How Goldman Tarnished America
July 23, 2009 | Posted in Operations & Finance
Terry Savage is a nationally known expert on personal finance, the markets, and the?economy. She writes a nationally syndicated financial column for the Chicago Sun-?Times.
Though it doesn't deal directly with agriculture or farm equipment, I found this perspective particularly interesting. Of course, I need to provide the following disclaimer. This commentary doesn't necessarily represent the views of Lessiter Publication or Farm Equipment magazine. D.K.
It is absolutely disgusting. If Goldman Sachs is guilty of the charges brought by the SEC, these greedy pigs deserve every fine and loss of stock value that the government and the markets mete out to them.
But America does not deserve this fate, nor do the innocent employees of the company who will be brought down as this once iconic and always egotistical firm is pilloried.
Although Goldman says it will vigorously defend the suit, the battle will publicly bare the ways in which Wall Street — and Goldman, which has become a proxy for Wall Street — helped destroy the American dream of home ownership.
Of course, that destruction started with greedy-home buyers, and greedy mortgage brokers, and greedy ratings agencies. But now the laser of blame is focused directly on the process that ultimately financed that mortgaged house of cards – and on the firm at the center of the circle of greed.
What Goldman Did?
First, here's a simple explanation of what Goldman is accused of doing. They allegedly put together packages of subprime mortgages, to be sold to global investors. These packages were called Collateralized Debt Obligations (CDOs). Big international banks puchased pieces of these high-yielding fund shares, without looking into the risk of the underlying securities. Of course, American mortgages had always been viewed as secure debt obligations.
Who picked the mortgages that would go into this pool or fund? It was supposed to be Goldman. And Goldman was supposed to be acting in the interest of its clients – the banks and institutions that would buy shares in the fund.
Instead it is alleged that one "star" Goldman trader, the 31-year old Fabrice Tourre, was working closely with a hedge fund called Paulson & Co, to pick the securities. And instead of picking the best mortgage securities to put into the fund, Paulson helped Goldman pick the worst, most risky mortgage securities to put into the fund.
Why would they do that? Well, Paulson & Co had made a multi-billion dollar bet (using those over-the-counter derivatives traded between banks) that the mortgages, and thus the fund, would fail! As the mortgages within the fund securities defaulted, the value of the fund shares would collapse. But those who bet on the "short side" like Paulson would make billions.
And that is exactly what happened! Within a year of the creation of this fund in 2007, 99 percent of the mortgage securities within it had failed, costing the institutional fund investors $1 billion. But the hedge fund made at least that much, or more, by betting against the fund investors.
It's as if the dealer in a card game had purposely handed all the players the low cards, while dealing himself all the aces and picture cards from the bottom of the deck. Those sitting at the table, betting on the game, were bound to get fleeced.
Laying the Blame
Many have asked why only Goldman was charged, and not the Paulson hedge fund that helped stack the debt. (By the way, the hedge fund founder is John Paulson, and he is not related to the former Treasury secretary Hank Paulson who bears the same last name.) Of course, morally the Paulson hedge fund is indicted, and it is likely they will face huge lawsuits from those who invested, and lost money, in those mortgage fund shares.
But the SEC charges are made under securities laws – the laws that require a broker to fully disclose all potential conflicts of interest.
Just a few weeks ago, I wrote a column about the effort in Washington to get stockbrokers to abide by the higher standards of investment advisors – the "fiduciary rule" that requires registered advisors to put their clients interest ahead of the their own, and to fully disclose any conflicts of interest.
That proposal was sidetracked to a "study group" – because everyone in Washington knows that you can't make money – or pass laws – if you have to fully disclose all conflicts of interest. But now you see why the big firms in the brokerage and insurance community opposed this legislation.
In Goldman's case, this blatant conflict of interest and the lack of disclosure that they were the cardsharks at the table, dealing from the bottom of the deck, will likely result in a win for the SEC when the case ultimately comes to court.
In the meantime, they have given fuel to the fire that demands increasing regulation over Wall Street activities. Never mind that government regulators had the laws, and the power, yet still completely failed to uncover scams ranging from Madoff to the current Goldman conflict of interest.
Scamsters will always be attract more smart minds than regulatory agencies, simply because they can make more money on the dark side of the street.
But the real loss is to the future of America, which needs the free enterprise system to provide growth and opportunity, as well as pay down our existing debts. Every over-regulated economy in history has failed – from the USSR to Cuba – to provide for its citizens, despite the good intentions of government planners.
The name Goldman will live on in infamy. Hubris – the sin of pride – has brought them down, and an important piece of America is now at risk.
There's an ultimate irony: Gold, the precious metal, cannot be tarnished. But Goldman has forever tarnished its name — and the free enterprise system.
And that's The Savage Truth.
About Terry Savage
Terry Savage is a nationally known expert on personal finance, the markets, and the?economy. She writes a nationally syndicated financial column for the Chicago Sun-?Times. Her articles also appear online at Moneyshow.com, the popular investing?website, and also have been featured on YahooFinance.com and TheStreet.com.
Terry is a frequent guest on television and radio shows including CNN, NBC, and?CNBC. She's appeared several times on Oprah! She co-hosted CBS-TV's Chicago?morning show in 2010, and appears on their evening news, commenting on the markets and the economy.
She's in demand as a speaker at business meetings across the country. Her lively?presentation style entertains as well as informs, whether talking about global economics, investing techniques, or personal finances. In 2011, Terry was named a "Top5 Speaker" in Economics/Finance as a result of popular votes at the Speaking.com web site.
Terry's most recent book is The New Savage Number: How Much Money Do You?Really Need to Retire? Coming out in Spring, 2011 is a new edition of The Savage Truth on Money, which was named one of the ten best money books of the year by Amazon.com when the first edition came out a decade ago. Says Savage: "Those Truths remain valid, though I've updated guidance and numbers in this edition, which is aimed at those just starting out – or starting over!"
You can read Terry's columns, as well as post questions and comments on her blog at www.TerrySavage.com.
Terry's financial expertise comes from experience. She started her career as a?stockbroker, and became a founding member -- and the first woman trader -- on the?Chicago Board Options Exchange. Savage was also a member of the Chicago Mercantile Exchange where she traded interest rate contracts and currency futures. She is a registered investment advisor for both stocks and futures.
Terry Savage has won numerous awards, including the National Press Club award for Outstanding Consumer Journalism, and the Outstanding Personal Finance Columnist award given by the Medill School of Journalism at Northwestern University and two Emmys for her television work.
Savage takes an active role in America's business community. She serves on the Board of Directors of the Chicago Mercantile Exchange Group, and previously served on the boards of McDonald's Corporation for 14 years and Pennzoil-Quaker State Corporation for 5 years. She was a recipient of the Director's Choice Award honoring selected women who serve on America's top corporate boards.
She is a Phi Beta Kappa graduate of the University of Michigan, where she won a?Woodrow Wilson Fellowship in American Studies.
KEYWORDS goldman Sachs Savage SEC suit
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