The Crisis Commission: Day One
This is a week where news about the economy is scarce – the only notable data was the fact that the trade balance widened to $36.4 billion in November, which is both the worst since January last year and a fairly good sign that domestic activity is improving. So we learn nothing new even from this little piece of news.
So the focus stays on banking and, in particular, the proceedings of the Federal investigation of the financial crisis. Today is the first day of public hearings with notables like Lloyd Blankfein of Goldman Sachs and Jamie Dimon of JP Morganm Chase in the hot seat.
Already we’ve had a tense moment: Phil Angelides, the commission chairman, got us off to a fun start when he lashed into Blankfein with questions about Goldman’s nasty habit of selling investments such as mortgage backed securities, and then immediately turning around and selling those same securities short. You would only sell something short if you were convinced it was going to go down in value. So the obvious question is: did Goldman let investors know it thought the assets it was selling were worth a lot less than the amount it was charging for those assets?
Naturally Blankfein dithered in his answer, before admitting that, no Goldman did not advise investors of such problems.
His defense, if one can call it that, was that all the investors were ‘sophisticated’ and ‘analytical’ professionals who knew full well the risks they were taking. So Goldman had a right to presume the investors had done their due diligence on the assets before they went ahead and bought them.
In the sordid and ethically challenged world Goldman apparently inhabits such a response seems perfectly reasonable. To the less jaded and less ethically challenged eye, however, the fact that a purveyor of investments immediately hedges against those investments suggests that the disclosure was less than transparent, and may well border on fraud. That is fraud in an every day sense, not in the legal, carefully protected, and suitably obfuscated world of ‘Goldmanian’ finance.
Blankfien’s defense is intensely revealing. It opens up to our view a world where supposedly slick professionals who are ‘sophisticated’ and analytical’ shovel toxic crap into each others laps in order to make a quick buck. This is called high finance. Since everyone knows the rules, no one takes due diligence that seriously – instead they hedge against losses. They sanitize their lack of care by palming the loss of on someone else. The end game is to be stuck with less rubbish than anyone else, and to make sure all the toxic stuff you may own is covered by some sort of insurance.
It is a world where the old meaning of words is perverted. Due diligence used to be a careful method of risk mitigation. Now it is a perfunctory pre-sales function diminished by the after sales function of insurance. I suspect that much, if not the entire, volume of derivatives trading has become infected with such perversion. Indeed I would wager that most of the volume of derivatives exists because of the manic need of the big banks like Goldman to dump what they know full well to be toxic waste into an unsuspecting lap before it explodes and damages the bank’s bonus pool. No one does proper due diligence because everyone is buying insurance.
Angelides himself gave an analogy for the benefit of the press: Goldman’s method of investment sales is, he suggested, like selling a car knowing it had no brakes, and then buying insurance ‘in case’ it crashed.
To add to the blatant sleaze of Goldman’s business practices is the asymmetrical nature of Blankfein’s claim. Apparently his firm is correct to foist garbage on someone else because that someone else is presumed to be as sharp as Goldman in evaluating the risk of the transaction. But what happens when it is Goldman supposedly doing the due diligence,when it is the buyer, not the seller of a transaction?
Aaah. Then the rules change. How odd. When, for instance Goldman is suckered by AIG,. and has bought completely useless credit default swaps, AIG should be ‘honest’ and make Goldman whole. Poor little Goldman Sachs surely should not take a loss on transactions that big nasty AIG knew were rotten. This is, of course, the position that Tim Gethner took when he allowed the reimbursement of AIG’s counter-parties using taxpayer money. Those slick, smart and world class bankers had been given a sucker punch. They had failed totally in their due diligence. But instead of laughing at their stupidity, Geithner felt sorry for them and wrote out billions of dollars worth of checks. AIG not able to pay out all those CDS contracts simultaneously? Who knew? . Welfare checks for the poor bankers of Goldman anyone?
Double standard? Cheap and sleazy? Venal?
All of the above.
One thing is for sure: no one should ever respect the ethical standards of Goldman Sachs. There aren’t any. Which is a terrible shame, becasue when I did business with Goldman, years ago, their reputation was for being smart and slick – sharp in a good sense. Not simply sharp. The difference between the old Goldman and the current sleaze version is that it is no longer a private bank, and yet still pays as if it were. The risks are dumped onto shareholders, while the returns are kept inside for the employees. With that basic relationship severed the bank’s ethics went overboard and making a quick buck became the only thing that mattered.
Clearly customer relationships and reputation don’t count.
Too bad.
Break it up.
