BREAKING NEWS: Goldman Spread Risk? That’s Very Old News!
Posted by Larry Doyle on April 26, 2010 8:43 PM |
The Washington Post just broke a news story, Senate Panel Finds Goldman Spread Risk Through Financial System, highlighting the fact that a Senate investigation has determined that Goldman Sachs actually ‘spread’ risk via its distribution and dissemination of structured transactions. Really? And this is supposed to be news?
If there were any doubt that the American public was being played like a fool throughout this economic crisis, this story just confirms it. Why?
Read and review this excerpt from The WaPo’s story:
The investigation by the Senate Permanent Subcommittee on Investigations suggests that Goldman’s actions may also have helped fuel the financial crisis by creating risky investments and then ensuring that other parties were exposed when they lost value.
Excerpts of hundreds of internal Goldman documents released by the committee show that Goldman created and sold complex investments backed by risky home loans. Then, Goldman also bet against those investments by buying a type of insurance that would pay out if the underlying home loans went bad.
“Goldman Sachs was slicing, dicing, and selling toxic mortgage-related securities on Wall Street like many other investment banks, but its executives continue to downplay the firm’s role in the financial engineering that blew up the financial markets and cost millions of Americans their jobs, homes, and livelihoods,” said Sen. Carl Levin (D-Mich.), chairman of the subcommittee.
Now, please read and review this excerpt from my commentary of November 12, 2008 (yes, 2008) entitled, The Wall Street Model Is Broken…and Won’t Soon Be Fixed!!,
In 2005 or thereabouts, Wall St. had such a voracious appetite for volume of collateral product that they pressed the envelope even further and came up with “synthetic” structures. These structures purely used a pool of known collateral (be it sub-prime mortgages, home equity loans, corporate loans, et al) as a reference pool for the stream of cash flows in the deal. Wow!!
Under the “originate to distribute” model, Wall St. hired reams of financial quants and engineers to structure deals. Wall St. grew their distribution efforts globally to sell these products far and wide.
Life was good!! . . . or so they thought.
Wall St. actually started to think they were as smart as everybody told them. Wall St. thought that their own models were so robust because they had the smartest minds build them. Wall St. thought that they had become so effective at “distributing” risk that they were blind to the fact of just how much risk they “created.” Then the music stopped. The Fed needed to increase rates to slow the pace of inflation that was emanating from global economic growth, especially in Asia. Mortgage rates reset at higher levels. Freddie and Fannie started to show signs of distress. Wall St. pressed so hard that they “killed the goose that had laid the golden eggs.”
The mortgage and asset backed markets (including commercial mortgages) are twice the size of the overall U.S. government bond market and approximately half the size of the U.S. equity markets. The mortgage market doubled in size from the end of 2003 until the end of 2007!!!
Investors now fully appreciate that with the economy slowing and seemingly picking up speed, delinquencies and defaults will continue to ratchet higher. The embedded losses are only exacerbated by the massive leveraging that occurred via the use of “synthetic” cash flows. No, the media has no appreciation for this and will not share it with the public.
Where are the other shoes that have yet to drop??
Please refer back to the “synthetic” structure that I discussed. These synthetic structures grew exponentially with the growth of a product called the “credit default swap” or CDS. This product, in theory, is outstanding because it acts to protect investors against defaults on the underlying referenced corporation or entity (such as sub-prime mortgages). That said, instead of helping to distribute risk, the CDS market has effectively “created” risk because it has grown to the point where it is now 10 times the size of the overall corporate bond market that it is supposed to be tracking.
While the media is following the tunes played by the combined Washington-Wall Street orchestra, the media has done the American public a great disservice by not fully probing the extent and timing of the underlying issues emanating from Wall Street and exploding on Main Street.
Goldman Sachs created and spread risk? Each and every Wall Street bank was involved in these types of transactions.
Little wonder why people no longer read the news. Why? It’s not new.