Normally, it is better to put pins in your eyes than to watch a congressional hearing. But, today is not a normal day. Today, executives from Goldman Sachs, the Wall Street investment firm recently indicted by the SEC, will be testifying before the Senate Permanent Subcommittee on Investigations and the nation, via its elected representatives, will be able to indulge a bit of schadenfreude at least.
Goldman Sachs is accused of several things, some transgressions of the law and others transgressions of ethics. If they knowingly sold investments that had been designed to fail, that is against the law. But, the much more difficult problem that needs to be addressed is the fact that most of what Goldman Sachs evidently did was perfectly legal. They bet against the housing market. Wall Street now lives on futures and derivatives and hedges and the Devil knows what else, none of it directly related to creating a more productive economy with good-paying jobs or a sustainable manufacturing sector, all of it directly related to making lots and lots of money for the Wall Street firms.
E-mail exchanges among Goldman Sachs executives have been released and they show that the company was doing what it does best: Assessing the value of different markets, betting on their future and doing so one step ahead of the other guys. Admit it, as you read about how Goldman made billions of dollars during the economic meltdown and because of the meltdown, didn’t a part of you wish you had invested with them? That itch, the sinful itchy manifestation of greed has, in today’s lower Manhattan, become a culture of greed, and the whole country will get a window into that culture during today’s hearings.
The hearings come while the Republicans are resisting Democratic efforts to reform the financial markets. Good luck with that. After today’s hearings, what will become clear is that Goldman Sachs was not getting rich based on illegal activity. This is not a case of a bad apple. Goldman largely succeeded because of perfectly legal activities that happened to take place in an unregulated market. No one is suggesting that we ban derivatives or other financial instruments. No one is suggesting that the government nationalize the financial sector. What is being suggested is that without outside regulation, this kind of malfeasance will occur again and again. I am not party to the negotiations, and perhaps the arguments being made behind closed doors are reasonable and smart. But, I can bet that after today’s hearings, the pressure to compromise will be even greater and several GOP senators will be looking for a reason to jump to the "Aye" column.
Schadenfreude is a sin, make no mistake about that. But, in a democratic society, the instinct to see the mighty fall is a healthy one and, in this case, a just one. It is now clear that Goldman executives not only took delight in the misery of others, they took billions of dollars from families losing their homes because of the collapse of the housing market. It is not enough to appoint regulators, there should also be some expression of public shame. In colonial times, towns put transgressors in the stocks and pillories, making them the object of public scorn. Today, the congressional hearing is the equivalent. Be sure to tune in.
Michael Sean Winters
The SEC has brought a civil complaint against Goldman Sachs, a much less serious non-criminal complaint. The civil complaint has not been heard or proven by a court and therefore can not be fairly used as evidence of anything.
Separately, Senator Levin is investigating Goldman Sachs in a very public. anything-goes way. Senator Levin before the hearings has even begun has publically repeatedly accused Goldman Sachs of wrong doings. Goldman Sachs has not yet had a chance to defend itself before the Senate Judical committee where Senator Levin is chairmen. This one-side public condemnation by Seantor Levin before any facts are presented and rebuttal made, has caused many to dobut the fairness of Senator's Levin inquiry. Is Senator Levin trying to fairly investigate and find the truth? Or is Senator Levin abusing the Senator Judicairy committee investigative authority by turning the committee hearings into a show trial to promote Senator Levin's political views?
2. This cheap political trick is disingenuous for the following reasons, among others: Goldman Sachs executives are major Democratic donors, and 2 of their most recent CEOs are major Democratic party figures: Robert Rubin & Jon Corzine; Chris Dodd, the man writing the bill to 'save' the little guy from Wall Street greed, took special deals and favors from, among others, Countrywide Financial, on his own house mortgage, the subprime market was essentially created because liberal Democrats, raising the specter of redlining and racism, pushed banks to lend to people who shouldn't have been lent to, regulations re: trading derivatives were ADDED by Dodd to GAIN GOP SUPPORT, not in spite of it.
3. The GOP desire to shape the regulatory incentives is aimed at ending the 'too big to fail' mentality that Democratic policies during the Clinton years created. This blog attempts to cast these objections as an extension of Wall St. 'greed' & avarice; this is a disingenuous move.
4. This blog exemplifies some of the characteristics of the recent NY Times story re: the abuse crisis that many of the writers have objected to. It would be behoove all of us if Mr. Winters had laid out some GOP objections and responded to them rather than vainly attempting to smear people who don't support Dodd in its current form as nothing better than a bunch of greedy Goldman hacks.
The real problem was that there was so much money out there to buy bad debt at high interest. This was almost a certainty when Bush pushed his tax cuts on the wealthy and on dividends through Congress, not once but twice. If this money had been taxed rather than invested in these securities, the bubble would not have happened and the money collected would have likely gone to housing assistance that would not have proven to be a trap for home buyers.
This was a case of price inflation in the investment markets. Too much money chasing too few assets.
If I were on Wall Street or in the financial sector at all, I would welcome regulation right now. The alternative is, well, alternatives to the financial system like employee-ownership of companies and those companies deciding to offer financial services to employee-owners at low or no interest (which is quite possible if the employees own all the shares - so that the loans need not be a profit center). If it becomes common for such firms to offer mortgages, educational loans and consumer credit loans (like payroll lines of credit), many in the financial sector will find themselves out of business. See more on this on my web page.
The more the financial sector is dysfunctional, the more people will both seek and create alternatives. Regulation is in the interest of Wall Street, as the alternative is oblivion. We will see if the GOP is forward thinking enough to see this. I doubt it.
"[A]ccording to the Center for Responsive Politics, Goldman Sachs employees contributed $994,795 to Barack Obama during the last election cycle, a sum that is "more than the combined Goldman haul of every Republican running for president, Senate and the House.'"
Oh my. Does this uncomfortable fact change anything? Nope, guess not.
1. I think we discussed Jeff L.'s argument last week. Here's my post again about $$ and legislators:
Mary Bottari, director of the Center for Media and Democracy’s Real Economy Project and editor of the website BanksterUSA.org, has been tracking the money this year and it's going to candidates who oppose Congressional members who support consumer protections that cut into their bottom line.
2. Jeff S. claim is one that has made the rounds but there is no evidence to support it, e.g., most subprime loans were made by firms that aren’t subject to the CRA.
3. David Smith's mention of Catholicism is interesting-since everyone has focused on what the bishops had to say two months ago how do they weigh in on banking and business ethics?
Seantor Levin mistakenly thinks hedging is sinsiter. Seantor Levin objects to Goldman Sacks betting agaist their own position, But that is exactly what hedging is technically by definition. Long positions are always offset by short positons for the same amount or quantity. Hedging greatly reduces risk exposure and therefore is always done in any market.
Senator Levin's cynical iterpretaions of Goldman Sachs market activities are wrong and uncalled for.
If the money from the tax cuts from the wealthy did not go into the bubble, then, pray tell, where did it go?
So its your assertion that wealthy individuals who received tax breaks invested the net gains from those breaks in subprime mortgages or financial instruments based on those financial instruments, & that this, in turn, caused the housing bubble which in turn brought on the Great Recession?
If that is your argument, it is a wholly novel argument, & one I am unaware of in any reporting on the causes of the financial crisis (Sorkin, Michael Lewis, the Congressional Investigations, etc.). Wealthy individuals, by and large, did not invest in or were not parties to the synthetic CDOs created by Goldman; the counterparties to these contracts were large financial institutions (other banks, hedge funds, etc.), hence the domino effect when 1 counterparty went belly up. I don't mean to be contentious, but your Bush tax cut explanation is simply a very minor factor, if at all, in the financial crisis. Lower fed funds rates had more to do with it than anything, and were a response to the tech bubble a few years before.
Michael Bindner has the right idea about cutting out the unnecessary financial behemoths. They should be chopped down with or without reform. However, there are too many people suckered in to the rocks by their siren song. An appealing alternative to false dreams of excessive prosperity for everybody needs to be found. Self-formed worker collectives would be great. Would the corporate-owned government stay out of THEIR way?
If anything is to be learned from the committeein hearings it is how ignorant the Seante is of our basic economic insitiutions. Investment banking raises hugh amounts of private capital from around the world for private U.S. business and industry which in turn provide and sustains jobs in the United States. To rejoice that this intitution should be harnmed or diminished for unsubstatiated political purposes is highly distructive, irrational behavior steeped in ignorance. How can Catholics be sympathetic or support such alienated nihlistic thinking? It is wrong to use or exploit legitimate business as political scapgoats so as to appease the ignorant, strange and alienated.
Once agains the Seante hearings demonstrates to all that government is not the solution; governemnt is the problem.
FWIW, Tom Coburn is the most intellectually honest politician in the country.
http://www.forbes.com/2010/04/26/goldman-sachs-sec-regulation-opinions-columnists-richard-a-epstein.html
Additionally Investment banker issue corporate and municipal bonds bonds and commercial paper which are also hugh fiancicial sources of the American economy.
Goldman Sach are big time operator that provides very needed and important financial services to the American economy. It makes no sense and is very politically exploitive that this American institution be the scapegoat for the system wide near financial collapse of 2008.
This experience is confirmed in every regime since the end of the second world war, although the Obama recovery is pretty much dependent on deficit finance - primarily because taxes have not yet been raised on the wealthy - although they are about to be. My prediction based on the economic data of the past 65 years is that when the Bush cuts on the wealthy are allowed to expire, the deficit will shrink and further growth will result.
I think its entirely legitimate and necessary to discuss whether this wild west capitalism should be allowed or not or highly regulated or not, but before we can have that discussion I think people need to understand the facts of the matter, and Mr. Bindner, Bush's tax cuts simply aren't a fact that is directly relevant, at least in any significant manner to the causes of the financial crisis. Again, take off the ideological lens.
It is the DemocratIC Party, and the other one is called the RepublicAN Party. The last time I looked, I saw/heard no commentator of any strip refer to the "Republic" Party.
Three things drove the bad loans, first the permission set up by lenient loan policies in the 1990's and the stigma as well as regulatory pressure imposed on financial institutions if they did not make the loans, the tremendous amount of money in the world that resulted from high economic activity in the period 2000-2007 that was then in search of investments to increase this pool (world wide money supply rose from 36 trillion in 2000 to 72 trillion in 2008), unscrupulous lending activities by mortgage brokers who suffered absolutely no adverse effect from a foreclosure. The tremendous amount of money in the world was fueled by economic activity all over the globe but especially in the US by tax cuts and low interest rates. One potential landing place for this money was mortgage bonds in the US and this created great pressure to provide even more. Here is an extremely funny but all too accurate account of what happened. It appeared almost a year before the crash.
http://www.youtube.com/watch?v=mzJmTCYmo9g
It was not just the US that was hit hard in 2008, but also several other countries in Europe and elsewhere. If one wanted to witness absurd housing prices one only had to go to Ireland in 2007 and 2008. Townhouses in Dublin were going for $20-$30 million dollars that even in New York would fetch only a million or two. I understand similar things happened in Spain and other countries. European banks lost trillions in bad loans around the world that had nothing to do with the United States.
If you want to identify the causes of the crisis here in the US, they are the permissive loans and the attitudes created in the 1990's not to qualify potential home owners accurately, the low interest rates created by Alan Greenspan which helped create the high economic activity around the world and the subsequent asset bubble, the tremendous pressure by Wall Street for instruments to satisfy the huge demand for investments for the 72 trillion dollars in money that was floating around the world and the unscrupulous mortgage brokers. Could it happen again? Certainly but what is going on in Washington now will not prevent it.