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Here is a nice, scathing article about the role that Goldman, et.al. played in the mortgage/financial crisis. Enjoy.
http://www.huffingtonpost.com/2011/05/23/gretchen-morgenson-reckless-endangerment_n_864841.html
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This points to the problems of full and fair disclosure. But, I look at it this way. Goldman has a client who wants to buy a house. Goldman says they can get them a mortgage, but it will be subprime as the client does not qualify for a traditional mortgage. The client is aware that they have an ARM mortgage and if the home value does not increase they will be unable to refinance and thus be susceptible to higher payments which they can not afford. Goldman recognizes the risk that housing prices might not increase forever and buys "insurance" (betting against the loans). As long as the client understands that they are a “at risk buyer” (they should because they are issued a subprime mortgage), and they understand how a ARM works and the implications of housing prices not increasing and the effects on their ability to refinance then I do not see a problem with Goldman buying “insurance”.
ReplyDeleteWhat if Goldman identified this risk and did nothing about it? They would have gone bankrupt and all their shareholders would have lost money.
Comparing mortgage originators and ratings agencies to drug lords... quite an interesting approach.
ReplyDeleteI agree with Chris. Again, it's the problem with open information. Many clients were not aware of all of the risks (which they should have looked into). Goldman would have faced bankruptcy if all the risks at hand had be out in the open.
I'll admit, I didn't make it to page 3, but from what I did read, I'm not buying it at all. The article keeps saying that "Goldman was betting against its customers," but that it is BS. Why isn't the author telling us how Goldman did that? Because, as I understand it, all Goldman did was take out insurance or hedge their bets.
ReplyDeleteLast time I checked, that is just smart business. Goldman didn't have a crystal ball that they were peering into, informing them that the bubble was about to burst. Their customers were making a lot of money on these investments and so were they. Who are we to tell them that because they saw some dark clouds forming they should have told everyone it was about to storm?
I think that's ridiculous. They saw that there was potential risk involved in being a part of these transactions, so they were conservative and they hedged their bets. This wasn't all some big trick. Goldman wasn't the only firm that knew there was risk. They were just the only one smart enough to take a hit on possible profits in order to make sure they didn't suffer major losses...cough...Bear Stearns...cough...Lehman Bros...
In short, I do not think Goldman should apologize for wisely being conservative and safe.
All three people above made good points that I kept thinking about throughout the article. Even though it was my first reaction to blame all this mess on Goldman because their top executives are making more money than some small countries do, I think the American people are to blame as well. Here is a quote from the article:
ReplyDelete"Within three months of the trust's issuance, more than 5 percent of the loans in the pool had become severely delinquent. Because borrowers had to have missed three consecutive payments before they were considered "severely delinquent," this meant that 5 percent of this pool's borrowers never made one payment. By August 2007, 16 months after it was issued, the pool had a 40 percent loss to liquidations."
Too many of these loans were given much higher ratings than they should have and Goldman was smart to realize this before it was too late and they got "insurance" against these risky loans. I do think that some employees of Goldman were unethical in not telling their customers about certain risks but to blame the entire company isn't right.
As easy as it is to point the finger and put all blame on Goldman, I think it is just as easy to put the blame on the people going after subprime mortgages. To invest in something that you do not know entirely about is your own fault, and if it does fail you should take on all of the consequences. I think that Goldman was smart to buy insurance on such loans to cover their back. I agree with the class that Goldman should not have to apologize for their actions. This should be a huge lesson for Americans in particular... do you're homework and know what you're buying
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