Wednesday, April 28, 2010

Senate Hearing Or A Bad Circus?


Yesterday I watched on CNBC a good deal of the hearings of the Senate Sub-Committee on Investigations. Senator Carl Levin chaired the panel of senators that questioned members and former members of Goldman Sachs. Goldman Sachs for those that do not know is now a major bank, having been a major investment bank for about 140 years. They have thousands of employees with offices around the world. And, among many on Wall Street, are considered to be a very bright and aggressive group of people. Unfortunately, for me it was like watching a bad circus. The senators, instead of getting on their horse by grabbing the mane, mounted backwards, or, more accurately, back-asswards, and grabbed hold of the tail. The senators could have used someone that knew the business and could ask the right questions. Someone like Sam Dash of the Watergate era with a knowledge of bonds and how they trade would have gone a long way to make the hearing much more productive, and less a badly orchestrated circus.

The most intelligent questions came from Senator Dr. Coburn (R-OK), as the rest of the senators did not know enough about the business to discuss this subject intelligently. And, I think I am being kind with my assessment.

I do not know how you get it through the senators' heads that the biggest conflict of interest is the CREDIT RATING AGENCIES!!! If only it was as simple as a mathematical formula, I could perhaps take all my money and buy ad space on broadway in mid-town manhattan for the world to see. But, unfortunately, it is not that simple. I wish a simple formula could open the eyes of the senate, but there is little chance for that. The conflict of interest begins with the fact that the people (investment bankers/underwriters) that bring the new issue of structured financed debt, mortgages-backed bonds, to be rated, are the same people that are going to sell them to their clients, and PAY the CREDIT RATING AGENCIES for their credit rating for the new issue of bonds. With the Triple-A rating in hand, the sales force then sells the mortgage-backed bonds to their institutional clients. Without the Triple-A rating the housing bubble would have never been inflated to the extent that it was because, without the Triple-A credit rating the institutional investors would not have bought the bonds.

Attacking Goldman Sachs for shorting mortgage-backed bonds to balance their risk as a firm is plain stupid. Yes, they may have bet against the mortgage market, but that is what market makers do. At a level (price) any trader or portfolio manager may find a market over bought or over sold, and, as a result take the view that there is money to be made by either going long or shorting the market. Don't take the bat out of the batter's hands, fix the umpire that can't tell an ball from a strike.

You know, for the cost of a bed a few meals and some money for someone to watch my dog Bud, I would have gladly gone to Washington and been their Sam Dash. I would have done it for free.

Stay tuned.

4 comments:

Julie Schuler said...

I don't really know why we need all these financial products. All those bank people make a lot of trouble for everyone else. They should learn to knit or make something useful. Like, would you rather have a sweater, or a 401k that is one fourth the value it was ten years ago? I bet most people would say "sweater"

winslow said...

People in high places like to show how smart they are. Unfortunately, Congressmen are not real smart in all issues. Goldman has very intelligent employees, but they need a parent to tell them what is wrong and unethical. I've worked for CEO's that had questionable intelligence but unfortunately, called the shots to ruin many businesses. We have individuals, such as moneythoughts, that have the knowledge and intelligence, but the "powers in charge" will not ask for advice.

moneythoughts said...

Julie, I certain can appreciate where you are coming from, and I agree, who wouldn't want one of your sweater? I know I would. But, mortgage-backed bonds can be a good thing too. It can help help mortgage interest rates down and give young people an opportunity to own their own home. What caused the housing bubble to burst was the same thing that inflated the bubble in the first place - the credit rating agencies and their irresponsible and unethical behavior. That is what needs to change, and the Senators in Washington don't have a clue.

Love your art work Julie!!!

moneythoughts said...

Winslow, you and I are on the same page this time again. Why wouldn't the Senators get some people to ask the questions that knew the business. If you could have heard the dumb questions that they asked, and the wasted the opportunity to really get to the heart of the problem.

You are so right, I am not in a high enough pay grade to get to help them ask the right questions.