ON GOLDMAN, ON BEAR, ON UNIONS, ON SENATORS, ON PEOPLE….

4/29/10

Several thoughts on the Goldman hearings, the SEC suit, financial regulatory legislation, etc. I may have to break this down into several posts, but maybe not; it is broken down into sections, partially to avoid overwhelming my readers. Here goes:

--CNBC had AFL-CIO President Rich Trumka on this morning and, predictably and perhaps justifiably, he was railing against Wall Street. When the host (Erin Burnett? I guess I should pay closer attention to the personalities on CNBC.) asked what he would like Wall Street to do, Trumka spewed such pabulum as “Pay their fair share,” “Make credit available to small business,” and, of course, accede to a transaction tax, which, according to Mr. Trumka, would create millions of jobs.

Mr. Trumka would have displayed more credibility if he said, in response to his questioner, that Wall Street ought to get back to its traditional role in the economy, which was raising capital for businesses, and move away from its what certainly looks to most observers as its current role of placing bets on esoterica with the downside socialized and the upside thoroughly privatized. How can I use a term like “esoterica” when Wall Street will argue that it is merely contributing to the efficient operation of the capital markets? Are 5th derivative securities (the subject of the SEC suit, at least according to my calculations) absolutely necessary to the “efficient operation of the capital markets”? Do hedgers really need such securities in order to protect their positions?

--The big news in the Wall Street Journal this morning on the ongoing SEC suit against Goldman is that GSC Group turned down Goldman’s offer to construct what became Abacus 2007-AC1. According to an e-mail composed by Goldman trader and 31 year old wunderkind Fabrice Tourre (the type of guy, by the way, who has all the risks in our economy and financial system under control, so no need to worry…just keep buying stocks and “betting on America,” but I digress), “GSC had declined given their negative views on most of the credits that Paulson had selected.” When GSC passed, ACA took up the task of…well, we don’t really know at this point. (See the latter section of my 4/27 post “HAVE YOU NO SENSE OF DECENCY, SIR?”)

Clearly, GSC’s taking a pass is interesting, but not as interesting as an earlier revelation that Paulson & Co. approached Bear Stearns to do what became the Abacus deal but Bear turned Paulson down for reasons that are not entirely clear but that had to do with risk and concern for the impact of the deal on its clients. When Bear refused, Goldman took the deal.

Now, a few caveats. First, I have been away from active participation in the markets for almost twenty years, and maybe Bear changed a great deal in the time between the stage of my career during which I was slinging junk bonds around and the firm’s demise a few years ago. Second, two of my favorite people in the world, or certainly in the money business, worked at Bear Stearns at one stage or another of their careers, one for almost all of his. (One of my regrets about no longer being “in the business” is my having lost touch with both these guys, though I remained in touch with one of them even after I was only tangentially involved in the business, but, again, I digress.) All that having been said, to those who dealt with the Bear during much of its storied history, hearing that Bear turned the deal down is perhaps the reddest of red flags. This would be akin to former 10th Ward Alderman and current convicted felon Ed Vrdolyak not getting involved in a real estate deal because he felt it was unethical.

--One does not have to be too cynical to think that Wednesday’s Goldman hearings, for all their historic import, were little more than yet another extortion attempt on the part of our public servants in the U.S. Senate. Goldman has been exceedingly generous with the political types. Since 1989, Goldman has been the largest corporate contributor to the Democratic party, providing a total of $20.3 million to the party of the people, according to the Center for Responsive Politics. Goldman employees gave community organizer Barack Obama $1mm for his presidential campaign. Lest any readers think I am, or Goldman is, is being partisan, the Republicans have reaped nearly as much largesse from Goldman over the years. But maybe it’s not enough; maybe our Senators want more and are merely showing Goldman what they could avoid if they only pay a little more protection money. And the message certainly has not been lost on Goldman’s Street colleagues: Do you also want to be harangued by a pack of hyenas with the financial knowledge of fifth graders? Well, pay up and maybe you’ll have no trouble.

It seems to have worked; note an upcoming (next Monday) fundraiser for Senators Kirsten Gillenbrand and Chris Dodd at a private Park Avenue residence of a Wall Streeter. $19,800 will let one achieve “host” status for “a political discussion” with these two estimables.

Lest anyone think that Goldman is an innocent victim here, like young Vito Corleone’s employer who was forced to hire Fanucci’s ne’er-do-well nephew, please don’t get that impression. Goldman seems to enjoy buying influence; it appears to be a vital part of its business model.

--One also does not have to be too cynical to think that these hearings were just a massive effort to get Republicans onboard for the financial reform bill being cooked up by the Dems in Congress and the Obama administration. This, too, seems to have worked. Do you really think that it was the flushing of the $50 billion bailout escrow fund that brought the GOP onboard? Of course not; the Republicans came onboard when the rage of their constituents was stoked by Lloyd Blankfein’s stumbling, yet still arrogant, performance under the grilling of Carl Levin and Company.

--One further does not have to be too cynical to think that these hearings were yet another attempt to absolve the American public in general for any culpability for the recession and near financial meltdown from which the likes of Fabrice Tourre are currently rescuing us. Sure, Goldman, and all of Wall Street, had a role in that financial fiasco. But the “crisis” had its roots in Americans’, and I might even say most Americans, borrowing too much money in order to finance a lifestyle to which they felt they were somehow entitled. There may have been many dark forces at work here (See my 4/22 post “TRY A LITTLE PROPAGANDA ON THEM”), but, ultimately, it is the people who borrowed too much money to buy things they couldn’t afford in order to impress people about whom they really didn’t care who are at least as culpable as anybody else, including the firms that provided the financial equivalent of heroin the people were craving.

--And how do I feel about the financial regulation bill? True to my overriding philosophy, I think such further regulation is completely unnecessary, unwarranted, and potentially dangerous. If the government would stay nearly completely uninvolved and let the Wall Street firms and the banks bear the consequences of their actions, we wouldn’t have had the problems from which the Wall Street Wizards are currently extricating us, according to the company line being blared in the financial media. That is, if the government didn’t insist on socializing the downside, these guys wouldn’t be taking the risks they are currently taking. A reversion to the partnership structure that prevailed on Wall Street when things worked, and worked not only for Wall Street, as Michael Lewis has suggested, would also help. But simply letting Wall Street bear the brunt of the downside of its risky bets would put things in order quite quickly. Regulation won’t work; Wall Street people are smarter, and better incentivized, than the regulators.