Tuesday, April 27, 2010

My Take on the Goldman-Sachs Hearings

Short form:  this is pure "Two minute hate".

Longer form.  Did Goldman Sachs do wrong things?  Probably.  The current economic collapse has many reasons, and the work of GS is just one phase.  In fact, in something this big, you can almost guarantee that corruption of both the government and private sectors are involved.  The root of the problem is the too big government and something called the Community Reinvestment Act, originally passed under the execrable Jimmy Carter.  The purpose of the CRA was increase home ownership among the under-represented (according to whoever decides such things).

The problem is, these people were not under-represented because of discrimination by the banks.  They were bad prospects.  In order to get the banks to loan to these high-risk customers, the Fed.gov, in the form of Fannie Mae and Freddie Mac, agreed to take responsibility for these loans.  In other words, the banks would get the profits, but the people (that is, we taxpayers) would take the risks and pay for the defaults.  What Goldman and the others did was invent ways to make money on these mortgages.

It's important to remember that up until 25 years ago, or so, mortgages were very boring things.  Lenders only lent money to people with established credit, who were not likely to default on their loans because it was their home.  Mortgages were considered among the safest of loans.  Yet another reason was a law known as the Glass-Steagall Act, which prohibited lenders - banks - from providing investment services.  If a large financial entity had both businesses, they had to be separated.  Glass-Steagall was repealed in 1987, and one of the consequences of this was mortgage lenders (banks) found ways to sell their mortgages as investment vehicles.  By now, everyone has heard of Credit Default Swaps, Collateralized Debt Obligations, and the other instruments used to spread these mortgages around.  Since mortgages had such a fantastic history of being very low risk, these investment vehicles found their way into retirement plans for lots of institutions and people seeking safety and accepting low ROI.

As the stock market crash of the late 90s was happening, those who could get out money (or had gotten out already) had to put their money somewhere.  The safest investment seemed to be real estate, and that gave rise to a real estate bubble.  Along the way, banks were hounded by groups such as ACORN, who allegedly followed bankers home to protest if the group deemed that enough bad-loan-risk people were not getting  mortgages.  I'm sure that everyone has heard the stories of people flipping houses for profit, and people being told not to worry because prices always go up. If there's anyone to truly feel sorry for, it's the earnest borrower who just wanted a home, and was talked into much more than they could really afford.  I can't bring myself to feel sorry for house flippers.

So, yes, Goldman probably did do wrong things.  But so did the Government Sponsored Entities (Fannie Mae/Freddie Mac), and so did the House Banking Committee, under Barney Frank and Chris Dodd. So did the Federal Reserve, the Secretary of the Treasury and more.  As Denninger has said, "where are the handcuffs"? 

People from Goldman-Sachs permeate the government.  It's probably why they do so well as a company.  I believe they are going along with the two minute hate so that they can pay penance and get ready for the next big money maker, Cap and Trade, which they believe will make them hundreds of billions per year, if not more. 

So the real purpose of the Two Minute Hate against Goldman is to distract us from wondering who else is involved and most of all, not look at them.  I'll believe they're serious about fixing things and not just putting on a show to distract us when I see Glass-Steagall reinstated, and when Barney Frank and Chris Dodd are in handcuffs along with the executives from Goldman, CITI and the others.

2 comments:

Bob said...

Even the New York Times, that bastion of the left, got the idea that subprime loans could lead to problems for the mortgage industry. In an article published in September of 1999 the Times reported on the potential problems with Fannie and Freddie reducing the standards on loan packages that they would buy. Quoting the times article:

"In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and load industry in the 1980’s"

And, as we know now, the results were much worse than the collapse of the S & L industry in the '80s.

For years the mortgage loan industry worked well by loaning money to people who had a high probability of paying back the loan. But with Freddie and Fannie willing to buy any P.O.S. loan the banks could sell, why wouldn't the banks make these bad loans? There was a ready secondary market for the loans. Add in the ARM loans that had very low entry interest rates and banks making loans that were 120% of the value of the house, the whole system was a train wreck waiting to happen! DUH!

Now, our Congress is out to fix this problem, and in the true style of politicians they are out of fix the problem they created!

TheGraybeard said...

Much of the content I based this on is in a report from the Nottingham Advisors - a financial company. The report was sent to me back around the time of the crash of '08 by a friend from work, whose wife has an account with them. It's a pdf that won't allow me to copy from it, and I can't find online to reference, but it's quite thorough. I'll send you a copy if you'd like.

There's really a lot more names that should go in that last paragraph. It's way too easy to leave people out, and my list is nowhere near complete.