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.