Goldman always wins

Goldman Sachs CEO Lloyd Blankfein

P.T. Barnum, the great American circus showman, may or may not have actually said of his customers, "there's a sucker born every minute," but it's a maxim that could just as well have applied to the recent financial crisis.

I'm reminded of the apocryphal quote after reading Gretchen Morgenson and Louise Story's somewhat convoluted, but nonetheless interesting report in today's New York Times on how the investment bank Goldman Sachs allegedly played both sides of the market for mortgage-backed securities and is now being scrutinized by various regulators looking to determine whether any laws or industry rules were broken:

While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.

One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded.

Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured within months of being created.

I'm no lawyer, but my take is that it's not Goldman's fault if its customers were suckers; the bank correctly saw that the U.S. housing sector was headed south and adjusted accordingly, while less prudent financial institutions were still making big bucks on complex securities tied to mortgages and couldn't wean themselves away in time to save themselves from disaster. As the firm's spokesman says in the story, it's not like these customers, pension funds and insurance companies, were rubes who didn't know what they were getting into. They were sophisticated financial players looking for high returns and willing to take risks.

Still, Goldman stands accused of some breathtakingly cyncial behavior here: selling products it didn't believe were worthy investments and then betting against them. It's as if McDonald's were caught investing in defibrillators and plus-size clothing companies. Nobody can deny, however, that Goldman made very smart moves and has come out far ahead of its competitors.

One thing I'm struck by in recent accounts of the financial crisis is the extent of "Goldman envy" among other Wall Street firms. Executives at J.P. Morgan, Lehman Brothers, Merrill Lynch, Bear Stearns, Morgan Stanley, and other big banks were obsessed with emulating Goldman's huge profits and resented its employees' reputation for being the smartest, boldest players on Wall Street. In some cases, the interfirm jealously was kind of like that of the character Jan on The Brady Bunch; just replace "Marsha, Marsha, Marsha!" with "Goldman, Goldman, Goldman!"

Yet somehow, with the possible exception of J.P. Morgan, which avoided the worst of the mortgage junk thanks to smart risk management by CEO Jamie Dimon, the other banks didn't follow Goldman's lead when in December 2006 the firm turned bearish on the mortgage sector. Why didn't they catch on?

UPDATE: Be sure to read Felix Salmon's informed analysis. Money quote:

The real lesson here isn’t that Goldman did anything scandalous. It’s just that if you’re making a bet and Goldman is your bookmaker, don’t be surprised if you end up losing.

See also Goldman's response and Salmon's custom answer to my last question.

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Obama is focusing too much on the bad stuff


Everyone's weighing in on Barack Obama's first year, and I suppose I can't resist -- with the caveat that it's far too early to judge his presidency, etc., etc.

I'm worried, frankly, but perhaps not for the same reasons as some other folks might be. Here's my overarching concern: Obama is focusing on foreign-policy problems, not opportunities. He's stabilizing the U.S. economy, working the Iran nuclear issue, trying to wind down the wars in Iraq and Afghanistan and bring peace in Israel/Palestine, struggling to contain a dangerous situation in Pakistan, and renegotiating nuclear treaties with the far-off goal being a world without atomic weapons.

Working these tough issues is necessary, especially after the mess George W. Bush left behind, and I don't have too many gripes about the new president's approach to them. What Obama's not doing, however, is more worrisome. He's not presenting a positive vision of a prosperous world, and he's spending too much time worrying about  failing backwaters like Yemen and Afghanistan and too little time thinking about the places that work, like East Asia and Europe.

Yes, it's true that in this day and age, threats can come from anywhere and failed states are often  incubators of terrorism and instability. Duly noted. Yet the United States became a globla hegemon not only by being the world's policeman and firefighter, but also by being its banker, lawyer, and retailer.

Obviously, the financial crisis has hurt America's economic credibility, but there are still plenty of countries eager to trade with the United States. A great example of a missed opportunity is Obama's recent trip to Asia, where the region's dynamic leaders were clearly disappointed that the U.S. president had so little to offer them on trade. Or look at Europe, where elites are feeling snubbed by perhaps the most "European" American president in recent memory.

Now that the health-care bill seems to be on its way to becoming law, and the economy is recovering, I hope Obama will start to focus on the future he wants to build for the world, not just the dangers he hopes to neutralize.

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