The spectacle of Goldman Sachs being hammered for "unbridled greed" by the United States Senate on Tuesday was good for a horse laugh. Those headless horsemen who spend untold trillions without reins are missing a bit more than just a bridle. And crass insouciant hubristic callous indifference trumps greed on my list of deadly sins any day of the week.
Rush Limbaugh used his program to level a withering critique of Congress for being less than frank about its own role in the creation of the subprime mortgage. Most of those ruinous investments we have been hearing so much about involved loans given for houses under pressure from both Houses. The government had been promoting home ownership by leaning on banks to lend to people who could not reasonably be expected to pay. There was a chance those loans would be repaid, but only if every variable lined up perfectly: homeowner retained his job, house retained its value and all parties behaved responsibly. The moment the bubble burst, the works were gummed up all around, hurting everyone including Wall Street.
Limbaugh pointed out that a familiar pattern is emerging on a number of fronts including health care. Government mandates certain activities the market resists, thus distorting the market until it collapses, at which point government steps in to save the market -- or to save society from being pinned beneath the falling market. The perpetrator gets to blame the victim, then gets to kill again; after all that, it demands to be congratulated as a savior.
All these observations are valid, but there is a surpassing irony here which fascinates. Namely, the Goldman Sachs guys and other Wall Street types were not only innocent bystanders and sometime victims of government policy here, they were actually hurt in a heroic attempt to save that policy. Goldman Sachs gained nothing by selling these derivatives. They mainly did it in a spirit of misguided idealism, trying to help the government help poor people.
I kid you not. Just think about it.
These derivatives are complicated investment vehicles, but they are something like a credit card company where the guy with perfect credit is charged nine percent, medium credit twelve and bad credit fifteen. In the end each segment produces the same 9 percent, because all the first group, three-quarters of the second group and three-fifths of the third group wind up paying their bills. In the same way investment packages were created with, say, fifty percent good 4% loans and fifty percent bad 8% loans in an effort to average out at the 4% return. When the bad became horrible, this calculus broke down.
The point remains that neither Goldman nor any bank needed to bother with this process. Wall Street had plenty of products to sell. The banks could have kept the loans in-house and then turned to the government for relief if the delinquency rate became excessive. Instead they all tried to minimize the impact of the poor people paying poorly by blending their loans out into a large mix. In essence, they were creating camouflage for Barney Frank and his buddies to keep churning out these mortgages without it being too glaringly obvious how insolvent they were in reality.
I know most people find this hard to believe and the brokerage houses are not even voicing this defense themselves, but I am convinced it is the ironic truth. I have had these Collateralized Debt Offerings explained to me by a number of major players and in each case they are stumped by this question: "What possible benefit does Wall Street have by selling a subprime mortgage more than any other?" There is only one answer: they were carrying the water for politicians they believed were doing something nice for the less moneyed segment of society. Far from unbridled greed, they were engaging in a form of compassion (or a complex assuaging of their guilt feelings over being too successful).
Anyone who has worked on Wall Street will tell you it is as uncool to be Republican there as in Hollywood. In 1996 I worked as campaign manager for Rob L. Verga, who ran as a Republican against Charles Schumer for his House seat. Rob worked for Bankers Trust where all his coworkers ripped him for being Republican. His bosses clamped down on his schedule, preventing him from having the time to mount a reasonable campaign.
If I am right, Rush is even righter. These executives now being pushed under the bus were in fact the Designated Derivers trying to steer the runaway train the Democrats had drunkenly launched into motion.
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