Taking Goldman to the gallows. Reactionary and Irrational.

I agree very much with Fareed Zakaria's line of reasoning. Goldman were the middle man. If they really "knew" that the sub-prime market would tank, they would have loaded up on bets against the sub-prime market. In some parts of the firm they probably did that. But overall they owned much more of the toxic debt that nearly brought them and the rest of Wall Street down. This whole debate is a charade which misses the crucial point of regulation. Banks are given money by shareholders to make more money. If their risks get excessive and bets go wrong, they lose money. In this case all the money and some more.

If a particular business is making money, business leaders are forced to participate and play the game. Otherwise they get sacked. Hence John Mack (Morgan Stanley CEO) begged the government to regulate the banks as they can’t regulate themselves. If you were the CEO of Goldman and you decide not to participate in the sub-prime debt (or more accurately securitization) in 2004 as you presciently thought the market was heading for a catastrophe, you would be out of a job soon. The securitization business continued to be a gigantic money spinner for the banks for three years after that.

SEC and Fed are supposed to be the grown ups that should regulate this behavior. And government is the only one in the position to see these risks in their totality. The banks would never show their books to each other, and would be oblivious to systemic risks. But they have to show there positions to the SEC and Feb auditors.

I wonder how long it will be before the popular sentiment against Wall St boomerangs against government and regulators’ incompetence. The poster child of this incompetence (corruption?) has to be Greenspan who stated on television that his curbing of the housing bubble would have been politically unpopular. Perhaps it’s time for the appointment of a bipartisan body that appoints Fed Chairmen for longer terms so that they are not politically beholden, like Greenspan and Bernanke, to the President and ruling party.

The real outrage: If govt was forced to bail out these banks (which perhaps it was - collapse of trade would have been catastrophic. As Michael Lewis puts it "City of Chicago carriers only 11 days of supply of chlorine to clean up the water”. Same would be true of oil, meat etc. etc.). But then why OVERPAY massively? Why pay $180bn to AIG (while creating a gigantic ruckus over a thousandth of that amount, $180m, that was paid by AIG in bonuses) when you would have gotten AIG for FREE. The stock was going to zero. And govt should have asked creditors to take hair cut. Same for the holders of AIG issued CDS's (credit default swaps).

Same was the case with Citbank. Govt injected 80% capital and got only 20% ownership in return (before debt/equity conversion later). It should have just taken these companies private under its wings (while letting smaller brokers fail) and asked creditors to take hiarcuts. It would have saved a few hundred BILLION of tax payer dollars. These could have been spent on real infrastructure, healthcare, education and other long term productivity enhancing projects.

What govt did was not wrong. It was just a very very expensive way of doing the right thing. And Hank Paulson and Tim Geithner's defense that they did not have time and had to give this money away to save the financial system does not fly. Not at all. We have seen these crises unfold in Europe, Asia and Latin America just in the past 15-17 years. Specialists know how to deal with them. Perhaps the apparatchiks of the US govt could not come to grips with how and why this could happen to US. To the undisputed super power of the world.....