Tuesday, April 27, 2010

The Goldman Affair

Sometime in a hearing room, long ago (or so it seemed by the end of the hearings) Carl Levin called in the kids from Goldman Sachs for a little chat. By chat, I mean hearing and by hearing, I mean group interrogation.

A lot of the media coverage centered on Levin's use of the word "s****y" as quoted from a Goldman e-mail. And while it was a direct quote, it had the unfortunate side effect of shoving the real information out of the way. I am sure that much will be made of the use of that word by the media. Whatever. Oh, except for CNBC's Jim Cramer. Stop apologizing for these guys, will you? Nobody wants to buy junk or crap. Nobody. Seriously, you sounded like an idiot.

What I saw was a rare peek into the inner workings of both Washington and Wall Street. And let me tell you, it is not a pretty sight. As a serious believer in free enterprise and a free market, I was interested to see how the Senate would come down on the issues surrounding Goldman. Between the push for the Financial Reform bill and midterm elections around the corner, one would expect a lot of posturing. And posturing we got.

The Senators get to tell their constituents that they stuck it to Wall Street and the Wall Streeters get to tell their pals they stuck it to the Senate.

However, we also had a look at how it really works when it finally came down to Carl Levin and Lloyd Blankfein. Before we got to that, there were panels of Goldman executives doing their absolute best to not directly answer a lot of questions, most of them loaded or too technical for actual comprehension.

We had the mortgage trader who was not sure what a stated income loan was. We had the division manager who really didn't see how packaging troubled loans with solid ones to get a good credit rating was a problem. We had the Senator who wanted to somehow get one of the execs to take the blame for the entire financial crisis. We saw the Senator who wanted to try to defend Goldman without defending them. We had hours of this stuff and more.

We also had a couple of interesting and informative points. One came when the trader who built the security that is at the heart of the SEC lawsuit against Goldman admitted he allowed the hedge fund manager to help designate the contents of that security knowing the hedge fund was going to bet against it be shorting it heavily. Sadly Claire McCaskill moved onto other matters rather than dive into that point. Full disclosure - I caught that when pointed out by FBN's Eric Bolling who made no excuses for Goldman and had good words for Levin. How refreshing.

Another was the blatant admission by a Goldman manager that he would select the bond rating firm that would give him the better rating. That also did not get the scrutiny it deserved

But the real look at how it works came when it was Levin and Blankfein. The heart of Levin's questioning was about the inherent conflict of interest that Goldman and all investment banks have.

In getting there, we had our peek behind the curtain. Levin came prepared with mountains of notebooks. Depositions, reports, e-mails, charts, tables and indices. And he made sure Blankfein had all the same documents. Frequently a staff member would whisper in Levin's ear when he had asked a question. Often Levin corrected himself.

When confronted with internal e-mails from his own staff calling securities crap and worse, Blankfein seemed to not know much. There was a lot of "I don't know," from the guy who supposedly knows it all. Blankfein actually said he had no idea that certain pension funds can only invest in AAA rated items.

And that is how it works on Wall Street and in Washington. They actually don't know. On purpose. Back just a few years ago, this was called "plausible deniability." Now it is business as usual.

Levin and Blankfein went around for quite a long time. I saw a CEO trying to look cooperative without cooperating and a Senator trying to look fair minded without any real fairness intended. Put them together and you had 2 masters hacking away at each other with carefully crafted and molded questions and answers.

When all was said and done, Levin made his point about conflicts of interest and intentionally selling junk. Blankfein managed to not actually admit to any of that while acknowledging it.

I recently posted that I thought the civil case should have been a criminal case. Now I am not so sure. I still believe that Goldman will settle for a pile of money and no admission of wrongdoing. But that will be a matter of convenience and not contrition.

But criminal? I just don't see it. Blankfein has a veritable army of lawyers to keep his firm right on the edge of legality. Not so much ethical, but legal. None of the stuff that came out today was an out and out violation of the law. Most of it was highly unethical and some of it just plain wrong, but not illegal. I have to correct myself from my earlier post on this point.

And therein lies the other peek at the inner working of Washington and Wall Street. They know exactly where the legality line is and pay platoons of people to keep them on the good side of that line. There is really no line for ethics to worry about. The powers that be in DC and on Wall Street know this. And they take full advantage of it.

You can't legislate ethics or morality. Either people are ethical and moral or they are not. That is where our political and business leaders fail us over and over. They trounce ethics and morals. Ignore them. But they always pull up right at the legality line. A false apology and back to business as usual.

We are the ethical and moral measures for these so-called leaders. We get to make that call. Whether it is at the ballot box in November or that proxy vote that you get with your stock holdings. We measure and rate them with our votes.

While I cannot vote to fire Lloyd Blankfein, I can vote to fire my elected officials, and I fully intend to do so. I think it is time to replace the whole lot of them. And that will put the Wall Streeters on notice that the new government is not going to play patsy and roll over. All of the bribes - sorry, campaign contributions - will be for naught.

As a member of the board of the USA (all 300 plus million of us) I move that we elect an entire new Legislative Branch. Do I hear a second?

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