Tuesday, April 20, 2010
There has been much discussion in other threads regarding the politics of the enforcement action against Goldman, and the environment for regulatory reform.
I thought it might be helpful to step back and look at the presentation by Frank Luntz, who generally is described as a Republican pollster and political strategist, and see how he views the current environment.
It is worth reading through all 30 slides.
CWCID: Business Insider
I definitely take the "conservatve" view on p. 4 (government caused the problem by Fannie and Freddie guaranteeing subprime loans) along with "majority of Americans" (people who took out loans they couldn't afford were also responsible). There would have been no ABACUS collapse, along with the 8 zillion other financial deals that went south, if it weren't for the underlying bad housing loans.
A phrase that drives me nuts is "predatory lenders". How the hell is it "predatory" to loan money to somebody who can't pay it back? It's not predatory, it's stupid and bad business - UNLESS the government bails you out for doing it! Republicans were trying to rein in Fannie and Freddie as long ago as 2005 but were blocked by Democrats - including BO - who wanted to keep the gravy train rolling.
I couldn't agree more on the Fannie/Freddie thing. Without that, I just don't see this crisis happening. That said, I would still like to see more prudent leverage ratios in the financial sector, notably for banks, and better disclosure/less off-balance sheet shenanigans. The combination of these factors nearly burned down the house, sort of like lax building codes, some gasoline and match.
My belief is that "SEC v Goldman" is just an opening gambit.
In the near-term it's going to help Obama get Financial Services Reform passed on his terms. Obama gets a soapbox to shift blame for the economy. It also distracts attention away from reporting on unemployment.
The Levin Committee on April 27 is key. The witness list is made public tomorrow -- expect Lloyd to be on it. Without the prelude of "SEC v Goldman", this hearing wouldn't get much attention. Instead, expect fireworks. I'd bet that Lloyd is on the cover of the New York Post the next day, and it won't be flattering -- any takers?
At a minimum expect to learn that Goldman and others were in effect shorting the mortgage deals they were doing back in 2006 - 2008. "Why didn't you raise an alarm back then -- instead of profiting from our collective misfortune?" will be asked.
"Lloyd, how much did you get paid in 2007. Answer: $70 million.
"Then you came to us in 2008 for a bailout."
"Lloyd, how much did you get paid in 2008" Answer: $41 million.
"Lloyd, how much has your Goldman stock gone up since the bailout." Answer: over $300 million.
It could go even worse for Lloyd, depending on what's in the stuff that's been subpoened. Can you say "AIG." Goldman's role in the run on Lehman could come up. Lloyd's pleading the Fifth isn't out of the question.
McCain is on this Committee -- he has a hard on for Goldman because he thinks Hank Paulson pulled a bait and switch with TARP and that it cost him the election.
Lloyd has to be good at his day job, obviously. He may be a great guy -- I don't know anything about him personally. But he's a horrible committee witness -- even compared to a Ken Lewis -- Lloyd's already shown this. Expect some awful soundbite clips to come out of the hearing.
After the hearing, we'll see a new narrative develop -- few will still care about the nuances of "SEC v Goldman."
After that, who knows. Obama & Co may ease off the gas, or accelerate. One of Obama's objectives will be to keep us all busy so we're not undermining AGW as he prepares for Energy. If the peasants get stoked enough, expect NYAG Cuomo to go after Goldman over AIG CDOs, etc -- and maybe Lloyd personally. He's already hit BAC's Ken Lewis with civil Martin Act charges. Cuomo's running for Governor -- he needs distracting issues too.
Last night's Letterman Top Ten
Goldman Sachs Excuses
9.You're saying "fraud" like it's a bad thing
8.Planned on using money to buy everyone in America delicious KFC Double Down sandwich
7.Distraught over George Lopez's move to midnight
6.We were framed by evil menswear company Goldman Slacks
5.Since when are financial institutions not allowed to screw their customers?
4.Hey sport, how much to make these questions go away?
3.America needed a villain both Republicans and Democrats can hate
2.Everyone we ripped off got an "I Got Cheated By Goldman Sachs" tote bag
1.Uhh, it's Obama's fault?
I have no inside information. My day job has kept me in front of business and legal news, so I'm just a well informed non-player. But the following makes me see a Holy Shit Headline that isn't being reported. What am I missing?
Theses dots just ask to be connected:
1) In recent years, "trading and principal investments" has delivered over 70% of GS's earnings. "Investment banking" and "asset management" split the balance. Thus, GS is really a hedge fund. The rest of the business is window dressing -- and useful for gathering market intelligence and "inside dope." This isn't your Daddy's Goldman Sachs -- it's not even mine.
2) Sometime around 2007, Goldman took a bearish stance on the US mortgage market -- especially subprime. I assume the following is true: in its "trading and principal investments" business GS went short and made a boatload. Does anyone know the detail?
3) If GS were actually a hedge fund, and not a bank, they'd be mostly immune from criticism for this. But they were a global I-bank and part of the plugged-in establishment. Some responsibility goes along with that, shouldn't it?
4) At some point during the mortgage slide, alarm bells must have been going off inside GS. Expect subpoenaed e-mails to confirm this. So did Lloyd play statesman and go public with his concerns? Or did GS increase their short position to take advantage? Lloyd got paid over $100 million for 2007-2008.
5) Hank Paulson -- Lloyd's predecessor as GS CEO -- was Treasury Secretary from July 2006 to Jan 2009. Hank talked to Lloyd regularly. I suspect it was a lot. If you had the phone logs, I wouldn't be surprised if Hank talked to Lloyd more than anyone except Little Timmy -- even more than his wife. So did Lloyd and Hank ever talk about the mortgage market? Or only about their fantasy league picks?
6) In late 2008 Lloyd and GS needed a huge bailout -- not just for GS but for GS's AIG exposure -- and got it from the taxpayers with Hank's help. Lloyd has made over $300 million on his personal GS holdings since the bailout.
With these dots, I draw a cat:
In the 2007 to 2008 period, Lloyd had really good inside dope that the US mortgage market was going to hell. Instead of giving a speech, or writing a WSJ op-ed, he shorted more. He was in a position to help stop the bleeding, but instead took personal advantage.
Am I crazy? What am I missing? Or do we think this is OK?
Like I've said, I'm a total novice at this stuff; all I've done is quote editorials from the WSJ which presumably is a bit more knowledgable than me. But I do question this:
"In the 2007 to 2008 period, Lloyd had really good inside dope that the US mortgage market was going to hell."
Did you really need "good inside dope"? The housing market had been rising nonstop for years. I have a link to an article printed in *2000* predicting calamity resulting from pressure to make questionable loans due to the CRA (Community Reinvestment Act). I live in Silicon Valley and remember being surprised early in the decade when housing prices did not fall after the dot-com collapse; they merely plateaued for a while and then resumed their steep upward climb. It was hardly surprising that by 2007 at least a few people were betting the party was about to end.
Now with all this it is still possible of course that GS was engaging in unethical behavior. But mostly it seems like classic "bubble" behavior - a lot of dopes thinking it's never going to end and a few cooler heads who make a killing because they realize it *has* to end sooner or later. It's just that in this case the "dopes" were multibillion-dollar investment firms.