Goldman Sachs - Wall Street's High Rollers
If the Senate Permanent Subcommittee on Investigations delivered any message this week about Wall Street it was this:
"It's gambling, pure and simple, raw gambling," said Senator Claire McCaskill of Missouri.
It was Wall Street as Casino Royale--starring Goldman Sachs as James Bond, running a complex, high-stakes game that made Texas Hold 'em look like Old Maid.
"I think most people in Las Vegas would take offense at having Wall Street compared to Las Vegas," said Senator John Ensign of Nevada. "Because in Las Vegas, actually, people know that the odds are against them."
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The chips in Wall Street's casino, were home mortgages. Millions of mostly sub-prime loans, bundled together by banks and sold to investors as something called a Collateralized Debt Obligation, or CDO. Instruments, McCaskill said, "That are created so that people can bet on them."
In many ways, trading on Wall Street was like stepping up to a craps table, according to the committee. Only, for years, virtually all the players -- banks, hedge funds and pension funds -- were making the same bet: that mortgage-backed securities would continue to pay off and the housing bubble would never burst. The betting became so hot the CDO industry grew from $68 billion in 2000 to $481 billion in 2007.
The casino got so packed Wall Street actually ran out of loans to package. So it created a new game: "synthetic" CDOs -- allowing clients to bet on assets they didn't even own.
"That's what a synthetic CDO is," said McCaskill. "I don't know why we need to dress it up. It was just a bet. That's all it is."
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And this week Congress accused Goldman Sachs and others of stacking the deck.
"The guys on Wall Street were in there kind of tweaking the odds while you were playing it," said Ensign, "and in their favor the vast majority of the time."
Case in point: The two billion dollar Abacus deal in which the SEC charged Goldman of letting one client of hand-picking the toxic loans in the CDO, but never informing clients on the other side of the bet.
"Don't you also have the duty to disclose an adverse interest to your client?" charged Committee Chairman, Senator Carl Levin of Michigan. "Do you have that duty? Do you?"
In fact, Goldman said they don't have that responsibility, arguing it's all part of the game played by Big Boys who knew -- or should have known--the risks they were taking because they were spelled out up front. For example, on page eight of the Abacus deal:
"...presentations may not contain all the information that would be material to the evaluation of the merits and risks..."
Translation: Forget about disclosure. Or conflict of interest. It's Buyer Beware.
"Well, I don't think Goldman did something wrong," said Daniel Sparks of Goldman.
But even the shadiest Wall Street games eventually come to an end. In this case, Merrill Lynch, Wachovia, Lehman Brothers and Bear Sterns folded. And those that survived, like Citi and Goldman got bailed out. All costing taxpayers an estimated $100 billion.
"Hard working struggling taxpayers are left to pick up the tab," lamented Maine Senator Susan Collins.
But it was only Goldman, one of the smaller players in the CDO game, that got hauled before the Senate, a symbol of excess and of unremitting greed. Unbowed, Goldman executives from CEO Lloyd Blankfein on down were unwilling to accept any blame.
"In the context of market making, that is not a conflict," Blankfein testified.
Now Congress is trying to re-set the rules on CDOs and other so-called derivatives. And, no surprise, Wall Street is anteing up, fighting back, determined to keep the doors of its own private casino from closing.