Democrats & Liberals Archives

Goldman Sachs Bet Against it's Own Risky Products

Read this and watch the video, folks, and get back to me with your opinions on the matter.

Personally, I believe in a free market. But a market needs rules so bad faith behavior doesn’t discourage people from engaging in legitimate economic activity.

Posted by Stephen Daugherty at November 1, 2009 8:47 PM
Comments
Comment #290146

People make high risks loans and markets go up and down. I don’t think you’re going to like where this particular trail leads. The current administration should have made a clean break from the past when they came in, but they were too worried about how far down the down side would be. Their advisors weren’t disinterested parties, which is what you need in a situation like this, and what you rarely get. A lot of people make a lot of money doing things that don’t benefit our economy at all.

Posted by: ohrealy at November 2, 2009 12:35 AM
Comment #290152

ohrealy-
It leads where it leads. If I start playing the game of backing off issues when it hurts my people, too, then imperfect policies and apparent conflicts of interest will become worse politics and real conflicts of interest.

Anyways, these people are politicians, and we should keep in mind that politicians can be convinced by their own self interests, when the public pushes them, to screw those who they called friends.

But that takes us dropping the knowing cynicism, and acting as if people should expect better from their politicians. When one person indulges this tendency towards demanding accountability, they are called naive, called idealists. When many people indulge this tendency, it’s called no more fun and games for the corrupt and the incompetent.

It doesn’t work if we accept the premise that government is supposed to work this badly. That was the Republicans fatal mistake: they got into a disagreement with their electorate about whether their government should be working for them.

Posted by: Stephen Daugherty at November 2, 2009 8:28 AM
Comment #290166


A strong third party progressive movement dedicated to representing the ordinary working Americans would go a long way towards restoring the balance in government that the liberal Democrats gave away.

Obama could help restore some of the confidence that voters had in him by firing his economic advisors. It wouldn’t hurt his cause if Obama would stop making deals with corporate interests behind closed doors and under the Maxwell Cheney cone of silence.

Then there are the big donors who are threatening to withhold contributions if the Democrats don’t lighten up on the anti-corporation rhetoric.

Posted by: jlw at November 2, 2009 2:38 PM
Comment #290174

jlw,

>A strong third party progressive movement dedicated to representing the ordinary working Americans

Which third party is it you’re talking about? Or are you going to try to merge all third parties into one strong one…we already have one of those, it’s called the Democratic Party.

Posted by: Marysdude at November 2, 2009 4:46 PM
Comment #290176

jlw-
It may very well do it. Or it may split the vote, enabling the Republicans, who are currently being endlessly stubborn on the matter, to just stonewall endlessly.

Probably, it would be more advantageous for moderate Republicans to split off into a third party, which would siphon off votes from independents, putting an end to their obstructionism.

Posted by: Stephen Daugherty at November 2, 2009 5:42 PM
Comment #290177

My apologies, siphon votes off from the independents, putting an end to the Republican’s obstructionism.

Posted by: Stephen Daugherty at November 2, 2009 5:59 PM
Comment #290182

The ethics in Wall St are non-existent not just in Goldman Sachs though their greed and willing to do pretty much anything to make a fast buck is pretty evident. Obama has tainted his presidency by associating with these folks just as every other politician who has taken money from any of these companies. The GOP has certainly done a lot more damage by turning a blind eye to these unethical activities for the past 8 years, but Obama owns a good bit of it too. The words “free market” as is used by the GOP and those in Wall St who want no regulation on their activities is a joke, or at least it would be if it were funny instead of incredibly destructive to the middle class in this country and to our economic future. We have seen how these crooks acted with little regulation or ignoring regulations how do they think anyone in their right mind can trust them at all without strictly enforced regulations? The answer is we cannot trust this concept of “free market” because it inevitably turns into this greed spiral that has cost this country way too much already.

Posted by: tcsned at November 2, 2009 6:54 PM
Comment #290184

submarinesforever-
Marketplace.

Let’s say you have a set of loans. When your bank or non-bank lender makes the loan, they send the money out to whoever is selling that house to make that purchase on your behalf.

They are now out that money. Theoretically, they could wait around for your payments to come in, but some folks came up with the idea, not entirely bad, of selling that note, that potential to get all your monthly payments, or failing that, the value of the home from the foreclosure sale, to another financial company.

In fact, that’s what Fannie Mae and Freddie Mac are about. That’s what they do. All they do, actually. They pay the bank for your Mortgage. Then the bank can loan out that money to somebody else.

This can’t go on forever, now can it? No, it can’t. First, there’s a limited market for homes. Only so many people need to buy them, or have the wherewithal to buy additional new ones. Second, There’s a natural limit to how many responsible home buyers there are in the market, whose loan you would really want to buy.

The distinction between Prime and Subprime relates to your credit. If you’re prime, you get lower costs, lower interest rates, and your loan is better fodder for secondary sale. After all, your record says you’re good for it. Subprime is less than perfect. The more imperfect, the higher the rates and requirements. If you’re more likely to default, they’re going to charge you more interest and more fees, and ask for a bigger downpayment, or things like that.

You can sell off these fellows, but like the folks getting the loan, it’s a higher rate, and a higher risk. A lot of secondary mortgage securities buyers are not interested in that.

It’s important to keep this in mind: The market is limited for high risk, big for low risk.

Another thing to keep in mind, though: higher risk loans are more lucrative, if they pay off, because the person getting the loan with a higher overall finall cost. More interest piles up, more fees, more penalties and junk.

If you can sell off such a high risk loan, you can claim an immense amount of future value. Of course, this comes at the price of uncertainty about whether that value actually comes to pass. If you do manage to sell off the loan, though, you make your lending company more money.

You might see where this is going: They wanted to make more money, sell off loans with higher values, for the price of the homes in question.

But that meant taking on mortgagees who were riskier, meaning you could get far less, if things didn’t turn out right.

The Republicans portray this as an onerous thing, the government encouraging greater minority lending, and that this led to the problem. But I think its fairly immaterial to it. The market would have naturally restricted the riskiness of the loans, given good information. But good information was never, never what investors were given in this market. At least not all of them, or all at once.

I believe it’s proper to say that these people engaged in deliberate strategies to hide risks from the market. What’s more, they created a system to make bets on these values, and then hedge those bets whose opacity would ensure the lethal confusion that marks the real reason the assets were termed toxic.

The secondary market, as the non-bank lenders ran it, was built to conceal the true risk, and therefore the true dependability of the values presented for the assets. The collapse of the housing market was merely the first car crashing in a series of cars that were following too close to each other. Think of it as Nascar, only with fortune-five hundred companies crashing and breaking to pieces instead.

The housing market provided the raw fuel, the loans that would be pulled together into tranches, according to their risks, and then bundled into securities to be sold to investors.

Let’s say I want to sell a risky mortgage, but I don’t have enough of a market for it. What do I do? perhaps I attach an insurance policy of some kind, saying, you know, if this goes bust, this insurance policy will make you whole, or at least keep the value up to a certain point.

Well, if somebody does that, then it’s not so risky anymore, is it? (at least not for the insured. The insuring company is potentially out its money) Now here again, the market should provide some sort of brake to things, as the insurance company should be careful not to write out more policies than it can actually redeem. Then everybody’s screwed.

But that’s exactly what happened, because for the time being, it was great business!

So, a lot of risky, but highly valued junk got dumped into bundles of Mortgage Securities. Moreover, there really wasn’t any ingredients labels on the bonds in this case, so when push came to shove later, the market was deprived any way to measure what the real value of the mortgage security was.

The Ratings companies were part of it. They certified a lot of junk as Grade AAA super stuff, allowing a lot of inflated mortgages to be sold off to investors looking for safe investments, like pension funds and 401k funds. The apples sure looked juicy, despite being rotten on the inside.

Encouraged by their ability to do this, Lenders wrote more and more outrageously risky loans, and kept writing them so that they could satisfy the demand for new grist for this mill.

But like I said before, the market has its natural limits. By taking such huge risks, the Mortgage Lenders created a pool of sure to default homeowners. Oh, well, give the house to the next buyer, and they’ll be a better mar- sorry, customer. But what if that house wasn’t going to sell?

When the bottom dropped out of the housing market, when people stopped really wanting to buy houses, when people were no longer capable of satisfying that demand, home values finally fell, and a ****load of speculators lost their shirt. The effect compounded each other.

Soon, the situation was, the mortgage securities that were circulating around were of uncertain value. Folks knew they weren’t all worth as much as they were advertised to be worth. But what were they worth?

Folks stopped buying them. But then they realized something else.

The secondary mortgage market was not the only one. If you could go into debt financing it, or if it required the extension of credit, it was sold on the secondary market the same way.

And also, these assets had been bought up by the big financial institutions.

And also, these financial institutions, including AIG, had extended the insurance policies that I spoke of earlier. Suddenly, many of these “policies”, the derivatives used to insure the mortgages and other financial instruments, seemed to have come due. Or maybe not.

The trouble is, folks like AIG and the big financial institutions had ignored basic laws of insurance underwriting, and had made these derivatives beyond any sensible ability to be able to honor those obligations. If laws had required the folks like AIG to limit their derivatives obligations to what they could actually afford to pay out, then the company might be upright at the moment. But instead, they went wildly out of control, going every which way.

What you had were these firms all investing in real estate, hedging their bets, bundling, concealing their assets worth, this way and that, no firewalls between the different kinds of corporations, few regulations telling them they couldn’t overextend themselves that way, or rate the mortgages that way…

You had a free market. But at the very bottom of it, it was all dependent on what those mortgage securities were worth.

Which, by the time fall approaches last year was a far too open question. The insurers didn’t know how much they were out. The mortgage bond holders didn’t know how much they had or didn’t have, whether they were lucky enough to be rich or screwed enough to be poor.

And nobody wanted to buy somebody else’s crap. Sure they’d love the good stuff, but they had to know the good from the bad. If they couldn’t tell, you didn’t have a market, or even a casino, you had complete chaotic paralysis.

And into this fray steps the Republican Party, eager to let the chips fall where they may. In particular, George Bush. He lets the folks at Lehman Brothers go into bankruptcy.

Which means that very likely, anybody owed something by Lehman brothers is screwed. Networks of mutual investors, businesses that depended on them for commercial paper. It was the financial equivalent of one of those accidents in comedy films, where one mistake by the protagonist causes an escalating series of disasters, all which serve to ultimately humiliate the main character.

Or in this case, start the wreck of a financial system.

And then, as the decline became obvious, and the anxieties got even worse, the Republican Party met together with the rest of the Congress, and in the face of the crisis, and dealing with a potential plan to reverse the damage, the Republicans united and voiced their opposition to any bailouts. Because a nice number of Democrats also did this, we ended up without a real plan.

That was when Wall Street went off the cliff.

What ultimately made those toxic assets toxic was that they were divorced enough from what their value depended on (what the Derivative was Derived from) in their value that you couldn’t buy or sell it with any certainty of whether you were making a good deal by doing so.

Meaningful information about realities in the market is essential for a market to exist. But there will always be people who seek to distort that information in order to get people to buy things against their better judgment. Things get worse when whole companies are built around that approach, and they get downright ugly when whole industries that the rest of us depend upon are built on such deceptive manipulations.

People can’t simply play games and make-believe with our financial system. It’s got to be bound to creating real growth and value in the real world, not merely paper wealth. The crash was a consequence of a paper wealth system that finally floated free of its reality and created an absurd situation that no economy could maintain growth within.

We need a system aligned to reasonable goals.

Posted by: Stephen Daugherty at November 3, 2009 12:01 AM
Comment #290187

Stephen,

Send that to Geitner…I’m not sure he has this information in his portfolio.

Posted by: Marysdude at November 3, 2009 4:41 AM
Comment #290189

Stephen,

Excellent summary of the process by which the financial sector led us and the world on a debt fueled speculative binge in real estate.

Now, what do we do about the consequences? How do we prevent future episodes? Private sector debt has exploded and is unsustainable. Incomes are falling. Unemployment is rising. Our “too big to fail” banks are teetering on insolvency. Credit for small and medium businesses is extremely limited. The Fed is furiously printing money to fund mortgage backed securities, to capitalize the banks, to fend off deflation and get the real estate and credit markets functioning. Thus far, the efforts appear to have been successful in stopping the bleeding and there does appear to be a modest recovery from the crash of last October.

However, little attention has been paid, in blogs like this, to any long term regulatory adjustments necessary to create greater transparency in the financial markets, to the consequences of having TBTF banks and more importantly to actions that might be taken to re-direct investment capital from speculative bubbles to productive long term enterprises beneficial to our economy. The financial sector should be in service to the economy, not an end to itself.

I hope that your comments spark a vigorous discussion of this topic. All too often this blog degenerates into conservative vs. liberal political generalities. Little discussion of substantive issues on their merits. This topic deserves better. It is too important for political games.


Posted by: Rich at November 3, 2009 8:27 AM
Comment #290192

Reinstate the Glass Steagall Act and kill GLB. That might not be the total fix, but without that no fix will work.

Posted by: Marysdude at November 3, 2009 10:39 AM
Comment #290194

i am shocked. and i am sickened. so, everybody was lying? i mean everybody? the ppl who bought the home knew going in that they did not make $5,000/month as a cashier at target. the brokers sent them through - i am sure they are the ones who filled in the salary amount. where were the tax records from the previous year? where were the paystubs from the “buyers”. where was the checks and balances? i mean this is really easy audit. i mean super easy.

it sickens me. they set up americans to fail, then they profitted by it. if they were boxers, they would never be able to box again. all licenses should be suspended, all involved jailed. not the country club jail, real jail.

Posted by: bluebuss at November 3, 2009 11:30 AM
Comment #290196


Rich, It is very hard to have a true evaluation of what happened.

The Republicans, for the most part, want to blame the borrowers for the cause and the Democrats for the aftermass.

The Democrats, for the most part, want to blame the Republicans.

It is usually left to the independents to reveal how truely guilty both political parties and their Wall street partners were in all of this.

Stephen chose to concentrate on one corporation and it’s actions. What Goldman Sachs and others did was terrible but, they would not have been able to do it had it not been for Robert Rubin, Larry Summers, Alan Greenspan and many politicians, both Republican and Democrat.

I think all Democrats should hold their breath until the Obama Administration and the Democratic controlled Congress repeal GLB and reinstate Glass Steagall. It ain’t going to happen.

Posted by: jlw at November 3, 2009 12:46 PM
Comment #290197

jlw,

I hope you are wrong. There can be no recovery without those two actions. And, the longer we put off reform, regulation and recovery, the less likely we’ll ever be large in the financial world again. That should put us just above third world status with a ‘B’ credit rating and huge interest on the debt. Waiting for a third party to come along to save us may not be the best answer…the winner might be the ‘anarchists’.

Posted by: Marysdude at November 3, 2009 1:13 PM
Comment #290202

People need to understand the real history of money to understand what is going on in our country. Our system is weighted in favor of the biggest banks, insurance companies, oil companies, etc. That’s how Wrigley Field went from being owned by someone who actually made something, they’re bought out by a corporation, Tribune, and end up being owned by people like Sam Zell(Forex) and now the Ricketts(Ameritrade) family.

Posted by: ohrealy at November 3, 2009 1:42 PM
Comment #290204

yeah, but where is the state regulators in all of this? who checks the paper work? no one? so, make this very simple for me.

1. you contact realtor you want to buy a house.

2. you provide EVERYTHING massive amounts of paperwork - they copy it - old tax returns, current payroll forms, etc.

3. you fill out the paperwork

4. paperwork goes to the bank

5. bank ok’s loan

6. you get the keys.

now where is the fraud. somewhere between 3 and 4. now, if it is 3 - that is average americans defauding other americans - lying on a legal document - punishable by law. and if it happened at step #4, all americans need to file a class action lawsuit for defauding fellow americans. where is the original paperwork? can we find it? or was it burned in cheney’s vp office fire.

Posted by: bluebuss at November 3, 2009 3:45 PM
Comment #290207

Stephen:

Yesterday I responded to your article. Later you wrote a lengthy answer. Today I log on to answer you and both of our posts are deleted. Can you or one of the Editors of this site please tell me the reason? Thanks.

Posted by: submarinesforever at November 3, 2009 4:18 PM
Comment #290211

submarinesforever - that has happened to me too. but i figured it was a conspiracy. :)~

Posted by: bluebuss at November 3, 2009 4:41 PM
Comment #290214

I will probably get banned for usurping mod powers, but the blue column does not work very well. I’d suggest reposting in the top thread in the green or red column, whichever discussion is closest to the subject, when posts don’t go through in this column. It’s not a new problem, and apparently isn’t going to be fixed. Most people read the new posts in the three top threads across the columns, and at least the 3 top threads in the blue are usually continuing to get new posts. From the way things have been going, it looks like change or death is in the near future.

Posted by: ohrealy at November 3, 2009 7:51 PM
Comment #290220

jlw-
I chose one such article, because I thought by itself it would say something about the system as a whole.

My angle has never been, at it’s core, about partisanship, but pragmatic approaches. Ideals to me are useless if they do not represent the distillation of practical understanding. In this way, I can accept a degree of free market behavior, because I believe that some order in the complexities of real world economics must emerge, rather than be forced out of rigid, sometimes blind authoritarian control.

At the same time I do not object to limited market manipulation on the part of the government when it’s aimed at catalyzing the positive movement of our society in some direction, kickstarting a process that then might move under its own power.

And I also do not object to the application of law and order to the market. Free for me means more that you don’t have somebody just arbitrarily setting prices and micromanaging what can and cannot be sold. It does not mean that you throw aside the rules that keep the transactions in a market meaningful, that keep the merchants honest, and the customers and investors protected from unscrupulous trickery.

Posted by: Stephen Daugherty at November 3, 2009 10:47 PM
Comment #290287


Stephen, the free market is an illusion dreamed up in the minds of conservative capitalists and has no real world applications.

How do you have a free market if you subject it to workplace rules that protect workers? How do you have a free market if you subject it to minimum wage regulations or S.S. contributions? Will liberals choose to eliminate these impediments to a free market?

What about environmental rules?

But then, the liberals have already helped many corporations and companies avoid these impediments to a free market, haven’t they?

It is cheaper for companies to hire Chinese coolies and pay the Communist party 51 percent of the profits than to pay for the American impediments.

Do like the big boys do, buy some stock, bet against America.

Posted by: jlw at November 5, 2009 11:23 AM
Comment #290402

Many of our elected representatives within the Democratic Party are no longer following in the time-honored footsteps laid down by the founding fathers of our great Nation. More importantly, we as democrats see our elected representatives within the Democratic Party abandoning the values and principles as set forth within the Declaration of Independence and the Constitution of the United States.

Nonetheless, this is only the beginning of our problems as Democrats, for the current Democratic Party leadership is tainted by corruption and being taken over by Socialists. These Socialists are clearly a threat to everything we hold sacred in America, and they are gaining evermore control over our Democratic Party, our Nation, and the American people.

Despite this, we as Democrats can restore control of the Democratic Party back to the party members. All we need to do is cut off donations to the local, state, and national headquarters of the Democratic Party, and to make sure the donations are made directly to patriotic and honorable Democratic Party candidates that are not corrupt and/or Socialist.

So please help spread the message to everyone of our fellow Democrats. Also, don’t forget to contact and request the Unions and other outside contributors to follow our lead as patriotic Americans.

Thank you, and God Bless America.

Web site: http://www.democraticreformparty.com
Blog site: http://blog.democraticreformparty.com

Posted by: Eric Pearson at November 7, 2009 10:31 AM
Comment #290450

Eric Pearson,

We get a few trolls here, but we don’t welcome them, and this will hopefully be the last response you’ll get.

Posted by: Marysdude at November 8, 2009 1:11 PM
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