What Are Your Thoughts About This Goldman Op-Ed

[erpowers]

This is an op-ed written in the New York Times that states Goldman Sachs is not the only villlan in the story of the financial collaspe. The author states that many indidivuals and groups could have done things to prevent the collaspe. The author starts with ACA and IKB, the two investors involved in the Goldman Abacus deal. The author mainly restates what Fabrice Tourre told the Senate Subcommittee on Investigations, that each investor could have figured that the deal would lose money. The author then moved on to the ratings agencies and claimed that if the ratings agencies has done their job none of these deal would have been done. Finally, the author moved on to congress and listed the things Congress did and did not do in the lead up to the financial crisis.

I do agree with some of the op-ed. It would have been good if the ratings agencies had rated the packages the way they should have been rated. Also, government regulators should have prevented some of these actions. In addition, it would have been good if Congress had done a better job dealing with this issue. However, I do not think Goldman should be let off the hook for the things that were done by the company.

http://www.nytimes.com/2010/04/27/opinion/27mclean.html

[sandnsea]

1. She gets the story, and then stumbles away from it

"...the hedge fund manager John Paulson, to help design the investment in order to improve the odds that it would fail.

... Meanwhile, the company’s insurance arm was covering as many subprime mortgages as it could to increase its own short-term profits. In some ways, the ACA story is the A.I.G. story: The company thought it had found free money — and basically bankrupted itself."

This is the story, and not only did they bankrupt themselves, they took millions of working families with them, and they're going to do it again. They're still shoving this no-interest loans as a fix to the mortgage crisis.

Instead, the ding-bat goes right back to the premise that it's the mortgages themselves that are the problem, "But there was nothing hindering ACA’s ability to see that mortgages sold to people who probably couldn’t pay weren’t great investments."

If the mortgages alone had failed, the banks would have rewrote them and all would be well. It was that they designed the investments in order to improve the odds that it would fail. In other words, they needed to dupe people into mortgages in order for them to "find free money", in her own words.

And I don't see where she gets it yet. It was intentional and they're still stumbling around trying to blame the victims.

[Puzzler]

2. If it was just the mortages, then why was the amount of money lost...

... orders of magnitude greater?

[Igel]

3. For lots of reasons.

For instance, if 10% of the mortgages failed but there was no way of knowing *which* 10% of the CDO pool this represented, the taint would be assumed to be widespread and the CDO pool would suddenly be worth less. The CDOs were collateral on leveraged deals, and with their reduction in value lots of people would have to come up with more collateral or sell. Lots of people and firms sold a lot of securities to raise capital and avoid collateral calls, and that drove the market down, which had yet other effects.

So we can blame the lack of transparency and the use of leverage.

But ultimately if the mortgages hadn't failed, the CDOs wouldn't have been toxic. If you want a cause somewhat closer to the root, look there. At least you'll have moved off the flower's sepals. And if you're just looking at Wall Street, you're at least to the tap root, if not to the root hairs. Of course, we can consider the entire mortgage problem as well, but many people get a mite squeamish at that; it's hard to be consistent and only blame the right people.

Mortgages--collateralized debt--is the base that the entire system rested on. The base was yanked out, and we're left wondering how to build the system so that it need not rest on a base. We should have more transparency, we should have less use of collateral, but that would be enough.

Anything that reduced the value of securities would have fed--and did feed--the downward spiral. It wasn't just mortgages even though that's where it started. Some statements by the administration caused the markets to shudder and for conditions to get worse; when Lehman Brothers wasn't bailed out, holders in Lehman Brothers stock suddenly joined the spiral, and things got markedly worse. For example.

As for this particular deal, the entire claim is that had these two investment banks known that Paulson was picking the CDOs folded into this particular synthetic CDO they'd have said "no." They knew which CDOs were included--it wasn't the choice of CDOs that is at issue. It was the chooser that mattered, the SEC says, as well as the chooser's intent. But there are two problems. First, why does chooser and chooser intent matter unless you think that the chooser has some special insight or predictive abilities? Second, nobody's even hinted at any evidence that in May-June 2007 these firms would have given a rat's ass about Paulson's opinion, special insight, or predictive abilities. The case will boil down to this: If they can show that his opinion would have made a significant difference, it's material; otherwise, the SEC has no valid claim in this case.