Thursday, April 14, 2011

Did Goldman Sachs Lie?

If you missed CNN's In The Arena on Thursday evening, then you missed the fireworks. Eliot Spitzer challenged investment banker Goldman Sachs: "Sue me. You lied to the public. You should be prosecuted" during an interview with Sen. Carl Levin, chairman of the Senate subcommittee charged with investigating the causes of the financial crisis (see interview below).

Obviously Spitzer doesn't care much for Goldman Sachs and he doesn't hide his political views, openly questioning why Republicans are moving back towards financial deregulation. Is Spitzer wrong to go after Goldman? It's a tough case to prove. I clearly remember doing research on CDO-Squared and CDO-Cubed in the summer of 2006. The more I looked into these "special purpose vehicles," the more certain I was that the credit bubble was going to collapse. I could never have imagined how bad it was going to be, but I was sure the bubble was going to end badly.

I also remember sending an email to Goldman asking them the best way to short this credit bubble. The guy covering us called me back and asked me "why would you want to do that?". That I remember -- crystal clear in my head. I remember the research I did, and I remember the response. It may have been that at that time Goldman was still long and genuinely thought that it wasn't worth shorting these CDOs.

But at one point, Goldman placed "The Big Short" and profited from the financial calamity that ensued. Did they lie to their clients? That is going to be tough to prove but I can tell you one thing, somewhere along the way, they reversed course and went short credit in a big way. I'd like to know why they didn't share this information with all their clients?

And it's not just Goldman. They're everyone's favorite whipping boy but other investment banks engaged in equally questionable transactions, selling CDOs and other structured crap to pension funds (who blindly bought the crap!). The other investment banks just weren't smart enough to reverse course at the right time, and they paid the price. Love them or hate them, Goldman Sachs is a money making machine. They seem to know exactly when to take the big risks, and the firm's reputation is such that clients still want to do business with them (even clients that hate them). They got smart people working for them and they do an outstanding job servicing clients.

And what about increasing regulation? There is no question we need better regulation, but I also know that bankers are running rings around regulators. I chuckle when I hear politicians in Canada saying they're going to "increase taxes on the major banks". Good luck! If you do that, banks will shed costs (fire people) and increase their tax arbitrage activities which already makes them a killing. Bankers are always two steps ahead of regulators.

That brings me to my final point, pension oversight. The people overseeing pension funds should be qualified enough to know when pension fund managers are taking stupid risks. There are no excuses. If they aren't capable of asking the tough questions, and safeguarding pension assets, then they shouldn't be supervising any pension fund.

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