WHO CARES IF GOLDMAN SACHS BET AGAINST U.S. HOUSING?
The media and the general public is up in arms over the fact that Goldman Sachs “bet against the US housing market” and effectively “bet against America”. Some investors have even gone so far as to call this “predatory short selling”. Why is it only predatory when they are shorting? What about those “predatory” longs? What about all those people who helped drive the bubble in housing higher? Why aren’t they “predatory longs”? Why isn’t the Fed and the US government blamed for being “predatory” when we know for a fact that they substantially contributed to the housing bubble? Have they not substantially contributed to the boom/bust cycle in the USA that got us here to begin with?
The free market works. I have bet against many bubbles in my life. In my opinion, it’s betters like myself and Goldman Sachs that normalize markets. When investors get greedy there are willing market participants who bet against this “predatory” long action. Every trade has two sides. The price discovery between that buyer and seller is part of the free market.
Of course, this doesn’t justify the fact that many of these banks created instruments and leveraged them up in a fashion that resulted in excessive systemic risk, but the act of betting against something is in no way inherently evil. In fact, I would argue that it is generally healthy.
I think a big problem or issue is that investment banks such as Goldman shorted “America” and then when things went to hell turned around to the same government/people and stuck their hands out begging for bailout and financial support. You can’t and shouldn’t have it both ways and I’d be perfectly fine with any investment bank/hedge fund/insurance company doing what ever it pleases as long as it’s allowed to fail.
True and it brings up what I believe is an important facet of the current regulatory debate. If you’re going to operate like a hedge fund then we need to ask ourselves a few things:
1) Why are these “banks” (Goldman still has its bank holding co status – ha) commingling client deposits with their risk taking arm?
and
2) Why is a hedge fund like GS public to begin with?
“Why is a hedge fund like GS public to begin with?”
actually blankfein answered that question in the Q and A. clients wanted goldman to be able to buy from and sell to it a broad range of securities at reasonable prices. to do this, you need a massive inventory, which needs to be financed…which means you must be public.
goldman is a great investment bank that realized that as long as it was going to make markets for clients, it could participate in those markets as principal and make alot of money…all money center/investment banks do this, goldman just does it better.
there are conflicts to face doing this, but the one thing that most people don’t realize is that the essence of investment banking is to place yourself in a conflict position…the bank is an intermediary between a corporate client wanting to raise financing and institutional clients who want to provide financing…as viniar said, these conflicts are mediated by price.
plus, there is still an undercurrent of anti-semitism in all of this populist outcry, and goldman is more jewish than other peer institutions. you may not agree with this, but it is still a small part of what you are seeing with goldman
I don’t have a problem with someone being on either side of a trade. The problem I have is when the Ratings Agencies rate an inferior product as Triple A when in fact they were Junk!
The short side of the GS trade realized that it was Junk but sold it to the Longs as Triple A.
I think that is more than misleading.
Goldman didn’t rate the securities and ACA had the choice in picking the securities. Not to mention they were told by Paulson’s fund that Paulson was on the other side of the trade. As mentioned ad nauseum, these trades all imply a buyer and a seller on either side. Hell, that’s how just about every brokerage and exchange works! Customer buys instrument A at price X, Broker sells instrument A to customer and then aims to buy the same in the market at X-1, thus creating an arbitrage profit. I dont understand how the notion is being floated that a market can exist without both buyers and sellers – I mean this is something that’s existed since the beginning of civilized society!
This whole thing is an absolute political stunt. It’s about 10x worse than the Congressional hearings on steroids in baseball. They’re aiming to incite the public solely to pass legislation and appear as if they’re appeasing the public (and thus keep their seats in Congress).
That being said, I also think its a bit unreal for Goldman to have gotten bailed out and then given a free arb trade to ride for over a year and a half so far. However, I also remember the panic in the market when the bailouts began and basically any single rumor about an investment bank could send the stock spiraling down to the tune of 20%+ in a matter of minutes. This then causes a run on the institution’s money and triggers default as it drops below capitalization ratios – all mainly due to fear in the short term. But I think a price should have been attached to this. I don’t see why both a purchase of these toxic assets AND a 0% financing was provided to largely one industry.
But there are many paradoxes with the whole situation that must be considered and at the end of the day what we really should be talking about is what can/needs to be changed and what cannot. Instead of this political posturing to accomplish personal innuendos.
leverage is the problem and nothing else. as it’s always been. failability goes out the window. experimentation, evolution, and “free markets” go out the window. bailouts, moral hazard, and power re-accumulates… even leverage for student loans sucks people into overpaying for MBA’s and doctor degrees… it’s just too hard to face for all of us
If you build a house with the absolute lowest quality components (and perhaps even knowingly faulty ones), whose contractors are suspect, but all “to the letter of the law and building code”, then make the market for insuring 1000X the value, knowing full well that the protection buyer supervised the house design/construction … yah, there’s nothing dishonest there. Wilful deceit causing damage is all they have to prove in the civil case.
a key point from Blankfein yesterday is that Goldman saw its role as a designer of products to give investors desired exposures. Their role was to make sure that these products did exactly what they were supposed to do based on the representations. guess what – THEY DID. That is a key point in GS’s opinion – it doesn’t matter if John Paulson, George Washington, or Jesus Christ designed the portfolio or was on the other side of it. All that matters is what was in the portfolio, and those components were disclosed.
anyway, TPC, you didn’t even get to the people who blame the Paulsons and Magnetars of the world, because, get this, if they hadn’t been on the short side, the longs couldn’t have gotten long these products! and if Magnetar hadn’t contributed tiny equity tranches, then the ignorant money eating up the senior tranches (which were 10x larger!) might not have had a product to lose money on… that is the worst argument of all, in my opinion.
But the “Paulsons and Magnetars of the world” asked banks to create these products for the specific purpose of betting against them. What’s the social value of that?
who said anything about social value? that’s a WHOLE different ballgame… although i think it’s not a stretch to assume that the BUYERS of the assets thought they were getting a social value by picking up yield vs other AAA assets…
i certainly don’t think social value is a necessary criteria for evaluating the veracity of a product – but again, that’s an entirely different topic and debate.
Without greater fools overextending themselves buying MacMansions and taking out HELOCs there wouldn’t have been a housing bubble for lazy and greedy investors who failed to exercise due diligence to go long and for Goldman, Paulson and others to profit by going short.
The biggest sinner of all is a corrupt government that distorts the free market by bailing out losers.
Everyone is looking for free lunch. That’s the problem.
” What about all those people who helped drive the bubble in housing higher? Why aren’t they “predatory longs”? ”
TPC:
As you well know, GS played it both ways. They helped drive the bubble up and then, when they decided to exit, being a big player, they did it with the finesse required to exit quietly (i.e., without precipitating a big price decline in sub-prime securities).
What, IMO, they did wrong was to underwrite sub-prime securities after they knew it was a bad product. They did the equivalent of P&G selling a detergent that destroys your clothes instead of cleaning them! I do hope they get nailed on the willful lack of proper disclosure.
It is quite plausible that Paulson (the former treasury secretary) played down the sub-prime problems/bubble and its potential effect on the economy so as not to disturb the “trade of the century” going on at his former firm. And that is a lot more disturbing to me that whatever the people at GS did. GS employees may be excused for worrying more about their pockets than the US economy but a treasury secretary cannot.