for this whole economic crisis to have happened, we first needed to create a bubble.  And as with other bubbles  of the past, to have grown it required the assistance - direct or indirect - of various elements of our government.

Congress failed to provide oversight to Fannie and Freddie; and it created a regulatory spaghetti that made effective supervision impossible.

Corruption ran wild in both GSE's.  The books were cooked - a felony in most courts - but only a slap on the wrist offense for the very high paid execs of both firms.

Underwriting guidelines relaxed through an automated underwriting system that could be tweaked to accept unqualified borrowers.  And they said it was a sub prime problem at first.

Yes, Congress has a part in the evolution of the crisis as do the many regulators, SEC, FDIC, FTC, AG and other lettered agencies in addition to our executive branch going back to the days of Bill Clinton forward.

Having said that, the real issues are how did we (government's regulators) allow the creation of mortgage products that would entice buyers to buy more then they should have or bought at all.  How, as Carl points out as well, did the Federal Reserve keep interest rates artificialy low further enabling free and affordable looking credit.  Then how was Wall Street allowed to slice, dice, package and pool, mortgages with false Triple A ratings.  How did the SEC not investigate further the securities that were being created and sold to investors?  A very basic function of the SEC.

Even more interesting and not questioned at all is how these derivatives were created that further enticed investors to form long lines to purchase not only AAA rated bonds but bonds that were even insured against failure.  An insurance program with no regulation because it was called something else.

So what caused the economic crisis?  Wall Street with the help of Uncle Sam.  Were it not for Wall Street creating "toxic" mortgage programs, loosley underwriting them, funding them for the sole purpose of creating the RMBS's the bubble could never have happened.

If the fraudulent representation, yes, I will call it fraudulent, of Mortgage Backed Securities didn't create a feeding frenzy of worldwide investors then the money never would have been there - recycled - to loan over and over again to anyone - ANYONE.

The real trigger was the sale of these RMBS bonds and who is the leading bond salesman on Wall Street?  Who seemed to survive and thrive as their competitors failed?  What company was our previous Secretary of the Treasury the CEO of?

How did the market for RMBS suddenly stop, thereby depleting the amount of cash availablel by the lenders to fund their loans which in effect started the economic collapse?  (This was answered during the hearings when GS said they were bidding so low for mortgages that no one would sell them.  If they started this then you know the others houses did as well and well, the mortgage meltdown began).

The real issues then are not the fraud alleged by the SEC nor the ethics questions raised by the Senate.  The real question is who orchestrated all the events that allowed the creation of fraudulent financial instruments that created the bubble that burst spilling toxic waste over entire countries.  And more important dumping all this toxic waste upon our own country leaving our own people in ruin.

Ask Goldman Sachs.