Moral Hazard and the Laughing Gangsters

Goldman & God

Making sense of the financial meltdown. There is positive explanatory viewpoint and various idealized viewpoints. About this latter froth of blame-casting, I term such viewpoints normative-mythic.  The first viewpoint would be concerned with the actual mechanics of the meltdown. Opposite this first field of study is the prolific body of various normative “explanations.” So, for example, in this latter realm, one could learn that Fannie and Freddie played the major role, or, that lower class first-time home owners played the major role, or, that deregulation was the crucial factor, etc. Explanations that elevate single or a handful of factors to a consequential majority in the catalog of explanatory factors invariably make ideological turns. I have not encountered an explanation of this type able to remain connected only to the actual, positive facts, events, and obvious forensic estimations.

Back in the late summer of 2008 I figured TARP was necessary to avoid a wreck of every single train rather than many that were wrecked. However, back then, I didn’t have any grasp of the actual mechanics. I did comprehend the ethical consequences would be to bail out the financial gangsters in the unfortunately time-honored procedure of socialization of loss and privatization of gain. (Stating this, I invoke my own normative-mythic sensemaking.)

Scroll ahead almost three years, and the idealized “talk” on offer from ideological perspectives remains unhooked from the actual events, especially as these are now much better understood. So, for example, it is now an aspect of ideological orthodoxy to admit that what should of happened is that all the trains should have been wrecked on purpose, for the sake of moral clarity, and, a salutary system-wide creative destruction. Similarly, and in the same breath, it is conservative orthodoxy nowadays that the financial industry should be de-regulated, that the giant banks should always be allowed to fail, and, that business and capital gains taxes need to be eliminated.

As for the cheap retrospective moralist cant about creative destruction, such  cannot really be a testament to morality or purifying destruction, at least for the reason that had this alternate track been fulfilled, right wing “creative destroyers” would not have proudly have marched into the mid-terms testifying–amidst an economic depression– shouting “this is all great and maybe we should have more of it!” At the same time, millions upon millions of people were victimized by the implosion through no fault of their own, and so it would be basically not possible for a certain kind of ideologue  to run on the platform attesting to how good such destructive medicine really is ‘for you all.’

Socialize losses. No domos of finance stepped off of window ledges either.
Golman Sachs Tea Party

The current Randian Ryanian thrust is in the context of the surging, draining aftermath. It is at least obvious to me that is not credible to want it both ways: to advocate that the creative destruction should have been implemented, and, that the financial domos should nowadays escape accountability, regulation, and personal responsibility. Incredibly, this is exactly what is being promoted.

Megan McArdle possesses a BA in English literature and an MBA from Chicago Booth at University of Chicago. But how is it she has a cushy job as economic editor at the Atlantic when she says: “A short position is inherent in any sale of an asset?” Implied by this is that an investment offer, where the investor says “Buy this,” is implicitly, every time, attached to the qualification, “It’s going in the toilet in some way.”

Last week we learned that Libyan leader Muammar Qaddafi (above, on left) had, in recent years, invested billions of dollars in oil revenues in several Western institutions, including Goldman Sachs. Today we’re finding out exactly what Goldman bankers did with all that money. They lost it.

In early 2008, according to interviews and an internal document review conducted by The Wall Street Journal, Libya’s sovereign wealth fund invested $1.3 billion in stock and currency options with Goldman, only to watch as the investments shrunk to a measly $25.1 million–that’s two percent of the initial value, for those keeping score–as the credit crisis hit. A Libyan official was so furious with the bank during one meeting in Tripoli that Goldman officials hired a security guard to protect them before they left Libya, consulted Goldman chief Lloyd Blankfein (above, on right) about how to mend the relationship, and offered Libya the opportunity to become one of Goldman’s biggest shareholders by investing $3.7 billion in preferred shares or corporate debt. The negotiations eventually collapsed, the Journal adds, but the episode is emblematic of a period of several years when Goldman and other Western banks rushed to do business with Libya after the U.S. decided to lift its sanctions against the country in 2004. That period, of course, is now history. How Goldman Sachs Made Libya’s $1 Billion Investment Disappear

Lloyd Blankfein

Blankfein strikes me as a poster boy for the post-meritocracy. He surely guffaws all the way to the bank even if he had a hand in destroying billions of dollars of wealth while his firm borrowed almost $800 billion in tax payer money for the sake of avoiding the view of the abyss. Yes, he really did say he was doing “God’s work.”


Okay, Dan, you didn’t tell your customers it was shitty.

April 2010. From Dan’s opening statement:

Knowing whether we were long or short was often difficult, as our positions were complex and the market moved erratically. There were times when our analytical risk measures told us one thing, and my experience and knowledge of our positions told me something else. Some days, we took actions to reduce risk only to see the firm’s Value at Risk or “VaR” increase. During this time, there were differing views within the Mortgage Department, and around the firm, as to the direction of the residential mortgage markets. But the one constant theme from senior management was to reduce risk.

Well, what are sucker customers for?

Blankfein echoes McArdle in his April 2010 testimony. “By definition when we sell something we take the opposite position.”

To recap: Goldman, to get $1.2 billion in crap off its books, dumps a huge lot of deadly mortgages on its clients, lies about where that crap came from and claims it believes in the product even as it’s betting $2 billion against it. When its victims try to run out of the burning house, Goldman stands in the doorway, blasts them all with gasoline before they can escape, and then has the balls to send a bill overcharging its victims for the pleasure of getting fried. (The People vs. Goldman Sachs. Matt Taibbi, Rolling Stone, May 11, 2011)

You didn’t realize an investment bank holds onto its profitable paper and pawns off it losers on its “customers?”

Before the hearing, even some of Levin’s allies worried privately about his taking on Goldman and other powerful interests. The job, they said, was best left to professional prosecutors, people with experience building cases. “A senator’s office is not an enormous repository of expertise,” one former regulator told me. But in the case of this particular senator, that concern turned out to be misplaced. A Harvard-educated lawyer, Levin has a long record of using his subcommittee to spend a year or more carefully building cases that lead to criminal prosecutions. His 2003 investigation into abusive tax shelters led to 19 indictments of individuals at KPMG, while a 2006 probe fueled insider-trading charges against the notorious Wyly brothers, a pair of billionaire Texans who manipulated offshore investment trusts. The investigation of Goldman was an attempt to find out what went wrong in the years leading up to the financial crash, and the questioning of the bank’s executives was not one of those for-the-cameras-only events where congressmen wing ad-libbed questions in search of sound bites. In the weeks leading up to the hearing, Levin’s team carefully rehearsed the moment with committee members. They knew the possible answers that Goldman might give, and they were ready with specific counterquestions. What ensued looked more like a good old-fashioned courtroom grilling than a photo-op for grinning congressmen.

Sparks, who stepped down as Goldman’s mortgage chief in 2008, cut a striking figure in his testimony. With his severe crew cut, deep-set eyes and jockish intransigence, he looked like a cross between H.R. Haldeman and John Rocker. He repeatedly dodged questions from Levin about whether or not the bank had a responsibility to tell its clients that it was betting against the same stuff it was selling them. When asked directly if he had that responsibility, Sparks answered, “The clients who did not want to participate in that deal did not.” When Levin pressed him again, asking if he had a duty to disclose that Goldman had an “adverse interest” to the deals being sold to clients, Sparks fidgeted and pretended not to comprehend the question. “Mr. Chairman,” he said, “I’m just trying to understand.”

OK, fine — non-answer answers. “My guess is they were all pretty well coached up,” says Kaufman, the law professor. But then Sparks had a revealing exchange with Sen. Jon Tester of Montana. Tester calls the Goldman deals “a wreck waiting to happen,” noting that the CDOs “were all downgraded to junk in very short order.”

At which point, Sparks replies, “Well, senator, at the time we did those deals, we expected those deals to perform.”

Tester then cannily asks if by “perform,” Sparks means go to shit — which would have been an honest answer. “Perform in what way?” Tester asks. “Perform to go to junk so that the shorts made out?”

Unable to resist the taunt, Sparks makes a fateful decision to defend his honor. “To not be downgraded to junk in that short a time frame,” he says. Then he pauses and decides to dispense with the hedging phrase “in that short a time frame.”

“In fact,” Sparks says, “to not be downgraded to junk.”

So Sparks goes before Congress and, under oath, tells a U.S. senator that at the time he was selling Timberwolf, he expected it to “perform.” But an internal document he approved in May 2007 predicted exactly the opposite, warning that Goldman’s mortgage desk expected such deals to “underperform.” Here are some other terms that Sparks used in e-mails about the subprime market affecting deals like Timberwolf around that same time: “bad and getting worse,” “get out of everything,” “game over,” “bad news everywhere” and “the business is totally dead.” (The People vs. Goldman Sachs. Matt Taibbi, Rolling Stone, May 11, 2011)

Why isn’t Blankfein in the pokey?

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