Wednesday, April 28, 2010

Ayn Rand Gone Wild

This Goldman Sachs inquiry is beyond sickening. The usual Ayn Rand/Gordon Gecko-like apologists are out in force telling us that what they did was just business as usual and standard operating procedure for the financial markets. Just this week, "The Economist" (4/24, page 13) is saying that Goldman was greedy, but not guilty. That may be technically correct, but this is not just a legal issue, this is a fundamental moral issue, and anyone who does not think that what these pigs did was unconditionally wrong is morally bankrupt. "The Economist" argument is that various market participants go to market for various reasons and seller views of an asset by definition are opposite of buyer views. That is all well and good in a secondary market between parties of relatively equal information. However, these securities were sold in the primary market in which Goldman was the originator of a product certified to be high quality (AAA rated). To not make a distinction between Goldman's role as a market maker v.s. its role as an underwriter is amateur reporting. The underwriter role conveys a fiduciary duty that was clearly abrogated.

The Big Short (if you haven't read it, I highly recommend it)
By creating synthetic CDOs, Goldman essentially created a casino which allowed speculators (including themselves) to place billion dollar bets against the U.S. housing market. It wasn't enough to create plain vanilla CDOs which were layered packages of real mortgages and therefore had a modicum of investment purpose however foolish and ill-fated, no these "synthetic" CDOs were for pure speculation, a hand picked set of reference mortgages known to be particularly toxic and hence prone to failure. Bear in mind that the entire motivation for buying CDOs was to provide diversification by pooling a random set of mortgages from across the country of varying degrees of risk. Goldman did the exact opposite, they handpicked a pool of the most highly correlated, lowest quality mortgages they could find to guarantee the CDOs would fail. As soon as they sold these CDOs, they then bought insurance against them so they could profit from the inevitable failure. Moreover, by creating synthetic CDOs Goldman inflated a secondary (derivative) market that actually dwarfed the underlying mortgage market, thereby putting the entire system at risk when the whole pyramid inevitably collapsed. In all of this of course there were two main patsies, one of which was the overseas investors who were told these pieces of garbage were "AAA" rated securities which is how Goldman represented them to investors (thanks to the rubber stamp of the corrupt Ratings agencies). The other patsy of course was AIG who actually sold insurance guaranteeing these CDOs would not fail, much of which was not bought by investors to hedge their exposure, but by speculators hoping they would fail. The ultimate patsy however was the American taxpayer who ended up having to bail out AIG to the tune of $180 billion for the most part to pay off the speculators who had been betting against the U.S. middle class. What sick irony that the U.S. middle class tax payer was forced to bail out the scum bags who were betting that ordinary people would lose their homes. Were it not for the bailout of AIG, most of the speculators against the CDO market would have lost their bets and Goldman Sachs might not even exist right now. The fact remains that in the fall of 2008 there was a run on all of the investment banks - not just Lehman Brothers. Goldman Sachs was just a little further up the chain and rescued by the massive Bernanke/Paulson give-away.

So what did Goldman get for all this? In addition to getting $13 billion of the taxpayer AIG bailout money, for the bets they made against the very products they had created, they also "earned" roughly $3.7 billion in fees to originate these "crap products" (their own words from an email); products which had an average shelf life of about 18 months before self destructing and hence jeopardizing the entire financial system. Bear in mind, these were not trades in the secondary market. These were not junk bonds after-the-fact, trading for cents on the dollar, these were junk bonds at the point of origination that were marketed as high quality/high price (low yielding) securities. I submit, in what other industry can a company manufacture what is by their own admission a shit product, take out insurance against its failure and then still be in business two years later making record profits and paying out record bonuses? The analogy would be like Ford manufacturing fire-prone Pintos in the 1970s AND taking out life insurance on the buyers !!!

That there are still cheerleaders in the press and on Wall Street defending this type of destructive rent seeking and greed addled behaviour is a sign of the times and shows that the age of nihilism has reached a new all time low.