Christmas on Wall Street was another Tiger Woods story. The New York Times articles title says it all – Banks Bundled Bad Debt, Bet Against It and Won. Let me paraphrase. Banks like Goldman Sachs, Deutsche Bank, JPMorgan and others created and sold derivative intruments that made them money and then took the counter position that the underlying assets would go bust and made a ton of money from the clients to whom they sold the instruments. And in not a few cases, the payback came just months after issuing the derivative instruments.
As you might expect this article tripped off a flurry of responses in the growing financial markets trade press. To my surprise, Goldman Sachs was one of the first.; but given Goldman’s starring role in the NYTimes story I should not be so aghast. Below Goldman are some of the other commenters.
1)Goldman Sachs – these instruments had a long history in the market, clients demanded them so we sold them and these clients were - “The buyers of synthetic mortgage CDOs were large, sophisticated investors. These investors had significant in-house research staff to analyze portfolios and structures and to suggest modifications. They did not rely upon the issuing banks in making their investment decisions.”
2)Washington’s Post the Blog – Princeton Economist and Computer Scientists show that derivatives are inherently vulnerable to fraud
3)Naked Capitalism – Goldman, Deutsche Bank, and the destructive use of synthetic derivatives comes into focus.
4)You Tube – Goldman Sachs Role in the Credit Crisis
5)Felix Salmon of Reuters – essentially repeats the Goldman line – these were sophisticated investors they should have done due diligence, Felix steps two rungs down in fiduciary trust.
6)Wikipedia – Credit rating agencies role in the mortgage crisis
7) Investopedia – The Fuel That Fed The Subprime Meltdown
8)You Tube – The final word is reserved for Max Keiser, only because he said it 6 months ago anticipating the Goldman Sachs credibility crisis
What is clear from these links is that contrary to Goldman’s statements a)they not only dealt in the toxic derivative assets but helped create them and the market for them; b) they made large sums selling toxic assets to clients and then c) bet against those clients keeping and/or taking larger opposite hedge positions and made huge sums on those positions. But perhaps worst of all the there is the question of whether in creating the derivatives Goldman might have sabotaged the instruments they were creating ‘guaranteeing’ their return[the second links says that is very possible]. Finally, instead of during the crisis vigorously working for transparency, accountability, disclosure, prudent limits to bank capitalization, etc; Goldman and the other major banks used weaknesses in all of these prudent practices, each trying to game the system to their advantage – and in the process nearly brought the World Financial System to a standstill and then ruin. The problem is those players are still alive, well and in the process of rewarding themselves extravagantly with bonus dollars garnered from public bailouts and artificially high spread rates enabled by artificially low interest. That is the Christmas Present from Wall Street to the Nation and the World this year – more of the same from last year.
My concern is that now that the banks and financial institutions “too big to fail” have been shored up such that they should not fail, they will not be disciplined for gross financial malfeasance nor appropriately re-regulated to prevent this Doom Loop of “Too Big to Fail” being repeated again. Now given that Health Care, Climate Change [for at least 6 months], and Energy Policy are off the front burner, what topic will the Obama administration add to Job Creation as their number one priority. I suspect Banking Financial Control/Regulation will go the way of the dogs like decade ago lost causes like Campaign Financing Control and meaningful Lobbying Reform – proving once again that America is tired and factionally splintered and ready to cede not just World Leadership in Economics but also in Political Innovation and Responsibility. Who will step into the breech? BRIC has already asserted itself on Climate Change; Europe on some issues of Economic Governance; Iran, Al Qaeda and North Korea on maximizing and taking advantage of asymmetic warfare. Thus, just as technical and environmental change reaches a maximum – so it appears World Political Change will do so as well as America abrogates power by self immolation. One surely cannot ignore the ever more costly mistakes of the tarnished 2000 Presidential Election, The Iraq War, and the 2007-2010 Credit Crisis that are not just sapping national economic wealth but also moral and political wisdom and resolution.