Posted: April 29, 2010
How Goldman ruined your neighborhood
BY BRIAN DICKERSON
FREE PRESS COLUMNIST
FREE PRESS COLUMNIST
Carl Levin is a genuine Washington heavyweight, one of a handful of senators -- Arizona's John McCain, Connecticut's Joe Lieberman and Massachusetts' John Kerry round out the list -- whose celebrity runs coast-to-coast.
So far, though, he's had more success stirring up the political and financial establishments back east than rousing the folks back home to righteous indignation.
Tuesday's showdown with Blankfein and other Goldman Sachs execs, which led the Wednesday editions of the New York Times, the Washington Post and the Wall Street Journal, received far less prominent play in Michigan newspapers. Much of the in-state coverage focused on Levin's uncharacteristic use of profanity -- he repeatedly quoted a Goldman employee's e-mail describing one of the mortgage-backed bonds the firm marketed as "a shitty deal" -- while ignoring Levin's larger point that Goldman's aggressive marketing of such bonds had exacerbated the collapse of home values here and elsewhere.
For the record, Levin's theory about the nexus between what banks like Goldman did and what happened to housing values in your neighborhood is becoming conventional wisdom among economists.
The invention of the mortgage bond market, in which large investors bought and sold claims on the pooled monthly mortgage payments of thousands of homeowners, gave Goldman and other big Wall Street firms their first direct stake in the debts of ordinary consumers.
It worked out well as long as the bundled mortgages were sound ones guaranteed by the government. But when Goldman and its rivals began selling bonds tied to the performance of much riskier mortgages, the system grew unstable.
Goldman argues that it was merely meeting its sophisticated clients' demand for riskier (and thus more potentially profitable) pieces of mortgage market action.
But Fabrice Tourre, the young Goldman executive at the center of a fraud suit brought by the government, wrote in an e-mail obtained by Levin's investigators that sophisticated investors were the firm's worst customers ("they know exactly how things work"). He urged Goldman's sales force to target "ratings-based buyers" who would be impressed by the AAA reviews craven rating agencies such as Moody's and Standard & Poor's gave to Goldman's crummy deals.
Even CEO Blankfein conceded that Goldman's bad business decisions contributed to the financial crisis, and allowed that tighter government regulation of mortgage-backed securities would help prevent a repeat of 2008's housing market collapse.
He's confident Goldman and its rivals can continue to be profitable in a more regulated environment.
And really, who would bet against him?
BRIAN DICKERSON is deputy editorial page editor of the Free Press. Contact him at bdickerson@freepress.com
Charlie Brown, will you never learn? You really thought Democrats were actually standing up to the Republicans on financial reform, huh? From Huffington Post:
When Michigan met Wall St.
But Levin also is an elected official from a particular state, and one of his prime objectives as chairman of the subcommittee investigating the origins of the worldwide financial crisis has been to connect the dots between the chicanery on Wall Street and Michigan's foreclosure crisis.So far, though, he's had more success stirring up the political and financial establishments back east than rousing the folks back home to righteous indignation.
Tuesday's showdown with Blankfein and other Goldman Sachs execs, which led the Wednesday editions of the New York Times, the Washington Post and the Wall Street Journal, received far less prominent play in Michigan newspapers. Much of the in-state coverage focused on Levin's uncharacteristic use of profanity -- he repeatedly quoted a Goldman employee's e-mail describing one of the mortgage-backed bonds the firm marketed as "a shitty deal" -- while ignoring Levin's larger point that Goldman's aggressive marketing of such bonds had exacerbated the collapse of home values here and elsewhere.
For the record, Levin's theory about the nexus between what banks like Goldman did and what happened to housing values in your neighborhood is becoming conventional wisdom among economists.
The invention of the mortgage bond market, in which large investors bought and sold claims on the pooled monthly mortgage payments of thousands of homeowners, gave Goldman and other big Wall Street firms their first direct stake in the debts of ordinary consumers.
It worked out well as long as the bundled mortgages were sound ones guaranteed by the government. But when Goldman and its rivals began selling bonds tied to the performance of much riskier mortgages, the system grew unstable.
Sophisticated sales resistance
Levin argues that Goldman's willingness to package and sell loans its employees knew were increasingly, um, substandard allowed unscrupulous lenders to keep writing mortgages for borrowers who were less and less creditworthy, fueling the run-up in home prices and assuring that a large percentage of those mortgages would go sour.Goldman argues that it was merely meeting its sophisticated clients' demand for riskier (and thus more potentially profitable) pieces of mortgage market action.
But Fabrice Tourre, the young Goldman executive at the center of a fraud suit brought by the government, wrote in an e-mail obtained by Levin's investigators that sophisticated investors were the firm's worst customers ("they know exactly how things work"). He urged Goldman's sales force to target "ratings-based buyers" who would be impressed by the AAA reviews craven rating agencies such as Moody's and Standard & Poor's gave to Goldman's crummy deals.
Even CEO Blankfein conceded that Goldman's bad business decisions contributed to the financial crisis, and allowed that tighter government regulation of mortgage-backed securities would help prevent a repeat of 2008's housing market collapse.
He's confident Goldman and its rivals can continue to be profitable in a more regulated environment.
And really, who would bet against him?
BRIAN DICKERSON is deputy editorial page editor of the Free Press. Contact him at bdickerson@freepress.com
GOP Drops Filibuster After Dems Roll Over On Bailout Fund
By Susie Madrak Thursday Apr 29, 2010 8:00amThreatened with the prospect of having to spend the entire night sleeping on a cot inside the white sepulchre known as the United States Capitol, Senate Republicans have apparently assented to allowing a debate on the financial regulatory reform bill. Victory for Main Street! Unless, of course, Senate Democrats decided to back down on a strong(ish) bill so that the seeds of bipartisanship could be sown. In which case: Victory for David Broder!
No one exactly knows what is happening [C&L note: The Washington Post now confirms the deal], buthere's what the New York Times is reporting:
Republicans insisted that they had won some crucial concessions from Democrats, including the elimination of a proposed $50 billion fund that would be paid for by big financial companies and would be used to help pay for putting failed banks out of business.Oh, well, that's just great! You know, it seems like only a week ago, Republicans were calling that provision the "permanent bailout fund" because that was the precise lie that Frank Luntz coached them to tell, over and over again. Incensed Democrats complained about this falsehood, over and over again, and actually did pretty well in getting the media on their side. But now, it's just one more thing that nobody really liked anyway, whatever -- hope you enjoyed the Kabuki theater.
The Obama administration also had expressed opposition to the fund, out of concern that it would complicate efforts to deal with more costly failures of financial companies. And the Democrats already had expressed a willingness to remove the fund from the bill.
Of course, we now have the benefit of viewing Senator Christopher Dodd's FinReg bill alongside the one put forth by the GOP, and can appreciate the ways in which they parted company. (TheWashington Independent's Annie Lowrey has a great comparative analysis of which you can avail yourself.)
Significantly, the two proposals aren't exactly worlds apart. But one way in which they part company dramatically is in the area of consumer protection. Per Matt Yglesias:
The ugly part of the bill is what it does to consumer protection. On the one hand, it seemingly weakens the independence of the consumer regulator. On the other hand, it has the consumer regulator preempt any and all state regulations. This is a helpful reminder that nobody on the right actually gives a damn about federalism except as a tool to advance conservative substantive policy--federal preemption of strong state regulation is always welcome.
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