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Scapegoating Goldman Sachs

A dismal spectacle.

9:44 AM, Apr 27, 2010 • By MATTHEW CONTINETTI
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It's hard to feel sorry for Goldman Sachs. The investment bank has tremendous wealth and political power. I support efforts to break up such institutions, and I find it interesting that Democrats with ties to the big banks are often the same ones who argue that bank-busting won't solve anything. Nevertheless, the recent campaign against Goldman is an astonishing display of political gamesmanship. It's a clear effort to blame the financial crisis solely on the big banks. Summoning the Goldman team to prostrate themselves before Congress today is part of that effort. Don't let Carl Levin fool you: We're all responsible for the financial crisis.

Scapegoating Goldman Sachs

Sen. Carl Levin, Democrat of Michigan

The more you look at the SEC complaint against Goldman, the flimsier the regulators' case becomes. It's a civil case, not criminal. It was so ordered on a 3-2 party-line vote, a rarity for enforcement cases. The government will have to prove that John Paulson's relationship with Goldman was "material" to the sale of the Abacus synthetic CDO -- no easy task. The New York Times seems to have heard about the action before Goldman did. Establishment voices like Sebastian Mallaby and Fareed Zakaria raise the right concerns. Zakaria:

Evidence may yet be presented that documents specific misrepresentations and false claims by Goldman, but much of the public debate has struck me as guided more by emotion than careful analysis. Even if some Wall Street practices seem dodgy, or unethical, that's not the same as illegal. I want financial reform, but I also want our system of governance to be characterized by fair play and equal justice -- even for people making $10 million bonuses.

What's more, the selective release of Goldman emails over the weekend disturbed none other than Paul Krugman:

If you want to argue that Wall Street is corrupt, fine; but don’t use emails showing Goldman employees crowing over their success in shorting housing — which is ugly but doesn’t amount to wrongdoing — to make your point. (Use the rating-agency emails instead; S&P may not be a vampire squid, but it did enormous harm).

Congress is mad at Goldman Sachs because the bank made money off the housing crisis. Sorry, that's how capitalism works. At the most basic level, investment banking is hard to distinguish from gambling. Goldman bet that the value of mortgage backed securities would fall (the short position). But it also made some bets that the value would rise (the long position). Taking out short and long positions is called hedging risk, and hedging is not illegal. It's not even "ugly." It's a way to protect against loss.

You may not like the idea of profiting from the housing bust. You may think, as I do, that the U.S. financial sector is out of control; for too long the banks have ignored their traditional function of allocating capital and spent all their time at the Wall Street casino. Normally, that wouldn't be a problem, but the financial crisis showed that the banks really aren't playing with their own money, their playing with the taxpayer's.

But it is hard to argue that Goldman's hedging made the crisis worse. Many, many other things take precedence over greed: government policies that encouraged shoddy lending and excessive consumer debt, lax monetary policy, ratings agencies that handed out AAA labels like dime store candy, regulators who were out to lunch or watching porn. If anything, a proliferation of shorts was the first sign that something had gone terribly wrong in the housing sector.

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