Sunday, April 25, 2010

Saching the Quarterback

The NY Times has the latest scoop in the Goldman Sachs matter. A Senate subcommittee chaired by Carl Levin (D-Failure) has released emails in which GS execs say they could make "serious money" shorting the housing bubble, which is scandalous somehow. What were they supposed to be doing, making cupcakes? Goldman Sachs Messages Show It Thrived As Economy Fell
In late 2007, as the mortgage crisis gained momentum and many banks were suffering losses, Goldman Sachs executives traded e-mail messages saying that they would make “some serious money” betting against the housing markets.

The messages, released Saturday by the Senate Permanent Subcommittee on Investigations, appear to contradict statements by Goldman that left the impression that the firm lost money on mortgage-related investments.

In the messages, Lloyd C. Blankfein, the bank’s chief executive, acknowledged in November 2007 that the firm had lost money initially. But it later recovered by making negative bets, known as short positions, to profit as housing prices plummeted. “Of course we didn’t dodge the mortgage mess,” he wrote. “We lost money, then made more than we lost because of shorts.”

He added, “It’s not over, so who knows how it will turn out ultimately.”

Wow! You can practically see him chuckling and swirling his brandy! GS was taking a short position as a hedge against their wide ranging exposure to America's falling real estate market and didn't know how it would resolve! You can see why GS is called the "Vampire Squid."

I make no great claims to knowing whether GS committed fraud somewhere along the line. But, one thing is undeniable: GS is one (of many) institutions that managed to survive the Crash of '08 while others were overwhelmed and destroyed. Where is the SEC complaint against the executives who enabled the failures? You say Goldman was shorting housing in 2007. At that point, isn't that something any prudent investor would have done, simply as a hedge? But that's not what happened. A lot of Goldman's rivals doubled down or tried to pretend there was no problem. How did that work out for their shareholders and employees?

After months of presidential and senatorial demonization of Goldman Sachs, it might be hard to remember that the Crash of '08 and the Little Depression arose from mismanagement and fraud at banks that went out of business precisely because of ... mismanagement and fraud! The world didn't turn upside down because Goldman shorted the housing bubble. Wall Street "died" because Bear, Lehman, Merrill, Fannie, Freddie, WaMu, Wachovia, Countrywide, AIG, and dozens of others went long at precisely the moment they should have been getting out! These companies, and their executives, are the ones who helped cause the Crash, but they seem immune from any sort of attention, let alone government sanction.

Of course, Levin might not understand what it might mean when a company sets out to actually make money, rather than mollify economically illiterate politicians. Given where Levin hails from, he actually might have a different image of what success looks like:

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