Levin hits on the main points of mainstream revulsion

Posted on April 28, 2010 by Danielle Park

Very long day of testimony today on Capital Hill. The nub of the matter comes down to what our society deems ethical versus what present laws deem illegal.
Tonight's segment where Senator Carl Levin questions Goldman Sachs CEO Lloyd Blankfein on their products, procedures and ethics hit on many of the most important questions. Whatever the outcome of the SEC legal case, I think these hearings are helpful in revealing to the masses the nature of investment banks and their business model. Our society has been doing deals with this devil for many years now to allow us to borrow and spend without restraint. Now that we have seen the peril of our ways, there is a push to get the leverage genie back in the bottle. Hopefully now it is clear to taxpayers and law makers that we should not again allow ourselves to be hostage to bailing out gamblers and their reckless bets. We need renewed rules to separate and divide legitimate banking and hedging from risk-seeking and speculating.

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7 Responses to Levin hits on the main points of mainstream revulsion

  1. Anonymous says:
    April 28, 2010 at 6:10 am

    Congress will be hearing from Goldman Sachs today in relation to SEC charges that Goldman created synthetic CDOs based on real estate mortgages suggested by a hedge fund that wanted to sell massive quantities of the CDOs short, that Goldman knew the CDOs were likely to plunge in value and didn’t tell investors it sold the investments to, and may have even profited by selling the housing market short themselves in anticipation of its collapse.
    Goldman and Wall Street firms say they did nothing illegal. I’m no lawyer and that may well be. However the SEC does have lawyers, and I understand their lead lawyer’s previous career was in charge of the legal department of a major firm that was also heavily involved in creating CDO’s. So the SEC and its lawyers probably have more legal insight into the situation than do the anchors on CNBC who are so loudly defending Goldman.
    Yet some of what the paid Wall Street lobbyists and Wall Street cheerleaders on CNBC are saying makes sense.
    One example they use is that if Charles Schwab & Co creates another mutual fund that it sells to investors, or recommends a stock to investors, it has no obligation to tell investors if it knows that some of its other clients are selling the fund or stock short, and in fact would probably get in trouble for doing so.
    True. However, it’s not quite as clean an example as it sounds on the surface. Schwab would not load up a mutual fund for investors with stocks recommended by a hedge fund that believes the stocks are going to plummet and wants to sell the fund short.
    However, the real question is not whether Goldman had a legal or moral obligation to let investors know more about the risk in the synthetic CDOs it created. The question is whether synthetic CDOs should be allowed to exist at all.
    During the good times, banks and other lenders packaged mortgages and sold them as investments, their ratings depending on the quality of the mortgages in each package. As investors, particularly hedge funds, clamored for more ways to take advantage of the housing boom, banks and brokerage firms met the demand by splitting those previous packages into risk ‘tranches’, and reselling them again as collateralized debt obligations.
    As demand increased there weren’t enough mortgages to break up into CDOs. So Wall Street came up with the bright idea of creating ‘synthetic’ CDOs, or credit default swaps, which didn’t need real underlying assets.
    They “created imagined value out of thin air”, says George Soros, founder of $27 billion hedge fund Soros Capital Management. He should know.
    Their creation and sales pumped up the credit bubble and worsened the structural damage when the bubbles burst, with losses in the $trillions as real money that was invested in the bubbles of thin air simply disappeared. Soros says the process went on for years “and cannot be allowed to continue.”
    Other knowledgeable participants and analysts say they have no purpose except to game the system and hide losses.
    So keep that in mind as you hear how Goldman broke no laws. The real question is should synthetic investment products be abolished. Should banks at least be banned from trading in them?
    Warren Buffett Wants an Exemption for Himself.
    Warren Buffet is famous for having said a number of years ago that derivatives are “weapons of mass destruction.”
    So it’s interesting that as debate heated up over coming Wall Street regulations and that they may require more transparency and controls over derivatives, Buffett began lobbying heavily to have any new rules apply only to newly created derivatives such as CDOs, and that pre-existing derivatives be exempted.
    No wonder. It has since been revealed that Buffett has a $63 billion derivatives portfolio in his holding company Berkshire Hathaway.

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