I watched the hearings yesterday for 11 straight hours while I was multi-tasking our trades and research. There are 3 main questions. 1.) Did GS break any laws on the ABACUS Deal? 2.) Is GS obligated to disclose their opinion when they act as Market Maker? 3.) Did GS cause the housing collapse?
1.) There may be some disclosure issues here. Goldman knew what they were doing. They picked asset manager (ACA) for their synthetic CDO (The first time in over 50 deals they did not do it themselves- a clue). They let Paulson (who was going to make a massive bet against their success) assist in picking the RMBS securities for the deal. This was not disclosed in the marketing material on the executive summary. Almost everybody on the GS side thought the securities were "Sh&tty". They looked long and hard to find a "sucker" asset manager. They did in ACA. It is obvious the Mortgage trading desk knew the market was going to blow up and bet heavily against it. Not a crime. In my opinion: Goldman was ethically wrong (not in Wall Street terms, business terms) and my be somewhat criminally wrong on their disclosures. Their intention was to take advantage of a situation in the most expeditious manner knowing it would collapse- The smoking gun is that Goldman let a 2% revenue contributor (Mortgage Desk) use a 56% VAR (Value at Risk) bet. No one bets 56% of their total risk capital on a good idea or a hunch. BTW- the traders left the firm shortly after the all this happened. The Verdict: Guilty ( so are many many others on The Street)
2. No. Market makers do not have to do this. Verdict: Not guilty
3. No not the cause; however, they were a flammable liquid in an explosive environment (as were others). Goldman made great trades. They were definitely helped by all their connections in a "rigged" environment and exacerbated the results and the devastation. Goldman took advantage of a bubble in a grand fashion. Not a crime. The real crime is the government letting themselves be taken advantage of by Wall Street. Wall Street is Wall Street. It was shocking to see during this crisis how little Congress and Senate know about finance and capital markets. In the end- can you imagine letting the politicians run the capital markets?! My goodness that would be a disaster. Good or Bad- The Fed needs to remain in control. My solution: Bring back The Glass-Steagall Act. Let there be Fox dens and Hen houses-Not foxes in the hen house.
Conclusion: Goldman Sachs is the very best player to ever play Wall Street. They are a product of their environment and adapt very well. People go to Wall Street to "play to win". It is unfortunate and wrong when "Main Street" gets hurt as "collateral damage" when titans clash. There must be size limits (in all categories) imposed and regulated to contain the damage when things blow-up. There must also be seperation of "Main Street Money" ,"Wall Street Money", and "Government Money". Each with very distinct rules and regulations. The mucking of the categories, government financial ignorance, lack of law and order, and greed (Main Street included) caused the crisis.
Wall Street does what they are supposed to do- Try to profit. If you are going to have a pet tiger, you better know how to control it. Is it the Tiger's fault that it bit you or is it just being a Tiger? Thank goodness Wall Street is in America. IT is better to have "The Tiger" on our side then anywhere else in the world. When it is "good" -It pushes innovation, develops growth, creates jobs, fills our coffers, funds our defenses, and destroys our opponents (U.S.S.R. - yes it was capitalism that collapsed the U.S.S.R and not missles). A good example is to play Sid Mier's Civillization- the development of capitalisation is crucial to a country's development and success
P.S. They should teach every American basic finance in school
