As someone who works for the so-called “corporate cronies” (i.e. the banks on Wall Street), I get to see capitalism at its best and the damage (and cost) that the government can do when it gets involved in the private sector.

The financial regulatory bill floating around Capitol Hill is a disaster and it’s targeted toward the wrong crowd.  Wall Street did not steal our money or cause the economy to crash.  It was a combination of the government pushing Fannie Mae and Freddie Mac to loosen mortgage loan standards, Fannie and Freddie loosening those standards and individual consumers who bought houses they couldn’t they afford.  The bubble burst and it caused the economy to come crashing down… just like every other bubble burst that we’ve had.  Remember the tech bubble burst of 2001?  Luckily we had a President in power who had already decreased taxes and acted quickly to stimulate the economy, rather than focusing on other issues like health care, the environment and apologizing for America.

Goldman has been slapped with fraud charges, but no one knows what information the SEC has now that they didn’t have a year ago or even 3 years ago.  Sure, Goldman made some bad bets, but since when is that illegal?  Some investors made some bad bets, but don’t we all at one time or another?  Again, not illegal.  Keep in mind that the people trading credit default swaps and mortgage backed securities were the big and girls.  The majority of people that traded these securities made hundreds of thousands, if not millions, managing portfolios.  Each of the securities have a prospectus, which describes the goals and general composition of the investment product.  They knew what they were doing so no one should feel sorry for them.  For those that didn’t know what they were doing, you shouldn’t feel sorry for them either because understanding your investement is Rule #1.

The SEC was saying that Goldman was pushing to sell the credit default swaps while short selling.  That’s the only place that I could see where they might get in trouble.  However, the market can change on a dime so it’s possible that they pushed the product in the morning and began short selling by lunch.  That shouldn’t be a shocker to anyone in the industry.

Here’s the bottom line.  If you want someone to blame, look to your neighbor with that for sale sign in their yard, look to Fannie and Freddie (who aren’t even included in the financial regulatory bill) and look to the politicians like Barney Frank and Chris Dodd who pushed Fannie and Freddie into easing loan standards, but don’t look to Wall Street.  They may be the easy target, but they are not the culprits.

If you’d like to do a little extra reading about capitalism, please read an article that John Stossel wrote last week regarding the myths of capitalism.  Click here for more.

Comments

  • Alaina Segovia

    I thought I did address your points. The markets are competitive and open.

    Not everyone agrees with the “too big to fail” theory and we just have to hope that the next we are in a situation like this (which will happen) there is someone in power who doesn’t believe in bail outs. “Too big to fail” is what happens when you have a moderate, a liberal, a moderate and then a socialist running the country.

    Everyone has access to the same economic data and there is an incredible amount of analysis available to all of us. Few are perfectly informed, most of whom are paid to be, and a few others just because they enjoy it. I don’t see the problem. If the info is available, it’s up to the individual to utilize it. Even at that, it’s an educated guess as to the right investment.

    • David Kaiser, Editor

      I completely disagree, I do not see competitive or open markets based on the economic definition of both.

      Alaina, all due respect, but you could also be a bit biased here, and that’s not a shot at you, its just an observation.

      Specifically, you say:

      “Few are perfectly informed, most of whom are paid to be, and a few others just because they enjoy it. I don’t see the problem. If the info is available, it’s up to the individual to utilize it. Even at that, it’s an educated guess as to the right investment.”

      The problem arises when the few that are perfectly informed decide to use that knowledge to sell to someone that is not “perfectly informed”, and takes advantage of that to make money. There is at least a hint that may have happened at GS, which is the point to the investigation.

      If it was merely a “bad decision” as you keep trying to hammer home, then an investigation has no legs to stand on, and this will go away. But the longer this continues, the more likely it is that there was wrong doing. And to continue to defend their actions without knowing what really happened is nieve at best.

      And for the record, I’m not the only one that sees smoke.

      • Alaina Segovia

        I think it’s unfair to assume guilt too. What happened until proven guilty.

        I’m working for former regulators at the moment who have been to Goldman. They have a pretty good idea what happened and they don’t believe they didn’t do anything wrong.

        So until somebody comes out with proof that they or any other I-Bank did something illegal, or even unethical, I don’t think it’s right to villify the entire banking industry and use it for political gain.

        • David Kaiser, Editor

          I’m not assuming guilt, I just want to make sure nothing wrong happened. An investigation that leads to no wrong doing is a good result for all, but to make a blanket statement “Wall Street didn’t see out money” is almost as bad as assuming all banks are bad.

          I don’t like the idea of anyone using this for political gain any more than you do, but I also want to make painfully sure that nothing funny happened, because if it did, we need to make sure it doesn’t happen again.

          I’m not personally vilifying anyone, I just want to be sure is all!

  • Alaina Segovia

    Also, I want to note that I designed a trading system for one of the investment banks you mentioned above 4 years ago.

    A major component of the design was to make sure that the traders didn’t know who they were trading against, even if it was internal.

    Here’s an example… Let’s say Sally and Billy both worked at the same I-Bank and even sits next to each other. Sally receives a sell order of 500 shares of X. Billy receives a buy order of 500 shares of X.

    It would seem logical and beneficial for Sally and Billy to work out a deal since they work for the same firm, right? Yes, but it’s illegal and they would both lose their license. The trading system is design so that both Sally and Billy go out into the market and right the best prices they can for an individual trade.

    Sally identifies the best deal in the market place and executes the order. Billy does the same. Neither know the details of the other person’s order.

    • David Kaiser, Editor

      This is all well and good Alaina, but you are assuming nothing happened.

      No, there is no evidence at this point that anything illegal happened, but there still remains the possiblity that something did.

      With all that is going on, where there is smoke, there is the distinct possiblity there is fire, and we need to at least recognized the possilbities here.

      • Alaina Segovia

        The difference here is that you see smoke… and, because I have an in depth knowledge of how the investment banks work on daily a basis, I don’t see smoke.

        There is not evidence that something illegal happened so why are are we on a witch hunt? It’s been a year and half since the market collapsed and there’s still no evidence, at least publicly anyway, that there was any wrong doing. Therefore, I don’t understand the constant need to hammer Wall Street when there is no evidence that they did anything wrong.

        You can’t hang someone just because they made money and someone else didn’t. There are winners and losers… ’tis the way the market works.

        • David Kaiser, Editor

          Did it ever occur to you that there is something you may not know, and that something may be the smoke you don’t see?

          You can certainly hang someone who made money if they unfairly used their knowledge to dupe someone else.

          The point, yet again, is that we do not know, and unless you worked at GS and know for sure what went down, I’ll again say don’t be so quick to say nothing was wrong.

          I respect the fact that you work in this field and I’m sure you know a lot about it, but that does not mean you know everything that went down, which is all I’m really getting at.

  • David Kaiser, Editor

    They didn’t steal it, but they sure as heck didn’t mind taking it under some shady circumstances.

    GS may or may not have done something illegal, they certainly share some of the blame. They were enabled to do some of the things they did, but they didn’t have to do them.

    Goldman Sachs is not being accused of betting against their investors. That is not illegal – though the people who did that will have a lot to answer for in the confession booth. The legal issue is whether they conspired to sell securities that were designed to fail.

    It’s sort of like a brain surgeon taking out an insurance policy on your life and then falsely convincing you that you have a brain tumor. The fact that people could buy insurance on other people’s transactions without the knowledge or approval of the buyers is one of the more remarkable aspects of this whole saga.

    Congress is to blame for much of this. They never should have passed the legislation that allowed firms to do this. However, you better believe that Goldman Sachs and their were pushing for this. Lehman Brothers and Citi Group were busy playing a shell game with their toxic assets, misleading investors and regulators alike.

    All the clamor for free markets ignores the simple point that free markets bestow their bounty on the economy only if the markets are also perfectly competitive. If we are even discussing “too big to fail,” then one basic tenet of the competitive market – that firms are numerous and small – is violated. Second, no one can seriously claim that a second underpinning of competitive markets – that everyone is perfectly informed – comes close to holding.

    Adam Smith never mentioned banks when he was heaping praise on free markets in “The Wealth of Nations”.

    • Alaina Segovia

      First, let me know clarify my position here. I am not advocating bail outs or “too big to fail” and I’m not saying that everything a bank does is right. What I am saying is that, in this situation, Goldman and the other I-Banks (investment banks) did not do anything wrong and, from what I can tell, unethical.

      Trading on a product that is comprised of bad mortgages is no different than trading junk bonds. It’s a risky investment. Period. Everyone knew that. Investors, particularly the types of investors that trade those types of securities, know exactly what they’re doing. Find me a hedge fund manager or a portfolio manager that says they didn’t know what they were trading and I’ll show you someone who will never work in the industry again (not only because no firm would hire them, but they wouldn’t be able to find any clients).

      Investment banks have a buy side and a sell side and they generally aren’t the same traders. It’s actually illegal for a trader to know who they are buying securities from or selling them to. The guys that deal with client trading are sell side. The traders themselves generally do not have the required license to give financial advice. They can tell a portfolio manager generally what to securities is comprised of, but they can’t recommend or discourage someone from making a particular investment. They could lose their license for that. The buy side traders are the ones that are trading on behalf of their firm and their firm’s portfolio manager who manage mutual funds, and other products. There’s not exactly a chinese wall, between the buy side and the sell side, but it’s close.

      All portolio managers and hedge fund managers have access to the same economic data to base their decisions. Do you really think that someone who is paid hundreds of thousands or millions of dollar to manage portfolios is going to make an investment on behalf of a client or their company if they don’t know what they’re investing in? That’s absolutely ridiculous.

      If a trader lied about the composition of a security or refused to provide that information, that would be illegal. In that case, I would be all for a public hanging, but as far as I know, that’s not the case and it doesn’t seem that anyone has proof to the contrary.

      • David Kaiser, Editor

        “…from what I can tell, unethical.”

        “…but as far as I know, that’s not the case and it doesn’t seem that anyone has proof to the contrary.”

        That’s the whole key here: none of us know, and there is a possiblity that something illegal may have happened.

        My point is, don’t be as quick to defend these banks as Nutter was to attack them.

        And neither of your responses address the latent economic flaws I pointed out. Sure, free markets are great, so long as they are competitive and open.

        My eyes see neither of those things.

  • Boru

    I’m not going to blame anyone, but it is interesting to understand.

    The housing market/economy problems seems to be about how lots of banks played around with stacked derivatives on mortgages. It all led to big banks and certain countries (China in particular) suddenly being unable to back the derivatives…and the whole line of dominoes fell…bursting the housing bubble and negatively affecting the stock market in general.

    http://www.youtube.com/watch?v=r66MMYyz9VI
    http://www.youtube.com/watch?v=2tWfU0Wb5Fw

    However, that may just be a sophisticated lie covering what really happened.

    What I really know is that the people/organizations who managed their money smart are riding this economy out just fine. In fact, many such people see this as a great investment environment.

    As usual:
    Wise turtles pwn gambling hares

    • Alaina Segovia

      Banks trading derivatives had nothing to do with housing bubble burst… people not paying their mortgages is 100% of the cause. Every cause has an effect… one of the effect was a market crash (along with a credit freeze, massive lay offs, etc.).

      You can listen to the media and the politicians and, of course, it sounds logical that it’s the fault of the banks. However, banks have been trading derivatives for a couple decades. They have absolutely no impact on loan standards or people being able to make payments on their house.

      • Christopher Nutter

        Your mewling apologetics for the billionaires has been noted.

        I blame the whole damn enterprise… slick marketing campaigns selling home ownership as the “American Dream” to people who couldn’t afford it, non-ethical loan officers issuing rubber-stamp approvals with only an eye on their next bonus, laws and accounting rules formulated for the benefit of the wealthy, and of course the vultures who profited from it all.

        Blame the regular American who was just trying to dance to your tune. Go ahead. I cordially invite the GOP to run on a “It’s all your fault… read some Atlas Shrugged” platform.

        • Alaina Segovia

          Nutter, I see you’re still grumpy today.

      • David Kaiser, Editor

        I agree with Alaina here, the SEC opened the flood gates of derivitive trading when they allowed five firms – Goldman, Morgan Stanley, Bear Sterns, Merrill Lynch and Lehman – to more than double the leverage they were allowed to keep on their sheets.

        In fact, I think the housing bubble bursting set a domino effect that brought down three of the five firms mentioned above when runs on those banks happened. They were not prepared for this, and three of them – BS, ML and LB – paid the price, and Morgan Stanley held on by the skin of its teeth.

  • Red State Eddio

    When are we going to find out that half the Obawan Administration is in the tank for GS, paid or unpaid?

  • http://twitter.com/theatomicmom East of Eden

    Alaina….thanks, you’re right on. :)

  • kristen

    Thank you for writing this. Even though I’m no financial guru, I have family members who are; and I’ve been trying to follow this story as best I can. I’m disgusted how The One is going after Wall Street while failing to look within Washington (i.e. Fanny and Freddy). It is gross negligence and irresponsible behavior. The MSM isn’t helping either. I wish they’d do their jobs and actually report the facts. This is all an excuse for Washington to go after “The Fat Cats”, shifting all the blame to them and saving their own guilty a#@es. Despicable.

  • Rob

    …and please forgive a few bits of bad grammar, I wrote this in your comments section.

  • Rob

    Respectfully, Aliana, you’re grossly oversimplifying the recession. When Lehmann Brothers fell, that proved that the U.S. Government would NOT necessarily intervene with any Wall Street sized firm that was in trouble. At that point, our economy, which had existed dependent on credit from top to bottom (from people who are buying more than they can afford– who certainly do exist, don’t get me wrong) to companys using Money Market Funds to pay their employees, experiecned a complete credit and liquidity freeze.

    If the U.S. government, the only institution capable of fixing this, had not stepped in to loosen credit to a reasonably stable level, we would have experienced a Great Depression. This is why “fiscal conservatives” in Congress acted. They literally had no choice.

    Goldman bet against the market while this was going on, because they knew things were going to get worse before they got better, i.e. shorting. But part of the reason that they knew things would get worse is because they systemically helped make it worse by selling hedge funds bad assets, while certifying them as good assets. Doing this has given them the ability to grow during this downturn, making THEM “too big to fail”, something that would go on to make the U.S. taxpayer have to bail them out after moral hazard caused them to take risky bets knowing they would never go under.

    • Christopher Nutter

      Good post Rob… what do you think would be the best solution?

    • Alaina Segovia

      Bush would not bail out everybody (and I completely oppose the AIG and GM bail outs). Obama will bail out anyone and everyone, as long as he can use it for political leverage.

      You’re right though, the credit freeze was/is a big issue. However, it an effect. The cause goes directly back to the bad mortgage loans. When everyone started to see that the bubble was about to burst, they stopped lending and that drew the economy to a grinding halt. The banks knew they that many of their competitors had a lot of bad loans on their books so they lost trust in each other, which lead to the credit freeze.

      Bush had it right with TARP. It was developed to buy the bad assets off the books of the banks. Not a bail out, not a loan, not ownership in a company, but an investment in products that have resulted in a profit.

      It was starting to work late last year, but then Obama came along and attached all these strings to TARP after the fact, which made it much more difficult for the banks to give loans, and as a result, the credit market froze again and hasn’t thawed much since. He completely defeated the purpose and then started giving more bail outs.

      Goldman didn’t do anything any different than any other firm with an investment banking arm and they didn’t do anything and prudent investor wouldn’t have done. If they were smarter than everyone else and saw a way to make money out of a downturn, good for them. That’s their job and that’s why they’re so good a what they do.

      I don’t think anyone should feel sorry for the hedge funds. Going back to one of the points in my post, they knew if exactly what they were investing in and, if they didn’t, they deserved to lose it all. They make a lot of money taking very risky bets, but sometimes they make very bad bets and lose the farm and the shirts off their backs. It happens quite frequently, but it’s not politicized like this particular situation.

      If they ever need a bail out and the government thinks they’re too big to fail, is it Goldman’s fault? The government encourages risky bets by continually bailing people out. Unfortunately, that’s going to be the role under the government until we get a President with some courage.

  • Christopher Nutter

    Alaina,

    Goldman Sachs is paying a ton of money to PR firms to rehabilitate their image… I just hope you’re not dim enough to do it for free.

    • Neil Braithwaite

      Hey Nutter – “I just hope you’re not dim enough to do it for free.”

      How about using a little respect when making comments to fellow PD contributers.

      • Christopher Nutter

        Braithwaite,

        I give what I get; no more, no less.

      • http://www.sotr.us Cordeiro

        Say what you want, Nutter, but unless I missed some barbed commentary, nobody here in the PD asylum called you “dim”.

        I’m sure Goldman is paying PR firms to bolster their public image. Most smart “corporate cronies” have at least one PR firm on speed dial for one simple reason – in the end, perception is reality.

        At least the PR firms get paid for what they do. The MSM is The One’s PR firm, and he hasn’t paid them a dime. Exactly who is dim again?

    • Alaina Segovia

      What’s your beef with Goldman, other than they are a big bad bank?

      • Troy La Mana

        Besides the fact that they stand to cash in big with the Cap and Trade bill? They own, as a company and individually, about 25% of the CCX scheme. Algore owns a lot of it as well. (Gee, that explains his climate change rants)

        • Alaina Segovia

          True, but not relevant to the current economic situation.

          • Troy La Mana

            But it is the reason why GS is going to get the slap on the wrist now. That way GS can get it out of the way so as to reap the rewards of CCX.