The National Catholic Review

Normally, it is better to put pins in your eyes than to watch a congressional hearing. But, today is not a normal day. Today, executives from Goldman Sachs, the Wall Street investment firm recently indicted by the SEC, will be testifying before the Senate Permanent Subcommittee on Investigations and the nation, via its elected representatives, will be able to indulge a bit of schadenfreude at least.

Goldman Sachs is accused of several things, some transgressions of the law and others transgressions of ethics. If they knowingly sold investments that had been designed to fail, that is against the law. But, the much more difficult problem that needs to be addressed is the fact that most of what Goldman Sachs evidently did was perfectly legal. They bet against the housing market. Wall Street now lives on futures and derivatives and hedges and the Devil knows what else, none of it directly related to creating a more productive economy with good-paying jobs or a sustainable manufacturing sector, all of it directly related to making lots and lots of money for the Wall Street firms.

E-mail exchanges among Goldman Sachs executives have been released and they show that the company was doing what it does best: Assessing the value of different markets, betting on their future and doing so one step ahead of the other guys. Admit it, as you read about how Goldman made billions of dollars during the economic meltdown and because of the meltdown, didn’t a part of you wish you had invested with them? That itch, the sinful itchy manifestation of greed has, in today’s lower Manhattan, become a culture of greed, and the whole country will get a window into that culture during today’s hearings.

The hearings come while the Republicans are resisting Democratic efforts to reform the financial markets. Good luck with that. After today’s hearings, what will become clear is that Goldman Sachs was not getting rich based on illegal activity. This is not a case of a bad apple. Goldman largely succeeded because of perfectly legal activities that happened to take place in an unregulated market. No one is suggesting that we ban derivatives or other financial instruments. No one is suggesting that the government nationalize the financial sector. What is being suggested is that without outside regulation, this kind of malfeasance will occur again and again. I am not party to the negotiations, and perhaps the arguments being made behind closed doors are reasonable and smart. But, I can bet that after today’s hearings, the pressure to compromise will be even greater and several GOP senators will be looking for a reason to jump to the "Aye" column.

Schadenfreude is a sin, make no mistake about that. But, in a democratic society, the instinct to see the mighty fall is a healthy one and, in this case, a just one. It is now clear that Goldman executives not only took delight in the misery of others, they took billions of dollars from families losing their homes because of the collapse of the housing market. It is not enough to appoint regulators, there should also be some expression of public shame. In colonial times, towns put transgressors in the stocks and pillories, making them the object of public scorn. Today, the congressional hearing is the equivalent. Be sure to tune in.

Michael Sean Winters


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Anonymous | 4/28/2010 - 9:31pm
Bush had little if anything to do with the financial crisis.  If there were no bad loans there never would have been a problem and he can hardly be tied to these loan practices.  He did cheer on home ownership and thought it socially worthwhile to increase home ownership but he had nothing to do with creating the bad loan practices or sustaining them.  There are some obvious targets for that.  Also without the bad loans, housing prices would not have risen so fast, roughly about 35-40% over normal levels in the first six years of the decade.  This meant that without the bad loan practices economic activity would have been less but housing was not the mainstay of the economic growth during the period 2001-2007 but definitely part of it.  
Three things drove the bad loans, first the permission set up by lenient loan policies in the 1990's and the stigma as well as regulatory pressure imposed on financial institutions if they did not make the loans, the tremendous amount of money in the world that resulted from high economic activity in the period 2000-2007 that was then in search of investments to increase this pool (world wide money supply rose from 36 trillion in 2000 to 72 trillion in 2008), unscrupulous lending activities by mortgage brokers who suffered absolutely no adverse effect from a foreclosure.  The tremendous amount of money in the world was fueled by economic activity all over the globe but especially in the US by tax cuts and low interest rates.  One potential landing place for this money was mortgage bonds in the US and this created great pressure to provide even more.  Here is an extremely funny but all too accurate account of what happened.  It appeared almost a year before the crash.
It was not just the US that was hit hard in 2008, but also several other countries in Europe and elsewhere.  If one wanted to witness absurd housing prices one only had to go to Ireland in 2007 and 2008.  Townhouses in Dublin were going for $20-$30 million dollars that even in New York would fetch only a million or two.  I understand similar things happened in Spain and other countries.  European banks lost trillions in bad loans around the world that had nothing to do with the United States.
If you want to identify the causes of the crisis here in the US, they are the permissive loans and the attitudes created in the 1990's not to qualify potential home owners accurately, the low interest rates created by Alan Greenspan which helped create the high economic activity around the world and the subsequent asset bubble, the tremendous pressure by Wall Street for instruments to satisfy the huge demand for investments for the 72 trillion dollars in money that was floating around the world and the unscrupulous mortgage brokers.   Could it happen again?  Certainly but what is going on in Washington now will not prevent it.
Jeff Bagnell | 4/28/2010 - 4:33pm
if it's good enough for Mark Levin, it's good enough for me
Jim McCrea | 4/28/2010 - 3:57pm
My comment was directed to Jeff S, not Jeff L.
Jim McCrea | 4/28/2010 - 3:56pm
Jeff:  if you want to be taken seriously, statements like "- the Democrat-party-inspired -" won't help.
It is the DemocratIC Party, and the other one is called the RepublicAN Party.  The last time I looked, I saw/heard no commentator of any strip refer to the "Republic" Party.
Anonymous | 4/28/2010 - 11:51am
Yes the large investment banks all showed profit this quarter. They borrowed 'evil' government money at less than 1% and loaned it out at 6% or more. even I could make money that way. When you liaten to Ca. ball games you hear a tax law firm advertize ' The McCourts who own the LA Dodgers paid no Fed or State tax on 100 million earnings. Call us for tax advice'  Moskowitz tax law firm..
Anonymous | 4/28/2010 - 10:50am
I would add that, to me, there is something unseemly about liberals, who have barked for some 10 years now, about due process and fair justice for people accused of terrorism, insisting on civilian tribunals to try people, now so willingly piling on to Goldman in order to score political points.  They did nothing illegal, and I'll leave aside for now whether it was unethical, but that "show trial" yesterday (that was Evan Thomas's words on Charlie Rose last night, not mine) was flawed.  The reason they have a target on their backs is because they came through the economic crisis with a profit, but everyone forgets that if the housing crisis had NOT occurred, they would have likely lost their shirts on some of these deals.  And if getting rich during an economic crisis is so offensive to liberals, then they'll have have to explain how the first family of liberalism, the great Kennedys, should be exempt from their ire.
Anonymous | 4/28/2010 - 10:38am
I responded to your question, Mr. Bindner, by pointing out that none of the leading narratives that I am familiar with regarding the causes of the financial crisis point to the Bush tax cuts as a major factor.  I am afraid you don't understand the nature of the securities that Goldman created and sold; they were not sold to individual investors by and large, but were entered into with financial institutions or entities such as other banks (AIG being primary) and hedge funds (where its probable high net worth individuals had money invested).  The nature of these financial instruments just aren't suitable for individuals with a lot of money; they are primarily used to hedge risks on other exposures that an institution has.  Is it not curious to you that NONE of Goldman's customers on these instruments are suing them, but rather just the SEC in the name of the investors?  These institutions KNEW what they were getting; they ASKED Goldman to create the securities for them. Blankfein was adamant in trying to explain this yesterday, and as usual, the ideology of both sides was having none of it.
I think its entirely legitimate and necessary to discuss whether this wild west capitalism should be allowed or not or highly regulated or not, but before we can have that discussion I think people need to understand the facts of the matter, and Mr. Bindner, Bush's tax cuts simply aren't a fact that is directly relevant, at least in any significant manner to the causes of the financial crisis.  Again, take off the ideological lens.
James Lindsay | 4/28/2010 - 10:38am
The positions I have are neo-Keynesian, although I have not published them and won't attempt to, since the journals only publish PhDs. This is not to say they aren't based on sound research. You can duplicate it rather easily. All you need is a copy of the historic budget data. I find that economic growth in one year can be predicted based on the financial performance of the budget the prior year - with the deficit being offset (or the surplus enhanced) by the payment for net interest. For example, if you run a deficit of $300 billion but your net interest is $200 billion, the net impact on the financial markets of the government is $100 billion in deficit. If you run a surplus of $200 billion and pay net interest of $200 billion in injection (which reduces the impact the government has on the credit markets). To normalize the data, it was expressed in GDP percentage terms and compared with the GDP growth rate in the next year. A slope adjustment was necessary, since graphical analysis of the data showed that for Republican regimes to have growth, they needed to borrow more in the prior year. Democrats had to run a surplus to get the same effect - meaning the more they paid back (or have the deficit be less than net interest) the better they did. The thing that most differentiates the two regimes is, of course, tax policy - which conforms with a keynesian view of things - since Democratic tax policy usually generates lower deficits or surpluses via progressive income taxation while Republicans generate deficits by cutting taxes on wealthier taxpayers and must therefore borrow money from the same in order to increase the consumption sector of society. Democrats, on the other hand, get more growth almost automatically via tax policy that takes money out of savings or investment in secondary markets and puts it into consumption - allowing them to return money to bondholders without decreasing consumption as a whole.

This experience is confirmed in every regime since the end of the second world war, although the Obama recovery is pretty much dependent on deficit finance - primarily because taxes have not yet been raised on the wealthy - although they are about to be. My prediction based on the economic data of the past 65 years is that when the Bush cuts on the wealthy are allowed to expire, the deficit will shrink and further growth will result.
James Lindsay | 4/28/2010 - 10:06am
I asked a question and still have not heard the response. I asked what the top 20% of households who got the biggest tax cuts used the extra income for, if not investment in the markets for stocks and mortgage backed securities. So far, I have not received an answer. I also find it odd that people are denying that these funds went into the investment sector when, as I understand the premises of supply side economics, the whole purpose of such cuts is precisely that these funds be invested. You cannot have it both ways without looking silly. The fact still remains that if taxes had been higher, many people would have had less to invest in mortgage backed securities. If the extra liquidity did not come from tax cuts, where did it come from. I accept that low interest rates allowed people to do ARMs and that came from monetary policy - however, unless your contention is that the money for purchase of mortgage backed securities was entirely leveraged, I suspect that a few trillion dollars in tax cuts had something to do with it. If such securities were entirely a product of leverage rather than people with money looking for somewhere to investment, show me the paper trail.
Anonymous | 4/27/2010 - 10:19pm
Some commentators here suggest that it's the Goldmans that supply the money to start jobs & businesses. The total stock trades in USA today was 12.77 billion shares.  It's venture capital that funds new jobs and business. If you asked Goldman to fund new jobs and businesses they would escort you quickly to the door/street. would they help you buy a company and lay off workers, break it up =parts worth more then whole.???. now your talking their game.
Tom Maher | 4/28/2010 - 1:02am
Goldman Sachs for 140 years has been and is a major investment banking company. One of the main functions is to issue new stock for new and existing publically held U.S. and foriegn companies along with other investment banking companies. New issues (IPO) are hugh continuous flow of private capital into American industries and is part of what makes American enterprises so numerous, large and prosperous. (The daily trades on all stock exchanges though in the tens of billions of dollars are thousands of times smaller than the total stock issues outstanding of all American companies which are measured in the tens of trillions of dollars.) Investment banking is a super big deal source of strenght in the American economy. Most of Americas economic infrastructure has been built by stock equity financing. Investment banking is a hugh engine of American continued economic growth, technical advanced, productivity and continued economic advancement.

Additionally Investment banker issue corporate and municipal bonds bonds and commercial paper which are also hugh fiancicial sources of the American economy.

Goldman Sach are big time operator that provides very needed and important financial services to the American economy. It makes no sense and is very politically exploitive that this American institution be the scapegoat for the system wide near financial collapse of 2008.
Anonymous | 4/27/2010 - 11:29pm
The SEC is the fraud (along with these bozo politicians and their partisan defenders)!  It needs to shape up or ship out!
Anonymous | 4/27/2010 - 8:43pm
Well at least Goldman got its million dollar's worth (contribution to Obama) in bully government today.  If the Democrats' hope is in Carl Levin, go with God!  Interesting that they extracted a "commitmnet" from Goldman to financial "reform".
FWIW, Tom Coburn is the most intellectually honest politician in the country.
Tom Maher | 4/27/2010 - 8:38pm
The telivised Senate sub-committee has not made any case against Goldman Sachs. It is distubing to see politicians attemping to warp normal time-honored practices of trading securities into something other than what it is.

If anything is to be learned from the committeein hearings it is how ignorant the Seante is of our basic economic insitiutions. Investment banking raises hugh amounts of private capital from around the world for private U.S. business and industry which in turn provide and sustains jobs in the United States. To rejoice that this intitution should be harnmed or diminished for unsubstatiated political purposes is highly distructive, irrational behavior steeped in ignorance. How can Catholics be sympathetic or support such alienated nihlistic thinking? It is wrong to use or exploit legitimate business as political scapgoats so as to appease the ignorant, strange and alienated.

Once agains the Seante hearings demonstrates to all that government is not the solution; governemnt is the problem.
Stanley Kopacz | 4/27/2010 - 7:06pm
Wall Street seemed a casino to me and appealed to the get rich quick gambling mentality. Listening to coworkers and acquaintances who dabbled in it did nothing to disabuse me of the notion. By staying clear of it, I'm in very good shape. Worked, saved money, drove cars into the ground, did my own auto and home repair, stayed away from the stock market, paid off all my debts. I'm probably ok now for the rest of my life.

Michael Bindner has the right idea about cutting out the unnecessary financial behemoths. They should be chopped down with or without reform. However, there are too many people suckered in to the rocks by their siren song. An appealing alternative to false dreams of excessive prosperity for everybody needs to be found. Self-formed worker collectives would be great. Would the corporate-owned government stay out of THEIR way?
Helena Loflin | 4/27/2010 - 5:39pm
This well is poisoned.
Jeff Bagnell | 4/27/2010 - 5:18pm
Tax cuts for the wealthy went into the bubble??  Huh?  First of all, it's our money that is being taxed and taken from us, and not just from the "wealthy."  Second, the Bush tax cuts were minimal.  Third, is the contention that the extra money we earned, which we got to keep as a result of these minor tax cuts, went into speculative mortgages??  Geesh, don't come to America for economic analysis.  Oh and higher capital gains taxes?  Great idea!   All that will do is slow economic activity, resulting in a reduction of revenue to the Treasury, which has been proven every time taxes have been raised to punitive levels.   
Anonymous | 4/27/2010 - 5:06pm
I should add the major problem in the last financial crisis was the "too big to fail" mentality, which I believe BOTH political parties share fault for both creating and failing to adequately regulate.  But the attempt to shift the blame to either Republicans in general or George W. Bush in particular is disingenuous.  After all, how many Democrats voted for the Bush tax cuts at the time?
Anonymous | 4/27/2010 - 5:00pm
"If the money from the tax cuts from the wealthy did not go into the bubble, then, pray tell, where did it go?"
So its your assertion that wealthy individuals who received tax breaks invested the net gains from those breaks in subprime mortgages or financial instruments based on those financial instruments, & that this, in turn, caused the housing bubble which in turn brought on the Great Recession?
If that is your argument, it is a wholly novel argument, & one I am unaware of in any reporting on the causes of the financial crisis (Sorkin, Michael Lewis, the Congressional Investigations, etc.).  Wealthy individuals, by and large, did not invest in or were not parties to the synthetic CDOs created by Goldman; the counterparties to these contracts were large financial institutions (other banks, hedge funds, etc.), hence the domino effect when 1 counterparty went belly up.  I don't mean to be contentious, but your Bush tax cut explanation is simply a very minor factor, if at all, in the financial crisis.  Lower fed funds rates had more to do with it than anything, and were a response to the tech bubble a few years before.
William Kurtz | 4/27/2010 - 4:48pm
MSW's concluding comments were on target. Now if we could get this (or any) Senate committee to bring forth the authors of the Iraq debacle for hearings. If this ever happened, I would like to see Rumsfeld, Wolfowitz et al asked this question: Did you honestly believe the war would go as quickly, easily and cheaply as you said beforehand? Or did you realize it would be more difficult and costly than you said, but were afraid that a less rosy-eyed prediction would make Congress (and the people) less willing to invade?
James Lindsay | 4/27/2010 - 4:46pm
I will agree that the bubble was started by Clinton - and have said as much - by lowering capital gains rates. Bush, however, replaced a bicylce pump with a fire hose.

If the money from the tax cuts from the wealthy did not go into the bubble, then, pray tell, where did it go?
Tom Maher | 4/27/2010 - 4:41pm
Senator Levin sub-committee inquiry into Goldman Sachs reveals a glaring ignorance on the part of Senator Levin and his staff on how marketes work. Incredibly Seantor Levin main complaint is Goldman Sachs doing "hedging", a perfectly ordinary, proper and time-honored actively that reduces risk. All participants in any market hedge. It is essential market behavior of a markets. Nothing sinister or worthy of comment or notice at all. As one Goldman Sachs execuive said its a very mundane activity.

Seantor Levin mistakenly thinks hedging is sinsiter. Seantor Levin objects to Goldman Sacks betting agaist their own position, But that is exactly what hedging is technically by definition. Long positions are always offset by short positons for the same amount or quantity. Hedging greatly reduces risk exposure and therefore is always done in any market.

Senator Levin's cynical iterpretaions of Goldman Sachs market activities are wrong and uncalled for.
Vince Killoran | 4/27/2010 - 2:57pm
Hi all-three quick points:
1. I think we discussed Jeff L.'s argument last week.  Here's my post again about $$ and legislators: 
Mary Bottari, director of the Center for Media and Democracy’s Real Economy Project and editor of the website, has been tracking the money this year and it's going to candidates who oppose Congressional members who support consumer protections that cut into their bottom line.
2. Jeff S. claim is one that has made the rounds but there is no evidence to support it, e.g., most subprime loans were made by firms that aren’t subject to the CRA.
3. David Smith's mention of Catholicism is interesting-since everyone has focused on what the bishops had to say two months ago how do they weigh in on banking and business ethics?
Anonymous | 4/27/2010 - 2:17pm
I just want to relay this quote from Politico:
"[A]ccording to the Center for Responsive Politics, Goldman Sachs employees contributed $994,795 to Barack Obama during the last election cycle, a sum that is "more than the combined Goldman haul of every Republican running for president, Senate and the House.'"
Oh my.  Does this uncomfortable fact change anything?  Nope, guess not.
Jeff Bagnell | 4/27/2010 - 1:19pm
Yes it was the Democrat-party-inspired "Community Reinvestment Act" that was the genesis of all the bad loans.  This was forced on the banks in the name of liberal feel-goodism, giving everyone  a chance to own a home, whether they could afford it or not.  The Bush tax cuts?  Please.  If tax cuts were to blame then the same thing would have happened when Reagan cut taxes.  Liberals have never met a tax they haven't liked, but they won't call it a tax but "revenue" instead.
Anonymous | 4/27/2010 - 1:09pm
This post blatantly distorts the entire situation in an attempt to tie GOP objections to current Dodd bill to Wall St. greed.  In my opinion, it is nothing less than intellectually dishonest.  Its not that I object to Mr. Winters being a liberal or the left of center POV of America; I fully realize as a conservative reading America where its coming from.  What I object to is the distortion of my party's position, and the generally flimsy understanding of the Goldman situation (hence the reference to Goldman being ''indicted'', which is not the case), and the ''spin'' of this as a bunch of hacks unconcerned about ordinary Americans.  Yet Mr. Winters ignores the comfy coziness of his own party with the policies that created this mess.  Mr. Bindner, your revisionist history about the Bush tax cuts creating the bubble is flatly wrong.  PBS did a interesting show recently on this: the bubble was created by the Clinton economic team.  Again, no objection to liberal opinions, but is it too much to ask for some intellectual honestly?  The Jesuits are rightly famous for requiring such and educating some of us to do that!  yet too often the commentary falls into GOP BAD, DEMOCRAT GOOD.
James Lindsay | 4/27/2010 - 12:53pm
The title of the magazine is America, last I checked.
James Lindsay | 4/27/2010 - 11:02am
Actually, Goldman took money from people who bet on whether families could pay their mortgages. If more people were shorting mortgages earlier, the rating agencies might not have rated mortgage backed securities so highly and liar loans would not have been so prominent. Goldman did not take money from families - they dealt in mortgage backed securities. Their investors took that money. If no investors had been demanding these bonds, it is very likely that most of these people could not have gotten (or would not have been pushed to accept) bad loans that they could not afford.

The real problem was that there was so much money out there to buy bad debt at high interest. This was almost a certainty when Bush pushed his tax cuts on the wealthy and on dividends through Congress, not once but twice. If this money had been taxed rather than invested in these securities, the bubble would not have happened and the money collected would have likely gone to housing assistance that would not have proven to be a trap for home buyers.

This was a case of price inflation in the investment markets. Too much money chasing too few assets.

If I were on Wall Street or in the financial sector at all, I would welcome regulation right now. The alternative is, well, alternatives to the financial system like employee-ownership of companies and those companies deciding to offer financial services to employee-owners at low or no interest (which is quite possible if the employees own all the shares - so that the loans need not be a profit center). If it becomes common for such firms to offer mortgages, educational loans and consumer credit loans (like payroll lines of credit), many in the financial sector will find themselves out of business. See more on this on my web page.

The more the financial sector is dysfunctional, the more people will both seek and create alternatives. Regulation is in the interest of Wall Street, as the alternative is oblivion. We will see if the GOP is forward thinking enough to see this. I doubt it.
Anonymous | 4/27/2010 - 10:49am
Wow, how can we get Jeff and Tom worked up about the bishop's coverup? And  Goldman does not need their help either.. Goldman has billions in profits  so a billion fine here and there is small change. GS is up this morning  ..not a bad spec either. Goldman is dominating the investment banking business.. Why ?? Lehmann died and  despite all the howling, the US Gov, did not nationalize the banking business; as we heard from the 'right' all last summer. Maybe Jeff and Tom  have good things to say about the Obama Market up about 80% in a year.
Anonymous | 4/27/2010 - 10:46am
1. This blog is a cheap political smear job that betrays a fundamental lack of knowledge about derivatives, the GOP objections to the bill & the legal system.
2. This cheap political trick is disingenuous for the following reasons, among others: Goldman Sachs executives are major Democratic donors, and 2 of their most recent CEOs are major Democratic party figures: Robert Rubin & Jon Corzine; Chris Dodd, the man writing the bill to 'save' the little guy from Wall Street greed, took special deals and favors from, among others, Countrywide Financial, on his own house mortgage, the subprime market was essentially created because liberal Democrats, raising the specter of redlining and racism, pushed banks to lend to people who shouldn't have been lent to, regulations re: trading derivatives were ADDED by Dodd to GAIN GOP SUPPORT, not in spite of it.
3. The GOP desire to shape the regulatory incentives is aimed at ending the 'too big to fail' mentality that Democratic policies during the Clinton years created.  This blog attempts to cast these objections as an extension of Wall St. 'greed' & avarice; this is a disingenuous move.
4. This blog exemplifies some of the characteristics of the recent NY Times story re: the abuse crisis that many of the writers have objected to.  It would be behoove all of us if Mr. Winters had laid out some GOP objections and responded to them rather than vainly attempting to smear people who don't support Dodd in its current form as nothing better than a bunch of greedy Goldman hacks.
Tom Maher | 4/27/2010 - 10:01am
Fact check. The SEC (Securities and Exchange Commission) has NOT indicted Goldman Sachs. Indictment is the result of a preliminary criminal judicial proceeding that determines whether any criminal acts may have been committed. The SEC has not alleged any crimianl acts on the part of Goldman Sachs.

The SEC has brought a civil complaint against Goldman Sachs, a much less serious non-criminal complaint. The civil complaint has not been heard or proven by a court and therefore can not be fairly used as evidence of anything.

Separately, Senator Levin is investigating Goldman Sachs in a very public. anything-goes way. Senator Levin before the hearings has even begun has publically repeatedly accused Goldman Sachs of wrong doings. Goldman Sachs has not yet had a chance to defend itself before the Senate Judical committee where Senator Levin is chairmen. This one-side public condemnation by Seantor Levin before any facts are presented and rebuttal made, has caused many to dobut the fairness of Senator's Levin inquiry. Is Senator Levin trying to fairly investigate and find the truth? Or is Senator Levin abusing the Senator Judicairy committee investigative authority by turning the committee hearings into a show trial to promote Senator Levin's political views?

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