Goldman Sachs took a beating during the spring. The SEC and a Senate committee were investigating whether it behaved improperly when it participated in a bet against the shaky mortgages fueling the housing boom and allegedly failed to disclose this to buyers of its “synthetic collateralized debt obligations.”
The allegation of wrongdoing is an empirical question, of course, but a few things occurred to me as the case was unfolding:
Financial firms have been roundly criticized for their “herd mentality”—that is, their incentive to run headlong into too-risky mortgage-backed instruments because everyone else was doing it. No firm wanted to be on the sidelines having to explain to its clients why everyone was making tons of money but them. Yet here Goldman went against the herd, and was coming under fire precisely for that reason. By betting against the sustainability of the boom (if that’s what it did) on the basis of hedge-fund trader John Paulson’s analysis, it injected needed information about the housing bubble into the market. More information is always better than less, and no social good would come from restrictions on activities that produce information that goes against the trend, such as short selling and trading credit default swaps. Whether fraud was in the picture, I can’t say (it seems doubtful), but I am confident that Goldman’s hedge strategy—and its delight over making money when mortgage-backed securities started losing value—would have drawn criticism in any event. It’s a no-win situation.
Second, the absolute worst place to get to the bottom of things is in Congress. Every member of the committee had an overriding incentive to engage in demagoguery, information be damned. Goldman Sachs is not exactly a positive household name, so which congressman could have resisted the temptation to denounce the company in public? It’s an easy target with no downside risk.
If there is evidence of criminal activity, there are appropriate agencies for such investigations. Better yet, if the “victims” of Goldman Sachs really believe they are victims, let them sue. This is not to say that criminal-justice agencies are above demagoguery—politically ambitious U.S. attorneys are notorious for it—but at least we should be spared the spectacle of self-righteous congressmen pontificating on matters for which the Congress itself is heavily responsible: the housing boom and encouragement of dubious mortgages. We already suffer the obscenity of Sen. Chris Dodd and Rep. Barney Frank rewriting the financial rules to prevent, so they say, a repeat of the debacle that they themselves did so much to bring about. These people are the systemic risk.
Finally, we must not lose sight of the fact that whatever Goldman did, it was in the context of a corporate State, a banking cartel, and loose fiat money, in which Big Finance exercises extra-market power derived from the rules written by Congress and the regulatory agencies. That’s the derivative to worry about.
These are hardly free-market enterprises. It is no coincidence that current and former Goldman principals have their fingerprints all over the government’s bailout response to the meltdown and that the firm was a major beneficiary. In an actual free market—without inflationary fiat money, implicit guarantees behind underwriters of dubious mortgages, and regulatory protection against open competition—a financial debacle such as we’ve seen is unlikely to have occurred. Even so, that doesn’t mean that everything that went on was a crime.
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