Tuesday, April 27, 2010

Today's Senate Witch Hunt: The Goldman Sachs Hearings

As I'm working this morning, I am listening to/watching the bullying of Goldman employees by several Senators in the venue of a Congressional hearing.

It's disappointing to see Michigan's Carl Levin and Maine's Susan Collins embarrass themselves by displaying their inability to understand how a modern investment bank works. However, nobody involved in these hearings so far has come off looking both intelligent and honest. The Senators look stupid, while the Goldman employees look evasive.

Levin, during his remarks, kept banging away at how the mortgage market collapsed while Goldman took legitimate proprietary trading positions to benefit from this. He tried to portray the firm as doing something illegal by doing this.

Where Levin did, however, score some points, was in linking the internal Goldman emails depicting one mortgage-backed security as "one shitty deal," with its subsequent appearance as a priority deal to be sold to Goldman clients. The Goldman employees fell largely silent as it became clear to viewers of the inquisition that the firm clearly pushed its institutional fixed income sales force to sell securities which the firm itself viewed as being of poor quality.

Mr. Sparks, a former Goldman employee, attempted to note that institutional clients had every opportunity to make their own assessments of the value of such securities. But I'm sure this was lost on most viewers. The lingering impression is that Goldman's institutional sales force operates in the same manner as a 'pump and dump' penny-stock boiler room operation.

Susan Collins, on the other hand, has said nothing to indicate she has the slightest idea of what she is saying. She has continually attempted to ask institutional traders whether they had a duty to look out for their institutional clients' welfare?

What Collins, and, for that matter, Levin, never bother to explain, and I don't actually think understand, is that the entire matter about which they are grilling the Goldman employees was between sophisticated institutional buyers and sellers. And, as several of the Goldman employees note, but is lost on Collins and Levin, is that they were acting as principals, not agents nor brokers.

That is, they were understood by their counterparty to own the securities in question.

Even now, at 11:53AM, Levin is accusing the Goldman parties of stalling and attempting to avoid answering questions, and, therefore, threatening that the hearings will last until the Senators get answers to all of their questions.

Of course, both Levin and Collins have been asking questions of the sort that equate to,

"When did you stop beating your wife?"

They demand incriminating responses to questions which aren't phrased appropriately or relevantly, given the context of the subject matter and the role of Goldman in the particular instances.

I'm quite sure that most business people watching the proceedings see the Senators as hapless, clueless idiots. I certainly do.

However, that doesn't change the clear sense one gets that the Goldman people are all embarrassed by the evidence that they pushed securities which they, privately, thought were of very poor quality.

Of course, it goes without saying that at no time has any Senator gone near the topic of asking why 'stated income' loans, or other questionable mortgages, were originated in the first place. That is, the role of Congress in pushing Fannie and Freddie to securitize such loans, thus making them common currency in the mortgage-backed markets.

Right now, another Senator is grilling Mr. Sparks about securitizing a Washington Mutual mortgage pool that contained so-called 'liar loans.' But he's not interested in learning that the GSEs were the entities that favored these creations. Nor that, having spurred their origination, it was only natural for investment banks to join in the effort to resell them to investors.

After all, what do these Senators think was going to happen to all of these mortgages, if not resold from the GSEs to investors?

All around, the hearings are a farce and an embarrassment to the notion of honest, intelligent, well-informed inquiries into such practices.

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