The Argument for More Regulation
I am confused by the recent argument for more financial regulation. The argument seems to go that because Goldman Sachs may have committed fraud, then we need more laws making more things illegal. But Goldman Sachs is accused of breaking existing laws. Isn't that just an argument to enforce the laws we already have? In fact, the government so far is stopping short of its full power to go after Goldman over the Abacus securities -- its seems like they would have a criminal fraud case but at the moment they are settling for a civil action. In a sense, the government is not using against Goldman all the power it already has.
Of course, a cynical person could argue that the government has no real desire to go after Goldman, who after all is pretty deeply in bed with this Administration, and is pulling its punches in a show trial that will end up with Goldman fined .01% of its quarterly profit but with the Administration looking tough to fuzzy-headed voters and with Congress having something it can wave around to distract people while it passes another 1400 page bill no one has read.
Evil Red Scandi:
The argument I always use in these cases is that the situation calls for less regulation, which at least throws people for a loop and gets their attention. What people desire from regulation is a feeling of security and a knowledge they will never get screwed. But no government regulatory regime - no matter how severe - can ever provide that. I have plenty of friends and family who grew up in the USSR where the government regulates every facet of existence and they had far less security and got screwed constantly.
Regulations cause people to get screwed over more often because they provide a false sense of security. Regulators at best provide spot checks on things; that is, when they're not being bought off either directly (with promises of cushy high-paying jobs in the industry after they retire) or indirectly though campaign contributions to the legislators that oversee them.
At the end of the day we have to look out for ourselves. We can rely partially on private sources of information (friends, family, research services, brokers, etc) that earn our trust but the only rule that always applies is "life's tough: wear a helmet."
April 21, 2010, 8:46 amMethinks:
"Of course, a cynical person could argue that the government has no real desire to go after Goldman, who after all is pretty deeply in bed with this Administration, and is pulling its punches in a show trial that will end up with Goldman fined .01% of its quarterly profit but with the Administration looking tough to fuzzy-headed voters and with Congress having something it can wave around to distract people while it passes another 1400 page bill no one has read."
Uh....no....that person would not be cynical. That person would have spent enough time working on Wall Street to know how things are done.
This show trial makes for good political theatre - while they rob entrepreneurs of their ability to raise capital and threaten to take over any company they wish on the pretext that it is "systemically risky". Nothing to see here except how we flog our own for show.
April 21, 2010, 8:48 ampaul:
This is the same logic (or lack of logic) that people use to argue for more gun-control laws. When someone commits a crime with a gun, people clamor for more gun laws, even if that person was illegally in possession of the gun. And whatever they did was against the law, but we need more laws to make it more illegal. When gun crimes rise, we need more gun laws. If gun crimes decrease, gun laws work.
April 21, 2010, 9:17 ammorganovich:
the SEC claims fail to hold up to even rudimentary scrutiny.
they accuse goldman and ACA of designing a portfolio to fail and then buying it and holding it.
why on earth would they do that?
all they did was line up clients that wanted to bet on different things and arrange a transaction.
how is this any different that vegas sportsbook making a book for a baseball game? if you bet on the giants, they even it out by getting someone to bet on the dodgers. if they can't, they even out the money by changing the spread or the odds. they don't want to be making directional bets on who wins.
making a securities market works exactly the same way. mostly, goldman wants to arrange trades, take a fee, and have no exposure. that's how the brokerage business works.
in this case, they actually did make a direction bet by holding some of the securities, a bet that they lost. they were on the same side of the trade as the guy they are accused of screwing.
if you bet on the giants and your bookie does too, why does it make any sense to blame him if the dodgers win?
ACA is one of the most sophisticated debt investors in the world. they haven't sued because they know there is no issue.
this is just politics. in my view, deliberately mischaracterizing a situation and attacking a private actor to gain legislative traction is immoral. done by a private actor, this would be actionable as libel.
NEW YORK (MNI) - The following is the text of a statement issued by Goldman Sachs late Friday:
April 21, 2010, 9:30 amGoldman Sachs Makes Further Comments on SEC Complaint
NEW YORK -- April 16, 2010 - The Goldman Sachs Group, Inc. (NYSE: GS) said today:
We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact.
We want to emphasize the following four critical points which were missing from the SECs complaint.
* Goldman Sachs Lost Money On The Transaction. Goldman Sachs, itself, lost more than $90 million. Our fee was $15 million. We were subject to losses and we did not structure a portfolio that was designed to lose money.
* Extensive Disclosure Was Provided. IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities. The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side.
* ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions. ACA had the largest exposure to the transaction, investing $951 million. It had an obligation and every incentive to select appropriate securities.
* Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SECs complaint accuses the firm of fraud because it didnt disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.
Background
In 2006, Paulson & Co. indicated its interest in positioning itself for a decline in housing prices. The firm structured a synthetic CDO through which Paulson benefitted from a decline in the value of the underlying securities. Those on the other side of the transaction, IKB and ACA Capital Management, the portfolio selection agent, would benefit from an increase in the value of the securities. ACA had a long established track record as a CDO manager, having 26 separate transactions before the transaction. Goldman Sachs retained a significant residual long risk position in the transaction
IKB, ACA and Paulson all provided their input regarding the composition of the underlying securities. ACA ultimately and independently approved the selection of 90 Residential Mortgage Backed Securities, which it stood behind as the portfolio selection agent and the largest investor in the transaction.
The offering documents for the transaction included every underlying mortgage security. The offering documents for each of these RMBS in turn disclosed the various categories of information required by the SEC, including detailed information concerning the mortgages held by the trust that issued the RMBS.
Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities ended in the reference portfolio or how they were selected.
The transaction was not created as a way for Goldman Sachs to short the subprime market. To the contrary, Goldman Sachs's substantial long position in the transaction lost money for the firm.
Methinks:
Morganovich,
you post irrefutable logic.
Hence, the politicians will be in a mad rush to cram this bill down our throats to prevent anyone from doing anything productive in the future.
April 21, 2010, 10:12 amelambend:
the best argument for regulation that I've seen has come from Simon Johnson. First of all, he does make the argument that all regulations are worthless if not enforced and points out that this has been a major part of the problem. Next, he main argument is that banks cannot to become 'To Big to Fail'. Several banks right now are operating on an implicit guarantee from the government (a la Fannie and Freddie) and are able to borrow at a rate below that of regular market participators. This competitive advantage is what is driving their profitibality right now. Johnson argues that these banks must be made smaller and and any such implicit garauntee must be explicitly ended. He does not like the current regulation because it sets the current size of the banks as the biggest they can get, yet they are actually bigger now than before the financial crisis hit. Furthermore, it sets the responsibility for bailout to an 'independant' organization. This is government garauntee by another name. The currently proposed new regulations will not prevent further bailouts and, despite the banks wailings, preserve their favored position vis-a-vis other businesses. They get their corportist place under the sun.
(on a tangental note, the same proposed regs (the dodd ones anyway) put some strangely onerous requirements on raising money for start-ups, effectively locking out mom and pop from getting in on the ground floor. It will not only make raising money harder, it will ensure that only the already wealthy can benefit from funding start-ups.)
April 21, 2010, 1:51 pmEd Darrell:
The spur for regulation is the crash of 2008. Goldman Sachs latest tribulations are a small part of the whole drama.
Anybody remember Santayana and what he said?
April 21, 2010, 1:53 pmSBABG:
@elambend - Bingo. Big Business always gets bigger when Big Government grows. They are symbiotic.
Tim Carney's book Obamanomics does a great job spelling out how and why.
http://www.amazon.com/Obamanomics-Bankrupting-Enriching-Corporate-Lobbyists/dp/1596986123
Carney also spoke on a Cato panel about his finding. The video is at fora - worth the hour watch.
http://fora.tv/2010/01/12/Obamanomics_Is_Obama_Bankrupting_America#fullprogram
April 21, 2010, 2:19 pmThe Truth is Out There:
My belief is that "SEC v Goldman" is just an opening gambit.
In the near-term it's going to help Obama get Financial Services Reform passed on his terms, obviously. But it also gives Obama a soapbox to shift blame for the woes of the economy. It also distracts attention away from MSM reporting on unemployment.
The Levin Senate Investigations Committee hearing on April 27 is key. The witness list is made public tomorrow -- expect Lloyd to be on it. Without the prelude of "SEC v Goldman", this hearing wouldn't have gotten the same attention. Instead, expect fireworks. I'd bet that Lloyd is on the cover of the New York Post the next day, and it won't be flattering? "Dr. Evil" will be the headline.
At a minimum expect to learn that Goldman and others were in effect shorting the mortgage deals they were doing back in 2006 - 2008.
"So Lloyd, why didn't you and Goldman give warning back then -- instead of profiting from our collective misfortune?"
"Lloyd, how much did you get paid in 2007. Answer: $70 million.
"Then when it got really bad, you came to us in late 2008 for a bailout." Answer: Yes.
"Lloyd, how much did you get paid in 2008" Answer: $41 million.
"Lloyd, how much has your Goldman stock gone up since the bailout." Answer: over $300 million.
It could get even worse for Lloyd, depending on what the Committee has in hand from the subpoenas it sent out months ago. Can you say "AIG." Goldman's role in the run on Lehman could come up. Lloyd's pleading the Fifth isn't out of the question.
McCain is on this Committee -- he has a hard on for Goldman because he thinks Hank Paulson pulled a bait and switch with TARP and that it cost him the election.
Lloyd must be good at his day job, obviously. He may be a great guy too -- I don't know anything about him personally. But he's a horrible committee witness -- even compared to a Ken Lewis -- Lloyd's already shown this. Expect some awful soundbite clips to come out of Tuesday's hearing.
After the hearing, we'll see a new narrative develop -- few will still care about the nuances of "SEC v Goldman."
After that, who knows. Obama & Co may ease off the gas, or accelerate. One of Obama's objectives will be to keep us all busy so we're not undermining "global warming theory" as he prepares to get Energy enacted . If the peasants get stoked enough, expect NYAG Andy Cuomo to go after Goldman over AIG, etc -- and maybe Lloyd personally. Cuomo's already hit BAC's Ken Lewis with civil Martin Act charges. Cuomo's running for Governor -- he needs distracting issues too.
April 21, 2010, 2:40 pmmesaeconoguy:
This is a scripted show trial to provide the SEC with a façade of competence, even though the case is prima facie absurd, as is the subsequent call for reform.
There is real and immediate danger in requiring banks or broker dealers to maintain positions/not maintain positions in financial instruments, and huge danger in eroding the sophisticated investor, institutional investor class and designation. The downstream effects of this are staggering, and potentially deadly to financial institutions.
April 21, 2010, 3:31 pmepobirs:
http://online.wsj.com/article/SB10001424052748704508904575192430373566758.html?mod=djemBestOfTheWeb_h
This article covers it pretty well. The issue isn't a lack of regulation but a lack of regulators with an interest in actually carrying out their duties.
April 22, 2010, 12:49 amanon:
"The spur for regulation is the crash of 2008. Goldman Sachs latest tribulations are a small part of the whole drama."
If you think about it, more hedge funds like Paulson & Co. with transactions like these (enabled by Goldman) and the crash would not have happened.
Paulson (John, no relation to Henry) did what no regulator could do -- find a bubble. He warned everyone about it -- by betting $1B that the bubble was going to burst.
If 1,00o Paulsons tried to make this bet, the bubble would never have formed.
We're punishing the canary for killing the miners.
April 22, 2010, 6:22 amPat Moffitt:
Your point about existing law is a good one. However the intent here seems to be the creation of new laws that prevent crime before it happens-- a very slippery slope.
April 22, 2010, 6:49 amMichael Miller:
Actually the "disgorgements" should come to .02% of quarterly profits. The additional .01% will be stealthily deposited into several numbered Swiss Bank acounts, which will be immediately vanish without a trace into the electonic vapors of the global banking system.
April 22, 2010, 7:43 am