Commentary Magazine


Topic: Goldman

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

Free Speech, Not the GOP, Is the Winner in Court Campaign-Finance Ruling

Today’s Supreme Court ruling striking down provisions of the McCain-Feingold federal campaign-finance law is a tremendous victory for free speech in the United States. The 5-4 decision in Citizens United v. Federal Election Commission upholds the principle that that 2002 law and other similar attempts to regulate campaign finance flouted, namely, that the government should not regulate political speech.

The case grew out of a 2008 federal ban on the showing of a documentary film, Hillary: The Movie, during the presidential primaries in which Hillary Clinton, the object of the movie’s criticism, was a candidate. McCain-Feingold allowed the Federal Election Commission to stop the showing of the film because a corporation produced it, even though the corporation in question was a nonprofit. This case aptly illustrated the way this law did not so much protect the electoral process from the corrupting influence of money as it protected politicians from the effects of political speech that they did not like. Far from bolstering the democratic process, McCain-Feingold suppressed it. Like just about every other campaign-finance law that has been passed since the 1970s, when the Watergate scandal gave impetus to a drive to “reform” election spending, this law did not eliminate the influence of money on politics, but it did play favorites as to which sort of speech may or may not be legal. While efforts to bring transparency into campaign finance remain laudable, the process by which money began to be shunted first into political action committees and then, in the wake of McCain-Feingold, into new classes of unaccountable groups did nothing to make the system fairer or cleaner. Instead, it granted a government agency the power to regulate or suppress the one kind of speech that the founders of our republic would have agreed was inviolate: political speech. The court has now chipped away at this expansion of federal power to allow corporations and other groups the freedom to advocate on elections as they please.

The responses to this ruling from some in the political class are predictable. President Obama has issued a call to Congress to pass legislation to overturn the will of the courts, something that we trust the new absence of a filibuster-proof majority for the Democrats will render impossible.

Interestingly, among the first reactions was a blog post by New York Times reporter Jeff Zeleny, who claimed that, “at first blush, Republican candidates would seem to benefit from this seismic change in how political campaigns are conducted in America.” To back this assertion up, he quoted the president’s demagogic statement that claimed the “Supreme Court has given a green light to a new stampede of special interest money in our politics. It is a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans.”

As Zeleny also noted, labor unions and a host of Left-leaning groups are now also free to spend money to publicize their views, as they like. It should also be pointed out that the notion that big business is a dependable backer of the GOP is a myth. The crony capitalism that the bank bailouts have highlighted in the past two years has aptly illustrated the fact that many industries, including the denizens of Wall Street, have a stronger loyalty to corporate welfare that benefits them than they do to the principles of free enterprise. The steady flow of money from firms such as Goldman, Sachs (the principal survivor and beneficiary of the latest shakedowns) to Democratic candidates like Obama is proof of this.

The point here is that more political speech is not a danger to the republic; it is instead the lifeblood of democracy. The only ones to gain from the suppression of views via campaign-spending laws are those politicians who are the subject of critical scrutiny. Acting in the name of “reform,” campaign-finance-restriction advocates have sought to restrict political speech, effectively empowering the politicians and the mainstream media at the expense of the electorate. In a democracy, the people must be free to sort out the views of a host of disparate elements. The free flow of critical advertisements and independent documentaries such as Hillary: The Movie challenge the monopoly of public expression that such a system breeds. Let’s hope this ruling marks the beginning of the end of an era in which the political class used its legislative power to silence their critics.

Today’s Supreme Court ruling striking down provisions of the McCain-Feingold federal campaign-finance law is a tremendous victory for free speech in the United States. The 5-4 decision in Citizens United v. Federal Election Commission upholds the principle that that 2002 law and other similar attempts to regulate campaign finance flouted, namely, that the government should not regulate political speech.

The case grew out of a 2008 federal ban on the showing of a documentary film, Hillary: The Movie, during the presidential primaries in which Hillary Clinton, the object of the movie’s criticism, was a candidate. McCain-Feingold allowed the Federal Election Commission to stop the showing of the film because a corporation produced it, even though the corporation in question was a nonprofit. This case aptly illustrated the way this law did not so much protect the electoral process from the corrupting influence of money as it protected politicians from the effects of political speech that they did not like. Far from bolstering the democratic process, McCain-Feingold suppressed it. Like just about every other campaign-finance law that has been passed since the 1970s, when the Watergate scandal gave impetus to a drive to “reform” election spending, this law did not eliminate the influence of money on politics, but it did play favorites as to which sort of speech may or may not be legal. While efforts to bring transparency into campaign finance remain laudable, the process by which money began to be shunted first into political action committees and then, in the wake of McCain-Feingold, into new classes of unaccountable groups did nothing to make the system fairer or cleaner. Instead, it granted a government agency the power to regulate or suppress the one kind of speech that the founders of our republic would have agreed was inviolate: political speech. The court has now chipped away at this expansion of federal power to allow corporations and other groups the freedom to advocate on elections as they please.

The responses to this ruling from some in the political class are predictable. President Obama has issued a call to Congress to pass legislation to overturn the will of the courts, something that we trust the new absence of a filibuster-proof majority for the Democrats will render impossible.

Interestingly, among the first reactions was a blog post by New York Times reporter Jeff Zeleny, who claimed that, “at first blush, Republican candidates would seem to benefit from this seismic change in how political campaigns are conducted in America.” To back this assertion up, he quoted the president’s demagogic statement that claimed the “Supreme Court has given a green light to a new stampede of special interest money in our politics. It is a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans.”

As Zeleny also noted, labor unions and a host of Left-leaning groups are now also free to spend money to publicize their views, as they like. It should also be pointed out that the notion that big business is a dependable backer of the GOP is a myth. The crony capitalism that the bank bailouts have highlighted in the past two years has aptly illustrated the fact that many industries, including the denizens of Wall Street, have a stronger loyalty to corporate welfare that benefits them than they do to the principles of free enterprise. The steady flow of money from firms such as Goldman, Sachs (the principal survivor and beneficiary of the latest shakedowns) to Democratic candidates like Obama is proof of this.

The point here is that more political speech is not a danger to the republic; it is instead the lifeblood of democracy. The only ones to gain from the suppression of views via campaign-spending laws are those politicians who are the subject of critical scrutiny. Acting in the name of “reform,” campaign-finance-restriction advocates have sought to restrict political speech, effectively empowering the politicians and the mainstream media at the expense of the electorate. In a democracy, the people must be free to sort out the views of a host of disparate elements. The free flow of critical advertisements and independent documentaries such as Hillary: The Movie challenge the monopoly of public expression that such a system breeds. Let’s hope this ruling marks the beginning of the end of an era in which the political class used its legislative power to silence their critics.

Read Less




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