Five reasons Goldman beats the rap
Wall Street investment firm Goldman Sachs was hauled before Congress this week after the Securities and Exchange Commission levied a charge they were fraudulent in their dealings while selling packaged mortgage securities to its clients. Here are five reason Goldman will not only wiggle out of this temporarily bad situation, but emerge stronger than it could have hoped:
The people at Goldman are much, much smarter than the people in Congress. Did you watch any of the hearings? Then you're certain to agree with me. They know the laws better than the Congresspeople who passed the laws.
Caveat emptor. The Latin phrase, meaning "let the buyer beware," applies here. Goldman Sachs sold subprime mortgages as though they were blue chip investments. Why were they able to do this? Because the Wall Street bond rating agencies said they were blue chip investments. And that is beside the point. Little old ladies don't buy Goldman Sachs products from the shelves of Wall Street. Supposedly sophisticated Wall Street counterparties and sovereign debt funds bought Goldman's products, and they should have done their homework to see what they were buying, or they shouldn't have bought. That's called a free market. Goldman didn't do anything wrong. If you don't want to buy garbage, don't go to the garbage store and ask for the finest garbage, then complain about the smell later.
Congress completely missed the point. If you want to find misconduct by Goldman Sachs and other firms like AIG, investigate why tens of billions of taxpayer money went in the front door at AIG and immediately out the back door to Goldman and other firms. The money was paid at full face value of investments that had failed. It would be like answering an ad about a used car purchase, then showing up for the test drive only to find that car you were interested in was totalled -- then writing a check for the full purchase price anyway. There's your real crime, and Congress missed it.
The financial regulatory reform deserves to be passed, and it's not even coming up for a debate. (Republicans have blocked debate on the bill three times as of Wednesday.) The bill puts in place common sense measures such as upping the reserve requirement for "too big to fail banks." Essentially, the bigger a bank gets and the more likely it is to cause system-wide failure, the more of its deposits it has to keep on hand to make sure it's not betting too much of its deposits on risky investments. One version of the bill also would regulate derivatives like credit default swaps, a tens-of-trillions of dollars market that's currently the Old West in terms of following rules. The amount of money in derivatives makes a year's gross domestic product of the U.S. look like a spit in the ocean. Failing to regulate that in any way will lead to disaster -- again.
When the dust settles, the Congress will have puffed its feathers, been defeated, and won't get this important legislation passed. Goldman can not only go back to everything it did, it can do so knowing no harm will come to it, and more bailouts will be on the way if it makes bad bets.
Welcome to the age of moral hazard and an impotent Congress.
The Pioneer Journal editorial represents the voice of the newspaper's editorial board. Today's editorial was written by Steve Schulz, editor and publisher.