Did Goldman Sachs do Anything Wrong?
Apr 28th, 2010 by Carlos
I watched a couple hours of the Goldman hearing held yesterday in Washington, DC that featured US Senators grilling Goldman Sachs executives. I’ve never really paid attention to hearings like these, but after watching yesterday I have to say that this stuff is fascinating.
There were so many things happening at the same time, it was tough to keep track:
- Presumably, they were there to discuss the SEC charges against Goldman, which they sometimes hit on
- The senators were there to look good in front of the media as they wagged their fingers at Wall Street
- Goldman was there to take the fall for the mortgage crisis, which it did not cause
- The Goldman guys were there to not look stupid and protect the firm
Why is this so interesting? Because both the Senators and the Goldman guys are really smart dudes—but the Senators (as one admitted) don’t have the capacity to really understand all the details of how all this stuff worked. It’s not easy. They did their homework the night before, read all the papers and books (including The Big Short!), and then went out there to wag their fingers in Goldman’s face.
Why? Because they represent the people, and the people are angry. They’re angry about massive job losses, angry about their 401(k) losing so much of its value, angry that CEOs were making money hand over fist even though they messed up big time with the bets they took in the mortgage industry.
And the use of that word—bets—was in full effect during the hearings. The senators made a point to compare what Goldman did to a casino that stacked the odds against everyone else and then sat back to collect the money. Which is oversimplifying A LOT of what happened and is also wrong. The senators acted as if Goldman knew what was going to happen in the future and then acted illegally (or at least immorally) to reap massive profits from that information.
Some of the questions they asked Goldman were astounding. Senator McCain asked the Goldman CEO what he thought about community banks being in so much trouble. He asked him how much he got as a bonus last year ($9 million), and he asked him what he felt about the American people being in such a tough spot right now. Then he threw out something like “But you’re doing pretty well, aren’t you?”
What the hell does that have to do with anything? Absolutely nothing, and that’s why yesterday was so interesting. This was the biggest economic collapse in the history of this country since the Great Depression, and someone has to take the blame. And if you watched yesterday, it’s clear who Congress wants to point the finger at—Goldman Sachs. The people need a villain, and right not it looks like it’s going to be Goldman Sachs.
You Can’t Handle the Truth
Senator Coburn then chimed in with something I thought was pretty brave: he pointed out that 90% of the mess was Congress’ fault—they only hold these hearings retroactively, never before something bad happens. Bravo to you Senator Coburn: amidst the bashing and blaming of Goldman, you came out and spoke honestly instead of just piling it on some more.
It was quite the show.
But is any of it right? Did Goldman Sachs do anything wrong? After all, that’s the point of the SEC charges—that Goldman broke the law by creating a product that one client believed was “built to fail” while selling it to other clients.
I don’t see the conflict of interest. First of all, Goldman had no way of knowing what was going to happen. As we saw in The Big Short, some people were pretty sure that certain tranches of mortgage securities were going to blow up. But no one knew for sure. And even if they believed that these products were going to fail, is it their job to stop others from exposing themselves to the risk they’re looking for? Should Scottrade stop me from buying a stock because it “knows” or “think” it’s a shitty stock?
I don’t think so. I think if an institution or person wants to buy X or Y security from Goldman, Goldman’s job is to sell them the security.
No one knew exactly what was going to happen—including Goldman.
I am Not a Goldman Apologist
Let me get this straight—if it’s illegal to do what Goldman did (I don’t really know, but it doesn’t sound like it should be), they should be punished. Reform needs to happen. But what I don’t like is when people lay blame or make up their mind without knowing all the facts. And that’s what makes this so tricky—I bet 70% of the population can’t really understand (and doesn’t really care to understand) what happened, how it happened, and how to fix the problem.
All they have to do is read The Big Short and you’d get an entertaining, in-depth view of the crisis and how it blew the economy up. Goldman had some to do with it, but that was after lenders were giving out irresponsible mortgages to irresponsible buyers. I get very frustrated and upset when these knee-jerk reactions and decisions are made:
- Goldman made money of the crisis (they lost a ton too) and so therefore they are evil.
- The CEO got a $9 million bonus and so he did something wrong.
- Money is evil.
We’re not idealistic teenagers anymore that have these short-sighted opinions about the world. We should dig a little deeper and try to learn what the root cause of all this was. It was irresponsibility. It was lack of proper oversight. It was leverage. It was greed.
But if you’re going to put everyone that falls under those categories on the stand, it’s going to be one hell of a long hearing.
Anyway, there are hours and hours of video on this out there, but here is a clip of Goldman CEO Lloyd Blankfein on the “stand:”
It always astounds me when I watch those hearings to see how the folks tasked with regulating these industries seem to not understand the first thing about them. I can’t stand all those silly “how much did you make” questions either, it’s grandstanding pure and simple.
Having said that, that’s not what this case is about, it’s too bad those congress people spend so much time with the rhetoric–at times I wonder if it is to steer people away from the real point.
The SEC’s case is simply a disclosure case. Yes, some people bet against these products, some bet on them. They were all big boys, sophisticated investors. They each had opinions on the direction of the underlying assets.
But tell me this if you as a sophisticated investor are asked, “would you like to bet on these mortgages, here is all the detail about them?” OR you are asked “would you like to bet on these mortgages, here is all the detail about them and we want to note that the basket of these assets was selected by an investor that is taking the opposite bet,” think that might have impacted your decision?
The SEC does. That’s what the case is about.
I was just chatting about this whole thing with a friend and he made a good point: it’s the senator’s job to ask these questions. Why? Because their constituents are angry and they are there to represent them. So they ask what the people want them to ask. They want them to sit up there and be smug and point out how much money they made. Which is sad because it doesn’t deal with the fundamental problem or explain how everything went down in detail, but that’s not the American citizen’s strong suit: they want the cliff notes, good-guy/bad-guy version.
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I just discovered your blog…thanks for the insight. (Wait, that makes me sound like a spambot. Time to say something specific to this post.)
You’re right, senatorial grandstanding is political theater at its worst. But I question whether these senators’ constituents really give a damn. This isn’t health care or crime, both of which affect us all personally – this is an arcane subject that most people, even most financial bloggers, have trouble understanding. If Goldman is guilty of SEC violations – and I think they probably are – then punishment is in order. If I were a Goldman Sachs shareholder, I’d be fuming. But for our government to foment hatred against the old men in the suits simply because they look like an artist’s rendition of filthy capitalist swine does no one any good. Especially since Goldman sucked at the Treasury’s teat to begin with.
(Yes, I happened to blog about this same topic today. Manners preclude me from linking to my post.)
I watched the hearings and agree. When I purchase investments from my Broker, any information that I might be contrarian to his, or another investors opinions is not solicited. I was uncomfortable when the Senators talked over Mr. Blankfein’s attempt at trying to answer their repetitive questions. These types of hearings need to be moderated instead of looking like an angry inquisition. They appeared to have an agenda: Open the doors to the angry mob that is mis-informed. This process deflects focus fromwhere we really need some transparency (Audit of the Fed.) Greece has angry mobs too.
Kevin, I agree. I like that Buffett has stepped up to bring some reason into the whole discussion. When he speaks, people listen. I hope it puts a dent into the insanity that this has turned into.
I had to suffer through almost all of the hearings since when I am in the office, we have the market updates on nonstop and nothing was playing except the hearings.
Thank you for being a reasonable common sensical voice. What the Senators did not point out was that Lehman Bros, Merrill Lynch, BoA and many others throughout the world all bet on the same thing. Goldman was just the first to get out so they benefit. The poor investors who the senators are supposedly protecting are all the banks and insurance companies who knew the risk quite well because they turned around and bought insurance on the product. AIG insured a lot of those products and it blew them up. The underwriter who wrote the policies did not charge enough premiums to cover the risks.
Thanks Kim! I appreciate the thoughts…it’s really grated on me hearing so many people pile on to Goldman without really understanding the basics of what happened. I want to tell everyone to go read The Big Short and then we’ll talk!