The devil in Goldman Sachs

Goldman Sachs has been demonized in the last week as a result of betting against a market it knew would fail.

By , Guest blogger

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    Goldman Sachs chairman and chief executive officer Lloyd Blankfein testifies before the Senate Subcommittee on Investigations hearing on Wall Street investment banks and the financial crisis on Capitol Hill in Washington, Tuesday.
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Poor Ol’ Goldman…

Just trying to do ‘God’s work’…

And everybody treats it like the devil.

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The Washington Post carried a front-page headline, portraying the firm as though it was Satan himself:

“Cheers at Goldman as housing market fell.”

Goldman executives were in a good mood for a good reason: they had bet against the mortgage market.

Of course, that was the only reasonable thing to do. Anyone could see that the housing market was in a bubble. And everyone knew that the bubble would blow up sooner or later. Nobody knew better than Goldman because the firm helped create the bubble…selling those delicious, but teeth-rotting, mortgage-backed securities all over town.

Goldman did the right thing. It bet against the mortgage market.

Naturally, Goldman execs were happy when their bets began to pay off.

But to hear the press tell the story, Goldman executives were like a devilish cabal…cackling about the fall of the mortgage market as if they were celebrating the sacking of Rome.

“Sounds like we will make some serious money,” said one exec in an email.

Serious investors should pay no mind to the Goldman story. The Wall Street firm did the right thing – it helped separate the numbskulls from their money. And now, the numbskulls are moaning and the SEC is trying to salvage its reputation by prosecuting Goldman for betting the right way.

As usual, the pundits are on the story too – kicking the poor Goldman crew when they’re down. And as usual, they are drawing all the wrong conclusions.

Roger Lowenstein, in the New York Times:

WHILE the Securities and Exchange Commission’s allegations that Goldman Sachs defrauded clients is certainly big news, the case also raises a far broader issue that goes to the heart of how Wall Street has strayed from its intended mission.

Wall Street’s purpose, you will recall, is to raise money for industry: to finance steel mills and technology companies and, yes, even mortgages. But the collateralized debt obligations involved in the Goldman trades, like billions of dollars of similar trades sponsored by most every Wall Street firm, raised nothing for nobody. In essence, they were simply a side bet – like those in a casino – that allowed speculators to increase society’s mortgage wager without financing a single house.

The mortgage investment that is the focus of the S.E.C.’s civil lawsuit against Goldman, Abacus 2007-AC1, didn’t contain any actual mortgage bonds. Rather, it was made up of credit default swaps that “referenced” such bonds. Thus the investors weren’t truly “investing” – they were gambling on the success or failure of the bonds that actually did own mortgages. Some parties bet that the mortgage bonds would pay off; others (notably the hedge fund manager John Paulson) bet that they would fail. But no actual bonds – and no actual mortgages – were created or owned by the parties involved.

Lowenstein’s point is that Wall Street has lost its way. It is no longer providing a useful service. Instead, it has turned itself into a casino.

So far, so good.

But his solution? More regulation!

Of course, the regulators were on the case the whole time. But, according to the news reports last week, while the biggest scams of all time were going on the SEC team was busy watching porn on its office computers! It missed Madoff. It missed Sanford. It missed the greatest bubble in financial history.

More regulation? Forget it!

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