Wednesday, April 28, 2010

The Goldman Mess

Over at Powerline, John Hinderaker has a good post summarizing yesterday's Senate hearing where our esteemed representatives spent several hours trying to pass blame for the subprime housing crisis to Goldman Sachs while venting anger in hopes that the taxpayers think they're doing something useful.  I can agree most with the conclusion of Hinderaker's post:
I'm not a particular fan of either Goldman Sachs or Congress, but today's hearing confirms that, given a choice, I'd rather have Goldman Sachs regulating Congress than Congress regulating Goldman Sachs. Goldman's employees are much smarter, considerably more honest, and far more likely to have my interests at heart.
The smarter is self-evident from the clips of the hearing -- the Senators seem completely unable to understand what market makers do, what risk management entails, or have any true understanding of securities markets. Some of this is for show -- I don't think the Senators are all this stupid -- but some of it is real. As Megan McArdle notes, the Senators don't seem to understand what Goldman actually does...
Carl Levin is asking the same silly question that I've heard over and over: shouldn't Goldman have told buyers that it was short?

The presumption is that Goldman has some sort of godlike knowledge that it was concealing from its customers. It's not Goldman's responsibility to tell its customers what they should want to buy (or at least, not on the trading/ABS side), or what Goldman wants to buy. It's Goldman's responsibility to make sure that its clients have all the relevant details about the securities. Clients buy stuff from Goldman all the time that some part of Goldman is short; differences of opinion are what make marriages and markets.

...Goldman was making a bet. That bet could have gone wrong (not in this case, but in many similar). Other firms had different opinions of the market. Goldman was under no obligation to disabuse them of their opinions. They're not investment advisers; they're securities issuers.
I'm actually okay that the Senators don't know as much about this as Goldman -- this is Goldman's business. But the Senators' inability to understand the business goes a long way toward feeding misperceptions about the business, and inevitably leads to bad legislation, which will in turn probably lead to the next financial crisis. And that's where we're headed, and in 10-15 years Carl Levin or some other Senator will be huffing and puffing self-righteously against someone else for doing nothing more than making a profit.

And that's before we get to the question of whether the SEC suit against Goldman is motivated by other reasons, or whether it holds water.

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