"Emancipate yourself from mental slavery, none but ourselves can free our mind.” - Bob Marley

Monday, May 25, 2009

Hen-House, Meet Fox - You'll Get Along Great! (Updated)

Carl at NOFP posted this some time ago, on the subject "Banking, Opacity and Financial Securities, Part II " in which he plumbs this paper from Goldman Sachs and then asks:

Might Goldman Sachs's four principles be the central element of what I've sought (with no responses to date), "the minimum prohibitions necessary to impose on commercial banks to stop the financial system from [collapsing again]?"
Carl's post has 2 enormous problems:

Minimum Prohibitions Necessary

Carl is certainly not a fool, but here he has set himself on a fool's mission. When lives are at stake, (many have been ruined and some will die because of the current meltdown), you do not look for minimal solutions.

Lets us look at a brief history of minimal solutions in the field of engineering, in no particular order:

The Ford Pinto: costs were minimalized by not spending $11/car to fix problems known from pre-production testing, with the gasoline tank. Did the people subsequently incinerated in Pintos appreciate the cost savings?

The first Tacoma Narrows bridge: although the design was not unique, to save money it was minimalized by making the bridge thinner than others of the same design and length. It did not end well: this video of the bridge's collapse is pretty spectacular, as long as it wasn't your dog in the car on the bridge.

The Titanic: This gem was minimalized twice: first, the partitions between the "watertight" compartments "extended only a few feet above the waterline" allowing water to spill into adjacent compartments once the ship pitched even a little. "But in an rare cost-cutting exercise, the White Star Line decided that only 20 would be carried aboard Titanic , even though that meant that on her maiden voyage, she would only provide lifeboat capacity for 52% of the people aboard."

In the real world, even solutions not known or thought to be minimalistic often come to tears.

To actively seek minimalism is to invite disaster. This is even truer in the world of financial regulation, where you have players actively working to exploit weaknesses in the regulatory regime. The incredible blossoming of CDS since it's non-regulation was enshrined in the Commodity Futures Modernization Act of 2000 is only the most blatant example. (This bill also gave us the swindle known as Enron.)

Considering the Source: Goldman Sachs

Some useful information about Goldman Sachs and it's current and former employees:

In 2004, with Hank Paulson at the helm, Goldman Sachs successfully petitioned the Bush SEC for a massive increase in the amount of leverage allowed the Big 5 Investment banks as well as a "self-regulatory" regime .

Some people would say that this is coincidence:

Of course, some people would be wrong.

Goldman Sachs themselves went on to issue some notorious highly polished turds known as GSAMP. From the same article:

Goldman said it made money in the third quarter by shorting an index of mortgage-backed securities.

Similarly, Yves notes here:

In 2007, the firm was unapologetic about its decision to short the subprime market (a big, perhaps the big reason for its departure from industry profit declines) even though it was also still trading and selling those products from its institutional desks.
In the old days, when we had a real SEC, that was called fraud.

So, Hank Paulson becomes Treasury Sec'y.

Then AIG blows up, due to writing CDS on all the crappy MBS, most notably Goldman's. Hank, along with Lloyd Blankfien - current CEO of Goldman - puts together a "bailout". Hank appoints Edward Liddy to CEO of the AIG. Edward Liddy's previous job: member of the BOD of Goldman Sachs. What a coincidence.

In an even more amazing coincidence, AIG turns out to be nothing more than a conduit for taxpayer dollars flowing to Investment Banks - and according to the graphic here, Goldman Sachs is the biggest cumulative beneficiary! What an amazing coincidence!

But that wasn't all Hank was up to - he's modern multi-tasking guy!

Again from "The Financial Crisis: An Inside View" we find:

The options that turned into the TARP were written down in an initial form at the Treasury in March of 2008—to buy assets, insure them, inject capital into financial institutions, or to massively expand federally guaranteed mortgage refinance programs in order to improve asset performance from the bottom up.
But whare was all that work when everything exploded in late 2008? Congress was presented with a 3 page "bill" that gave Hank Paulson sole discretion, with no review or recourse, to spend $700 Billion as he saw fit.

Update: This discussion is incomplete without at least mentioning how Goldman Sachs ripped the world off by orchestrating the 2008 bubble in oil speculation.

So, when Carl complains that I've only looked at the source of the magic report, rather than its ideas, I respond:

I am not expected to take as reasonable a paper by NAMBLA on the regulation of pedophiles.

I am not expected to take as reasonable a paper by the Nazi party on the regulation of anti-semitism.

For all the same reasons, and to the same degree, I will not take as reasonable a paper by Goldman Sachs on the regulation of 'financial services'.

In comments to an earlier post, Carl writes:

"Of the Wall Street investment banks, Goldman Sachs has survived with its reputation enhanced."
This is long after after the information came out about Goldman shorting the same products it was selling. All the blogs I read knew at the time - prior to the Lehman and AIG implosions - that Goldman, along with all the other Ibanks, plus Citi, were a disaster waiting to happen.

Note to Carl: The word "reputation" does not mean what you think it means.

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About Me

I'm a 57 year old geek. I voted Democratic for 20 years, because I disliked the Republicans more. But now, nobody really speaks for me. I'm for Guns, for more correct government regulation of the financial world, against illegal immigration and amnesty. (in 2008 I ended up voting Republican - too many questions about Obama, and voting against anybody who voted for TARP 1.) In 2010 I voted a stright republican ticket because the Democrats have completely lost their minds.