Posted on 11/02/2009 6:46:44 AM PST by SeekAndFind
It's time to finally lay to rest claims stretching back as far as 2007 that Goldman Sachs was peddling securities backed by risky home mortgages while it was secretly betting that the US housing market was in trouble.
Far from being "secretly" down on the US housing market, very early on Goldman was publicly and privately warning that home prices would decline and that this decline would have an impact on mortgage backed securities.
The complaints about Goldman being on both sides of the mortgage trade stretch at least as far back as December, 2007. Ben Stein wrote a column complaining that Goldman had sold mortgage backed securities while it was shorting them. At that early date Goldman economist Jan Hatzius was saying the US housing market would cause serious problems for the economy. At the time, Stein was convinced that Goldman was over-playing the negative case to cause a panic and make its short bets pay out.
(Actually, it goes back even further than that. Stein's column was in part based on an earlier piece by Allan Sloan, to which I cannot find a link at the moment.)
More recently, the Goldman conflict conspiracy theory was taken up by Matt Taibbi. Today we got the most thorough version of this from McClatchy's Greg Gordon. The latest report says that in 2006 and 2007 Goldman sold $40 billion in mortgage back securities but "never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting."
But that really isn't true.
(Excerpt) Read more at businessinsider.com ...
Goldman economist Jan Hatzius wrote an article in 2007. Hatzius gave Business Week permission to publish his note in full.
See here :
http://www.businessweek.com/the_thread/hotproperty/archives/2005/09/goldman_sachs_e_1.html
Here’s a sample:
“Thus, if interest rates rise from their unusually low current level, house prices would decline, perhaps sharply. An interest-rate-induced decline in house prices might have fewer macro implications because the interest rate increase itself might be the result of strength elsewhere in the economy. But, the house price decline would nonetheless be painful.”
Because of this, the author concludes :
“Of course, we now know the “macro implications” were far greater than Hatzius anticipated in 2005. But there can be little doubt that Goldman was publicly warning about house prices very early on. Which means these latest charges that Goldman was somehow misleading those who invested in mortgage backed securities are simply bunk.”
There is nothing at all wrong with trying to sell something you think has reached its peak price.
There is a *little* something wrong with claiming that the securities involved are “AAA” rated. (This at a time when perhaps less than 1/1000th of available scurities were rated “AAA”.
There is a whole lot wrong IMO with the idea that ratings agys, just like a corrupt house appraiser might, and knowing that their future stream of business might well depend upon pumping the ratings of offerings by a large client (in or to get the next deal) seriously downplay the risks and credit quality of those offerings.
So, in which of the above wrong things you mentioned is Goldman Sachs at fault for ?
Welll....I guess GS is pure as the driven snow then. Did rates rise? No. Housing crashed anyway.
Nobody is blameless in this entire picture of rampant fraud from the very top to the very bottom of mortgage finance, which has been bleated about ad infinitum. Nobody. Not the borrower who overstated his/her income, not the ratings agys, not the lenders, not the securitizers.
Something is definitely wrong, however, when the entire pot of glue holding the market together was blatant fraud practiced at levels that can only be taken as having been designed to overwhelm the entire regulatory system.
Having envy of Goldman would be somewhat like having envy of a serial rapists. None starter for sane people.
OK, I’m all ears — how is Goldman Sachs like a serial rapist ?
I don’t consider it exactly admirable behavior on GS’ part to be selling MBS to cities and towns and college endowments amid downgrading such securities. Sure, there is an aspect of those buyers trusting Goldman acting as a “financial advisor”...not as *exclusive* financial advisor, and probably not holding fiduciary duty to the buyer. But there is something very asymmetrical, at least to me, about the idea that GS is an angel and everyone who bought from them is an ignorant doofus who deserved what they got.
GS is not just one voice. If you are the investment officer of a CALPers, yes, it is your responsibility *not* to buy any old thing and old company throws in your face. I absolutely fault the never-accountable idiots making decisions on those positions who, for an extra .3% in yield, would throw over all they are supposed to know about securities and actually believe that something ia “AAA” because of synthetic constructs of hedging devices.
This article says that one lone voice at GS meekly stated that housing was vulnerabl, and somehow, this absolves the whole company of any culpability from having a literal army of sales weasels out there pushing garbage on their marks.
And then, we could get into the aspect of GS receiving the blessing of having its AIG CDS exposure explicitly backed up by the taxpayer. That was a $13-$14 billion loss they should have taken.
At some point, there is what I would again call asymmetry, and it as a really obscene level. They have the inside track to early-released economic numbers. They know early what the Tsy and Fed are going to do at bond auctions. They can change from investment bank to FDIC-backable bank in record time in order to obtain FDIC backing. It’s OK for them to straddle high-power computers across order lines going into the NYSE so they can engage in hi-freq trading. It’s OK for them peddle snake oil to suckers. It’s just a coincidence that every Tsy sec’y and Fed official comes from their ranks.
At what point, if ever, do you come to the conclusion that they actually run the US government?
Which brings us to the next question —— Just how much clout does Goldman’s economist Jan Hatzius have in the scheme of things anyway ?
He wrote an article early on published in Business Week practically warning about the looming housing bubble, should the higher ups at Goldman still selling MBS have listened to him and informed their investors about it ?
What’s the ethical thing for Goldman to do ?
It sounds like a very basic transaction called a hedge. Junior high level finance.
Farmers plant a corn crop in April, but are buying options in case prices go down.
Airlines hedge their fuel costs...
My sense is that Goldman probably laid out all the risks in detail inside their prospectuses, and legally, they have a great deal of protection. It’s unfortunate, but most pension funds and other buy-side institutional investors typically haven’t bothered looking through prospectuses with a fine-toothed comb— and conversely relied heavily on the rating agencies instead.
What might give Goldman and other more trouble, however, is their dealing with the rating agencies. Getting to the bottom of how a Moody’s (for example) could conjure up a AAA rating on a security that likely had 70% or more of the mortgages as sub-prime, NINJA loan is just beyond me.
Goldman pretty much has known about investors’ disdain for prospectus details and for simply relying on ratings.
The question no one seems to be asking is how influential was Goldman (and other investment bankers) in pressing the rating agencies to make abysmally poor rating decisions— and not bother with the due diligence.
Goldman held an enormous amount of MBS insurance issued by AIG. When the federal government bailed out AIG and paid 100 cents on the dollar to holders of such insurance, Goldman collected almost $15 billion at taxpayers expense. So, one cannot help but ask -— WHAT IS THE REAL REASON FOR BAILING OUT AIG ?
Why did Goldman buy insurance it claimed was backed by an insolvent entity?
Isn’t it because they had enough influence on federal government policy (Geithner and Paulson oversaw this particular transaction) to be confident that they would collect anyway.
That said, I think when all is said and done, Goldman will come out of this with only minor scratches legally. From a PR standpoint, however, the damage to Goldman has been done. But heck do they care a whit ? They have the money, that’s all there is to it.
September 2005 is not "very early on" in the housing bubble; it is provably, by many measures (e.g. average median price), within six months of the very top of a multi-year bubble. And housing prices collapsed very nicely on their own with virtually no change in mortgage rates.
As you mentioned; risk was not properly identified with many high risk transactions.
Had the risk been identified; the marketplace would have properly priced it out.
High risk mortgages would have had corresponding higher interest rates and some would not have been made.
Yep. Just a normal transaction
A farmer harvests his corn., then sprays it with deadly poison. Then “buys off” a USDA inspector who writes an opinon
rendering the corn AAA rated. Then the farmer sells the corn to a co-op, and then proceeds to bet against the future price of corn. Nothing wrong here, fellas........just shrewd business going down....move along.
As I told Liz & you already, steph, they've screwed the pooch insofar as their credibility goes. They're no little than common garden variety thieves and I don't give a damned what their address may be.
They're done, finished, fini.
They may as well cut to the chase & crash the market now, again, while they can as far as I'm concerned.
The biggest difference between the real Great Depression & now? The numbers, my friend. The numbers of people who were ripped off, to be specific.
There'll be no where for the thieves to hide any more than there will be for us, their victims. Except there'll be many 10s of thousands more of us, one helluva lot more pissed off & able to deal with the lice than in 1929. ;^) LOL
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