Goldman Sachs – A Congressional Show Trial

Oh, boy, our elected legislators on the Senate Panel are having a field day ragging on Goldman Sachs…..the evil empire of the financial world!  Fab Tourre, GS architect of an investment instrument designed to take advantage of a CDO market headed south, denies any wrong-doing!  So, did you expect anything different?  Maybe he is just a smart guy that sensed a market ready for collapse…if so, then he was doing his job trying to make GS money!  We will probably never know the true facts in this case, but, Fab categorically denies the SEC’s allegations. 

This show trial does give our Senators plenty of opportunity to posture and puff-up for the press and their constituents.  Levin, Collins, McCain, etc., are all polishing their images taking advantage of the public view that Wall Street is full of crooks and shysters!  Traveling medicine men coming to town with the magic elixir of the day!  Since GS is the biggest firm, they will get all the attention.  Facts be know, other banks also created and invested in instruments to short the housing market….but they will not get GS’s scrutiny because of their size.

But, is GS the only culprit in the financial meltdown?  Hell, no!  There are many players that deserve a black eye!  Let’s review some of the factors that got us to this point.First, let’s go back to the Clinton administration when the economy was booming.  Housing prices were escalating 15-20% per year, the economy was strong, employment was high, and life was good!  The future was so bright, we all needed sunglasses!  The feds began to promote the notion that everyone should be able to own a home; and the public and mortgage companies bought in hook, line, & sinker!  Creative mortgages, balloon notes, variable rates, 95% financing, and all sorts of packages were available to everyone……especially those that previously could not have qualified for a loan.  Just make the loan, collect the closing costs, and float the note to Fannie and Freddie! Even, the dot-com bubble burst of the late ’90’s did not slow down the hunger for creative financing.

Fast forward to Greenspan keeping interest rates low during the early 2000’s, and the market is still ripe for fancy debt financing.  Moving on to the 2005-2007 time frame, some politicians and economists began to sound the alarm that the housing market and mortgage market was overheating.  John McCain warned about the potential problems of Freddie and Fannie….only to be scolded by Barney “Dufus” Frank, who insisted that the federally back mortgage companies were on sound footing!

Then, of course, the stuff hit the fan in 2008-2009; and since the collapse, Congress has been looking for someone to blame.  Did they find fault with the Treasury’s actions?  Did they find fault with the SEC (that now we know some officials spent lots of time watching porn instead of the marketplace)? Did Barney lose his committee seat?

Now, some incriminating e-mails surface from a review of GS’s records; and the race is on to blame them.  They may be at fault for taking advantage of a bad situation or may have acted unethically, but are they the only villain?

There is much blame to pass around.  Yes, some reform is needed.  But, what is really needed is for the existing regulatory agencies to do their damn job!  For God’s sake, do not create another agency to watch the agencies that are supposed to be watching in the first place!  If the existing agency employees can or will not perform their tasks, fire them, and hire some good people who will do the job!

Let’s not throw the baby out with the bath water….or lynch a few people at GS.  Let’s clean up the agencies that should be doing the job and get on with repairing the economy.  Drop the curtains on this latest show trial!


One response to “Goldman Sachs – A Congressional Show Trial

  1. If indeed the agencies responsible for oversight were not doing their job (which to a great extent clearly was the case), shouldn’t we also look to those responsible for ensuring that they did? That was not the legislative branch of the government, but rather the executive, which for the period from 2000-2008 took an extreme “hands off” approach to government involvement whenever and wherever it could (witness their willingness to tolerate Chris Cox and his total lack of performance as Chairman of the SEC).

    The bottom line in my mind is as human beings it is our nature to be greedy, and for some more than others. Financial markets require oversight and regulation or that greed will continue to result in the meltdown we narrowly averted just 18 months ago, whether those regulations limit leverage (recall the lack of margin rules that led to the markets’ collapse in 1929 and the great depression), or trading in complex derivatives (CDOs and CDSs).

    John Stossel of Fox (Faux) News produced a story last year where he defended unregulated markets, asserting that, like an ice rink with no posted rules, soon those skating will create their own manner of ensuring mutual success (not crashing into each other) by all skating only in one direction. What he failed to note, however, was the “bully” factor, and how when a bully shows up it is his rules that must be followed, and for his benefit/enjoyment alone. The same holds true for unregulated markets. Soon the bully will take over in the form of greed.

    As those in the business will quickly tell you, for someone to win, someone has to lose. What regulation is intended to ensure is that all get to play by the same rules, rules that today not only are not enforced, in the case of the CDO and CDS, do not exist.

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