Commentary Magazine


Topic: Fabrice Tourre

RE: Showboating Against Wall Street Greed

Maybe the Democrats overplayed their hand. The Washington Post editors are grimacing:

The broader implication raised by senators at Tuesday’s hearing — that Goldman somehow rigged the market in subprime mortgages, and that this led to the meltdown — does not strike us as a terribly useful or even accurate analysis of the crisis. Yes, in its capacity as a market-maker, the firm sold complex derivatives to market players who wanted to bet on a rosy view of housing long after Goldman had turned more pessimistic. To that extent, Goldman’s interest in short-term revenue clashed with what, in hindsight, was society’s need for a whistle-blower. For the most part, though, these were large, sophisticated institutional investors who had the opportunity to conduct the same analysis of economic data that Goldman did. They knew that there was someone on the short side of every trade. And Goldman had no legal obligation to trade in the same direction as these clients did. Indeed, if it had, then Goldman could not have started hedging its own bets on housing early, as it did. The firm would have lost billions, and it might have wound up needing an even bigger bailout by U.S. taxpayers than it actually got. It could have ended up like Citigroup, which tried to ride the bubble until it was too late and had to be propped up with hundreds of billions of dollars in federal cash and credit guarantees.

As the editors note, the senators seemed outraged — offended even — by the entire notion of short-selling, although even senators must understand at some level that short-selling is, in essence, the way information is transmitted to the marketplace that the herd is going in the wrong direction. (“Perhaps the housing bubble would have been mitigated if more shorts had piled in earlier.”) But the senators would not be deterred from their attacks, in part because the underlying merits of the actual case against Goldman are looking more suspect.

Others observe:

The SEC claims that Goldman’s Fabrice Tourre misled ACA into thinking Mr. Paulson’s firm would be going long on subprime, just like ACA. It’s not clear that this would have mattered, but Mr. Tourre flatly denied the allegation under oath yesterday.

The SEC also claims Goldman should have disclosed that Mr. Paulson’s firm suggested some of the particular mortgage-backed securities on which the two sides in the transaction would bet. Yet Mr. Tourre testified that the pool referenced in the transaction performed no worse than similar pools of subprime loans not included in the transaction.

In sum, it appeared to be another bad day for the SEC’s specific case against Goldman. But lawmakers seemed intent on finding the firm generally guilty of meeting institutional demand for subprime housing risk.

Well, you can see why the senators would rather talk about greed — or anything other than the merits of what seems to be a flaky case with highly suspicious timing.

Once again, lawmakers are betting the voters are easily bamboozled and can be lured into an anti-business, anti-bank fury. They may be right. But if the Post’s editors are any guide, they may have underestimated the public’s ability to see through their histrionics.

Maybe the Democrats overplayed their hand. The Washington Post editors are grimacing:

The broader implication raised by senators at Tuesday’s hearing — that Goldman somehow rigged the market in subprime mortgages, and that this led to the meltdown — does not strike us as a terribly useful or even accurate analysis of the crisis. Yes, in its capacity as a market-maker, the firm sold complex derivatives to market players who wanted to bet on a rosy view of housing long after Goldman had turned more pessimistic. To that extent, Goldman’s interest in short-term revenue clashed with what, in hindsight, was society’s need for a whistle-blower. For the most part, though, these were large, sophisticated institutional investors who had the opportunity to conduct the same analysis of economic data that Goldman did. They knew that there was someone on the short side of every trade. And Goldman had no legal obligation to trade in the same direction as these clients did. Indeed, if it had, then Goldman could not have started hedging its own bets on housing early, as it did. The firm would have lost billions, and it might have wound up needing an even bigger bailout by U.S. taxpayers than it actually got. It could have ended up like Citigroup, which tried to ride the bubble until it was too late and had to be propped up with hundreds of billions of dollars in federal cash and credit guarantees.

As the editors note, the senators seemed outraged — offended even — by the entire notion of short-selling, although even senators must understand at some level that short-selling is, in essence, the way information is transmitted to the marketplace that the herd is going in the wrong direction. (“Perhaps the housing bubble would have been mitigated if more shorts had piled in earlier.”) But the senators would not be deterred from their attacks, in part because the underlying merits of the actual case against Goldman are looking more suspect.

Others observe:

The SEC claims that Goldman’s Fabrice Tourre misled ACA into thinking Mr. Paulson’s firm would be going long on subprime, just like ACA. It’s not clear that this would have mattered, but Mr. Tourre flatly denied the allegation under oath yesterday.

The SEC also claims Goldman should have disclosed that Mr. Paulson’s firm suggested some of the particular mortgage-backed securities on which the two sides in the transaction would bet. Yet Mr. Tourre testified that the pool referenced in the transaction performed no worse than similar pools of subprime loans not included in the transaction.

In sum, it appeared to be another bad day for the SEC’s specific case against Goldman. But lawmakers seemed intent on finding the firm generally guilty of meeting institutional demand for subprime housing risk.

Well, you can see why the senators would rather talk about greed — or anything other than the merits of what seems to be a flaky case with highly suspicious timing.

Once again, lawmakers are betting the voters are easily bamboozled and can be lured into an anti-business, anti-bank fury. They may be right. But if the Post’s editors are any guide, they may have underestimated the public’s ability to see through their histrionics.

Read Less

Showboating Against Wall Street Greed

The marathon Goldman-bashathon yesterday suggests that Congress knows even less about financial reform than it does about health care. There was profanity from Sen. Carl Levin and histrionics from practically everyone else. The New York Times explains what really was going on:

For hour after hour on Tuesday, Democrats and Republicans interrogated Goldman’s mortgage men, including the chief executive, Lloyd C. Blankfein, and Fabrice Tourre, the employee named in the S.E.C. complaint, putting them on the spot over Wall Street’s questionable conduct at a legislatively propitious moment.

None of the Goldman executives have been found to have done anything wrong, but some Democrats were ready to place them in the same role played in past financial crises by high-fliers like Charles Keating, Michael Milken and Ken Lay, all of whom came to personify the excesses of the moment.

The hearings were the culmination of a Democratic strategy to take full advantage of the opportunity created by the S.E.C. civil case.

Frankly, it’s not even clear that the senators fully understood the transaction or were aware that there’s nothing illegal or unusual about investments between sophisticated players who are taking opposing bets in the marketplace. I was reminded of Rep. Louise Slaughter, who invoked the tale of an uninsured woman reduced to using her dead sister’s dentures. That had about as much to do with the merits of health-care reform — and revealed the paucity of lawmakers’ understanding of the subject – as a flaky fraud charge against Goldman Sachs does with financial reform. The hunger for anecdotal evidence of Wall Street greed — with little understanding of the anecdote — makes for good TV and poor reform.

There are real issues to be examined (e.g., the independence of rating agencies, the conflicts in investment-banking transactions), but it’s far from clear that the pending legislation is going to address those. But — like the frenzy to nix AIG bonuses — lawmakers aren’t as interested in legal niceties or creating a coherent, predictable financial system as they are in stoking populist anger against Wall Street. It is a convenient way of redirecting public anger away from them, of course. It might work, but we’re likely to wind up with financial “reform” that reforms very little.

The marathon Goldman-bashathon yesterday suggests that Congress knows even less about financial reform than it does about health care. There was profanity from Sen. Carl Levin and histrionics from practically everyone else. The New York Times explains what really was going on:

For hour after hour on Tuesday, Democrats and Republicans interrogated Goldman’s mortgage men, including the chief executive, Lloyd C. Blankfein, and Fabrice Tourre, the employee named in the S.E.C. complaint, putting them on the spot over Wall Street’s questionable conduct at a legislatively propitious moment.

None of the Goldman executives have been found to have done anything wrong, but some Democrats were ready to place them in the same role played in past financial crises by high-fliers like Charles Keating, Michael Milken and Ken Lay, all of whom came to personify the excesses of the moment.

The hearings were the culmination of a Democratic strategy to take full advantage of the opportunity created by the S.E.C. civil case.

Frankly, it’s not even clear that the senators fully understood the transaction or were aware that there’s nothing illegal or unusual about investments between sophisticated players who are taking opposing bets in the marketplace. I was reminded of Rep. Louise Slaughter, who invoked the tale of an uninsured woman reduced to using her dead sister’s dentures. That had about as much to do with the merits of health-care reform — and revealed the paucity of lawmakers’ understanding of the subject – as a flaky fraud charge against Goldman Sachs does with financial reform. The hunger for anecdotal evidence of Wall Street greed — with little understanding of the anecdote — makes for good TV and poor reform.

There are real issues to be examined (e.g., the independence of rating agencies, the conflicts in investment-banking transactions), but it’s far from clear that the pending legislation is going to address those. But — like the frenzy to nix AIG bonuses — lawmakers aren’t as interested in legal niceties or creating a coherent, predictable financial system as they are in stoking populist anger against Wall Street. It is a convenient way of redirecting public anger away from them, of course. It might work, but we’re likely to wind up with financial “reform” that reforms very little.

Read Less




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