This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
Carl Levin is really, really mad at Goldman Sachs. That's why he's dragging CEO Lloyd Blankfein (and six other Goldman execs) in front of his Senate Subcommittee on Investigations this morning. I am popping my popcorn right now, because this is nothing more than pure political theater.
Before you get too nuts, let's review a few core concepts about capital markets. There's nothing wrong or illegal about taking the other side of a client's position. Even within firms, there can be conflicting views about the direction of a given asset class.
Back in 2007, there were going to be Goldman clients that thought the housing market would continue to rise and those that thought it was destined to fall. Not even the SEC's allegation of fraud against Goldman is centered on taking the other side of a trade; rather it's about disclosure and materiality. Yes, synthetic CDOs exist purely for the betting purposes, but they aren't illegal. And, the transactions that Levin is likely to highlight weren't with retail investors, they were with sophisticated investors who held a contrary view to the one that Goldman held. (Those poor German bankers!)
That said, when you peel back the onion that is Wall Street, it stinks. For years Congress and regulators have relied on existing rules, the firms themselves and the inept rating agencies to manage the inherent conflicts of interest that exist. If we don't like those conflicts, then lawmakers better go back to the drawing board on regulatory reform. Given where that process stands, I'm not too optimistic that we'll advance the cause.
Until lawmakers are willing to take responsibility and take a bold stand on real regulatory reform, we are left with the political theater of these meaningless hearings.
Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.