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Goldman Sachs gored

The credit bubble was inflated by a series of Wall Street mistakes: Investment banks such as Bear Stearns borrowed too much; credit-rating agencies such as Moody’s bestowed their seal of approval on junk securities; supposedly professional investors poured money into mortgage bets without doing five minutes of due diligence. Collectively, these spectacular misjudgments allowed home prices to rise dangerously far, setting us up for the worst financial crisis since the 1930s. But today, senators were too busy grilling Goldman Sachs, a firm that purged itself of mortgage mania earlier than most, to remember the bigger culprits. In the topsy turvy world of Washington, the smart guys are the bad guys, while the dunces are magically transformed into innocent victims.

Goldman is under attack for betting that mortgage securities would fall in 2007, a wager that was so evidently sane that no firm should be expected to apologize for it. Markets need more skeptics willing to prick bubbles -- if anything, Goldman should be criticized for not dumping its mortgage positions earlier and harder. But the act of placing a negative bet -- or “short selling”-- is politically unpopular, so Goldman’s accurate call on mortgages has landed it in trouble. Bubbles are always popular as they inflate. Sooner or later, they are bound to pop, but woe betide the messenger.

In two ways, though, there is a certain justice to Goldman’s predicament. The first is that the byzantine business model of the modern investment bank is rife with potential internal conflicts, and the goring of Goldman reflects that. Even as it bet against mortgages with its own capital, Goldman was carrying on its parallel business of selling mortgage securities to those who still wanted to buy them. The way Wall Streeters see things, there is nothing wrong with this: How you bet with your own money and what you sell to your clients are unconnected. But non-Wall Streeters reasonably regard this compartmentalization as odd. Since Goldman had a clear view that the mortgage market was imploding, shouldn’t it have shared that view with its clients?

The second measure of justice relates to Wall Street’s hypocrisy. When the investment banks failed or came close to failing in 2008, they lashed out at short sellers of their stock, alleging a devious conspiracy to destroy what otherwise would have been healthy companies. This was dishonest: The investment banks were sinking because they had assumed crazy amounts of risk, and short sellers of their stock were merely recognizing that vulnerability. But the investment banks wailed loudly about short selling, and Washington did what they wanted. After Lehman Brothers went down, much short selling was suspended.

Now that hypocrisy is being punished. Because Goldman went along with the lobbying against short selling, it has difficulty fighting back when it is accused of that same practice. Indeed, Lloyd Blankfein, Goldman’s chief executive, apparently regarded a forthright defense of short selling as so politically unthinkable that he pretended Goldman wasn’t short at all, declaring that his firm was never "consistently or significantly net 'short the market' in residential mortgage-related products." Of course, if that were true, Blankfein would be saying that his own firm was dumb. Worse, internal Goldman e-mails seem to contradict Blankfein’s story.

In his drive for political correctness, Blankfein should have remembered an old political saying: Even when there is no crime, the cover up can land you in a heap of trouble.

By Sebastian Mallaby  | April 27, 2010; 5:03 PM ET
Categories:  Mallaby  | Tags:  Sebastian Mallaby  
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Comments

Nearly every word in this is a pious lie.
"Mistakes"? Is GS now claiming "we're stoopid"? We're dumb as shi* house rats? Don't blame us for screwing the US Treasury out of HUNDREDS OF BILLIONS OF DOLLARS OF TAXPAYER MONEY. It could happen to any common ghetto thief- with a Republican President on their payroll.

No, Goldman "Sacks" has long claimed to be smart and deliberate. That's why they get the big fees for their products. They knew exactly what crap they were peddling.

Fraudlent conveyance. Blue sky.

Tis pity there isn't the death penalty for customer treachery.

Posted by: law1946 | April 27, 2010 5:38 PM | Report abuse

Wow Mallaby, you are not even trying, are you?

They are not accused of consistently "shorting" the market. That is understandable. What they are being accused of here is selling junk, crappy, and worse loans to their customers. After selling those horrific loans, they took bets against them, knowing that they were going to fail.

Goldman Sach sales force knew what was going on and were under orders to get rid of the junk stuff to get their principle up so they could bet against them.

They did not communicate with their customers that they were betting on those failing loans. Here's a relatively simple example: If I'm selling a car to you, and I know that the engine explodes at 20MPH, I have legal obligation to do tell you that but these guys didn't. Not only did they sell you a crappy car, they took out a bet with the local bookie that that it was going to fail on you and possibly kill you.

Having a soul is important, I know you had to turn yours in when you started to working for the Washington Post, but when you do get it back can it survive articles like this?

Posted by: talan1231 | April 27, 2010 5:47 PM | Report abuse

The problem is not short selling itself, it's selling a straw man and then betting that it will catch fire. Of course you and your buddy (Moodys) swear up and down he's made of asbestos and the fire house is next door. GS made money on the sale and collected on the bet, which was paid off by AIG (US Taxpayers).

Posted by: jimbo1949 | April 27, 2010 5:59 PM | Report abuse

The art of politics is to denounce someone for doing what they want to do in terms that make it a perversion. Once in elections, Catholics were denounced for "practicing celibacy in the public streets." It was said to be a very rare sexual practice.

Now "selling short" is denounced in terms just as strong.

But who will believe such trash talk?

Posted by: GaryEMasters | April 27, 2010 6:15 PM | Report abuse

Is this guy a financial journalist? Because if so he is living proof of how skewed and detached from reality the financial community has become. "But the act of placing a negative bet -- or “short selling”-- is politically unpopular, so Goldman’s accurate call on mortgages has landed it in trouble." Ah, so that's what happened! Short selling is politically unpopular. Now I understand!

Posted by: gposner | April 27, 2010 6:17 PM | Report abuse

OOPS. I just read the other comments. Now I know who.

Hang them high, if you must.

I had rather you just pay attention.

Posted by: GaryEMasters | April 27, 2010 6:20 PM | Report abuse

The irony of this entire situation is that goldman did exactly what everyone is upset other banks didn't do - take appropriate precautions to ensure they weren't betting their firm on any single major position. The same people who are angry about the fallout of lehman and bear and who repeatedly chastised them for being grossly irresponsible are now condemning goldman for being responsible.

this is a complete joke and an embarrassment to our political system. rather than focus on the real causes of the bubble - significant government intervention into a market, including low interest rates, tax preferences for homes, mandates requiring low income mortgages - all in the same of increasing home ownership - politicians avoid their own mistakes by yelling at people who were smart enough to see it coming.

i'm sorry that millions of americans thought they could get rich quick by taking out no doc loans they couldn't afford. it is not goldman's fault you got suckered into the bubble. bubbles existed for hundreds of years before goldman. welcome to human nature

Posted by: Spencer99 | April 27, 2010 7:00 PM | Report abuse

A recommended punishment for Goldman Sachs: revoke Trading License; deregister GS stock. Pull the plug. There is no life support for these market manipulators.

Posted by: rmorris391 | April 27, 2010 7:05 PM | Report abuse

"this is a complete joke and an embarrassment to our political system. rather than focus on the real causes of the bubble - significant government intervention into a market, including low interest rates, tax preferences for homes, mandates requiring low income mortgages - all in the same of increasing home ownership - politicians avoid their own mistakes by yelling at people who were smart enough to see it coming. "

You choose to ignore the fact that credit default swaps made all those problems probably 20 times worse.

And Goldman engaged in credit default swaps. Worse yet, they knew they were destined to fail and wreak havoc on the economy and on the pension plans of millions of Americans.

Yet they did it anyway. All the while not sharing their concerns with their clients.

All the while making money off the failures.

Yes, there were greedy homeowners.

But the credit default swaps and the heinous ethics on Wall Street made the problem exponentially worse.

Posted by: Hillman1 | April 27, 2010 7:09 PM | Report abuse

I'm going to have to go with the notion that congress is not the entity to investigate this, since some current and former members of congress need to be investigated in addition to bankers. And, people who worked for Countrywide, speculators, etc - all need to be part of the investigation into what happened. Grilling GS employees is a small part of the investigation.

A separate commission that can subpeona anyone up to the highest government officials must be convened, with the ability to get clawbacks in bonuses and salaries from people who did not actually perform their jobs. I imagine people ranging from Moody;s to GS to mortgage brokers to loan officers will all see savings disgorged to taxpayers, since they were paid for fraudulent activities.

I guessed that the housing bubble popping would generate 10 years of business for an Indian firm that took shipping containers full of documents and unscrambled the loans and lies. Could still be a great business opportunity!

Posted by: djoelt1 | April 27, 2010 7:31 PM | Report abuse

Mr. Mallaby: You conveniently leave out the fact that theperson responsible for picking which mortgages went into the CDO's was also the one betting against them.

Which is akin to selling fire insurance to an arsonist.

You also leave out the fact that millions of people will lose their homes, savings, 401ks and college funds before this is all over.

Goldman Sachs was instrumental in killing the American dream and causing a worldwide recession.

This is not something to be taken lightly and you want me to feel sorry for them?

You're a pri*k.

Posted by: JRM2 | April 27, 2010 7:57 PM | Report abuse

I wouldn't buy so much as a used car from GS and I bet you wouldn't either. You may not need to though because the only reason I can think of why you'd rationalize away their harmfully deceptive business practices is because you're on the take from them.

Posted by: politbureau | April 27, 2010 8:18 PM | Report abuse

Look at it this way: it's like the guillotine during the French Revolution: somebody had to be first in line.

Posted by: thrh | April 27, 2010 9:20 PM | Report abuse

It's smart to steal other peoples money?

I guess I missed that lesson in school.

Posted by: yhrt | April 27, 2010 9:30 PM | Report abuse

This post misses the broader point.

The issue is not that GS shorted the market, it's that they shorted the market based on securities they were vigorously selling to other customers looking to take long positions. And further, it's not that they were hedging and protecting investments - they created synthetic CDOs specifically with the hope that they would fail (for a shorting customer) but marketed these securities aggressively and did not let customers (going long on them) that they were constructed to fail.

Conflict of interest - that's the name of the game.

Posted by: MikeB8 | April 27, 2010 9:32 PM | Report abuse

I guess these guys are like some Bank Robber of the thirties, when asked why he robbed banks, he said that was where the money was, so these guys rob customers because that's where the money is.. I think the problem with that in todays world is that the folks like Goldman are NOT banks. We should start by making them declare that they are indeed "Financial Casinos". Any resemblance between them and a real Bank is about like the resemblance between a Gnu and a Horse.
The real problem in the issue is that these folks produce nothing, they add no value they just muck about and cheat people.
Point of fact they are useless.

Posted by: macira | April 27, 2010 10:19 PM | Report abuse

"supposedly professional investors poured money into mortgage bets without doing five minutes of due diligence."

The investors paid GS for an investment with a specified risk profile. They had no reason to check them; they were paying GS to do that on their behalf.

There was a case recently where cheap wine was being sold as French burgundy. Can the importers be excused on the grounds that they were selling to restaurants who were 'sophisticated customers' and should have been able to tell the difference?

Posted by: glennet | April 27, 2010 10:32 PM | Report abuse

There appears to be evidence that GS sold substantial amounts of Triple A rated subprime MBS's that they knew were junk. Triple A equals a credit risk of almost zero. Now 93% of those same bonds have a junk ratng. There is no reasonable defense for that. It's simply seriously wrong.

Posted by: jryan758 | April 27, 2010 10:53 PM | Report abuse

Ha! Ha! Ha! Conservatives!

So you say Goldman Sachs is totally innocent? There was no crime?

Well, if there was no crime, we need new laws to make what they did a crime!

What? We don't need no stinkin' laws? Because it is OK for bankers to tank my retirement while they make billions?

We need laws. Maybe even some waterboarding.

G.W. Bush and his Wall Street buddies made my retirement poor.

B. H. Obama made my retirement richer.

Do the math, morons.

Posted by: colonelpanic | April 27, 2010 11:12 PM | Report abuse

I'm bemused by some of these smug comments.

Goldman did what it was supposed to, so we should just admire them? What constructive result came from Goldman's actions -- other than the excessive bonuses it paid its own folk? Did houses, governments, or businesses get financed? Do you really think this activity served any business purpose other than gambling?

But Goldman's gambling -- along with that of many other culprits -- sent our entire financial system reeling. It caused the value of our houses to fall much further than they would have in a simple housing crash, it destroyed our retirement funds, it wiped out businesses with real products, it gutted government budgets. And that was before they had the gall to ask us, the taxpayers, to bail them out.

It doesn't matter if they've paid back all or even most of the money they extorted from us. If they want to gamble, they should do it in a way that doesn't require us to pay their losses.

Posted by: thmas | April 27, 2010 11:37 PM | Report abuse

What kind of journalism is this? Selling short is not the issue here; GS is accused of lack of disclosure. If you don't understand the problem, you shouldn't try to report on it.

Posted by: wharwell1 | April 27, 2010 11:59 PM | Report abuse

Good article as a contrarian view. Too bad most of the comments in response to your article underline the failure of our educational system and don't bode well for our future. The pitchforks appear sharp and ready for use.

The irony is that we have one group of dissemblers (in Congress) lecturing another group of dissemblers (Goldman) for saying one thing, doing another and indicating that others are doing it, this is how it works, its someone else's fault, we couldn't foresee it, blah, blah, blah....

1) Success Measures
GoldmanS - we're in the business of making money even if it means driving the country towards insolvency.

Congress - we're in the business of getting re-elected, even if means driving the country into insolvency (party affiliation doesn't matter).

2) The high road doesn't mean success.
Goldman - circa 2007, everything's great with the mortgage market so why wouldn't we enable investors to double and triple a bet via synthetic products. If we counsel clients that this likely is not a smart move, how do we make any money? And since we're keeping some of the bad stuff, we had to hedge our risks.

Congress - everything is great w/ Medicare, so why don't we add another benefit (i.e., eliminate the RX donut hole). We're eliminating some costs in Medicare Advantage thus limiting our risks. Everything's great. While we're at it, lets delay the annual report on Medicare until late June (fewer people read headlines then). While everyone inside the beltway knows that Medicare will make the USA Greece of 2010 in about the year 2020 based on current projections. If we deal with this honestly and tell the truth, how will we get re-elected.

3) Can't foresee which direction things will go.
Goldman - no one could foresee that the subprime market would bleed into the overall economy so we had no way to tell which way the market would go so risk could have gone either way.

Congress - we don't foresee the new healthcare bill adding to our deficit/debt problem since its pays for itself (without mentioning that the purported savings could have been used to shore up our current structural deficits).

Its not my fault. Other guys are worse
Goldman - everyone's doing it

Congress - everyone's doing it (look at Greece, Italy, Portugal, Ireland, the states, the consumer). What's the big deal, we'll grow our way out of it, always have, always will....

Its the other guy's fault, the crash was not our fault
Goldman - Others were to blame, the investors for not looking at the underlying assets, the ratings agencies for being stupid, the consumer for buying houses they could not afford, etc... We just facilitate buying and selling. The crash hurt everyone.

Congress - it is obviously the other party's fault we're looking out for main street (whats left of it). The crash is forcing us to spend more and tax less.

Its too depressing to continue the analogy.

Posted by: Misanthropic | April 28, 2010 12:17 AM | Report abuse

wharwell1,

You're right that this is the crux of the issue with the SEC civil suit, but this was not the crux of the hearings if you watched any of them on Tuesday.

Posted by: Misanthropic | April 28, 2010 12:22 AM | Report abuse

So if a banker makes bad investments and tanks the economy (like Lehman) or needs a bailout (like AIG), then he is a terrible and incompetent person. But if a banker is careful and hedges to avoid excess risk, then he is a terrible person for not needing a bailout or tanking the economy? Seems like something is wrong with this picture.

But they all have some solace -- they get to keep their bonuses whether they earn them or not!!

Posted by: hithere2 | April 28, 2010 12:51 AM | Report abuse

The Obama administration and Senator Levin may well have picked a knife fight with people better at it than they are. This should be fun.

When you stop to consider that Sen. Levin brokered a deal to sell the American taxpayers stock in a bankrupt General Motors in exchange for billions in taxpayer cash and credit guarantees, you have to wonder how he can chastise Goldman Sachs for anything they might have done. Apparently, the Senator has no shame.

Posted by: publicola | April 28, 2010 1:18 AM | Report abuse

"The way Wall Streeters see things, there is nothing wrong with this: How you bet with your own money and what you sell to your clients are unconnected. But non-Wall Streeters reasonably regard this compartmentalization as odd."

The right word for what I think of this practice is not "odd," it's "sleazy," I am watching very closely how our esteemed Republican members of Congress vote on putting a stop to it.

Posted by: Portola | April 28, 2010 1:28 AM | Report abuse

Mallaby seems to have lost his critical faculties in becoming a GS fanboy.

Fraud is still fraud, no matter how 'smart' you are. The alleged issue and (semi-)crime here is that GS misrepresented what it was selling to its clients in order to relieve itself of failing bets. Even it that wasn't technically against the law--which is unlikely--it was unethical and should doom GS to a future in which no one is willing to do business with them because they can't be trusted.

Posted by: micron26 | April 28, 2010 1:52 AM | Report abuse

It's not about short selling or being a good market participant. It's about conflict of interest. It's not about making money off a deflating bubble. It's about committing fraud as an investment adviser or a seller of securities.

Posted by: apartinalex | April 28, 2010 2:03 AM | Report abuse

Did someone teach you how to have no ethics?

Posted by: Nymous | April 28, 2010 2:10 AM | Report abuse

What I'd like to know is, where was the Republican SEC during all this? And, where was the Republican oversight? . . . . . . . . Two simple questions. Well so much for Republican laissez-faire free markets ( "government is the problem, so ban it from the marketplace." )

Oh, and another question, where was our Corporate sponsored media? . . . . . . . Rush Limbaugh should swallow his tongue.

Posted by: Here2day | April 28, 2010 2:17 AM | Report abuse

Goldman has vast amounts of money with which to buy politicians. The worst they will suffer is a brisk finger-wagging from a bunch of bought and paid for Congressional hypocrites. There will be no actual accountability and no sanctions.

Posted by: nicekid | April 28, 2010 4:08 AM | Report abuse

There are plenty of days I want to punish the stupid. The mistake is in thinking any of this was in any way "smart". It was not. In the authors case I suppose ignorance is punishment enough.

Posted by: Nymous | April 28, 2010 4:49 AM | Report abuse

Does Mallaby have shares in Goldman Sachs?

What's up with this dude?

Posted by: Supertzar | April 28, 2010 4:49 AM | Report abuse

The golf club and a couple of holes became a play thing. With a golf architect and 18 holes it became a big business. The course is getting better and better and my golf game is getting worse and worse. The pleasure mania is not confined to the female sex for better or worse. The worst is yet to come, so cheers!

Posted by: tossnokia | April 28, 2010 5:12 AM | Report abuse

What moral sewage.

Posted by: dmblum | April 28, 2010 5:43 AM | Report abuse

The question is not whether what GS did was immoral or "wrong," but whether or not it was illegal. If it wasn't, then we can all berate them for being heartless and arrogant relative to the suffering of the average American as a result of their reckless behavior, but it's the nature of the business.

Posted by: stevenveshosky | April 28, 2010 6:10 AM | Report abuse

mallaby,

you are clearly a real pinhead.

these were no mistakes.

this was white collar racketeering of financial instruments.

i don't think the RICO statutes necessarily mandate that (threats of violence need to occur)...

but a saavy lawyer may use the Racketeering statutes to put away these guys in Federal prison....

there was clearly a conflict of interest going on at goldman....the next time you go and buy a house where the owner or real estate agent (who actually represents the seller) sells you a home with "hidden defects" and the home comes tumbling down or your family dies in a serious fire.... i am sure you will be first one in court...

goldman committed securities fraud...in which they knowingly put together bad deals that were certainly doomed to fail", never disclosed the details of the security, and sold them under otherwise false pretenses while at the same time shorting them because they had the "inside information" to bet against them.

don't you think taking "insurance" out on a financial instrument in which you have no direct financial interest -- should be illegal... kind of like taking insurance out on a neighbor knowing that another neighbor is very likely to kill him?

these are "off the books" transactions... they are never discussed in detail in any 10k or prospectus... they are purely speculative and wouldn't even be made unless there was some "inside information"...

therefore they are of no benefit to our national economy, society, the nation, etc..

they should be deemed illegal transactions.

Posted by: FranknErnest | April 28, 2010 6:23 AM | Report abuse

mallaby could put a straight face on a horse thief. He consistently mistates the SEC position: " Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson's adverse economic interest or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials." SEC Release.

The claimed fraud was non-disclosure. Mallaby ignores it. Maybe the poor guy can't read.

Posted by: auntywbush | April 28, 2010 7:13 AM | Report abuse

How much did Goldman Sachs pay you to write this junk?

You're nothing more than another wall street wh0re.

Posted by: dcp26851 | April 28, 2010 7:28 AM | Report abuse

Germany's National Socialists never punished the "smartest."

Mallaby's right:

why should ours?

Posted by: lichtme | April 28, 2010 7:31 AM | Report abuse

No Mallaby, punishing the crooked. Are you one ?

Posted by: rbe1 | April 28, 2010 7:52 AM | Report abuse

These are the most reasonable words I have heard or read from anyone concerning the Goldman affair in 24 hours. I'm a liberal Democrat, but I think all the Democrats (and some Republican) on Capitol Hill who are pillorying Goldman Sachs are just demogoguing for political purposes.

When I buy AT&T or Coca Cola stock from Goldman, I'm under no impression that the company thinks I'm making a good "bet" or "investment" or whatever. I just need them to help me make the trade.

The same is even more true for Goldman's major investment clients, who are full-time professional investors. If they want to buy mortgage backed securities, they expect Goldman to just sell them the darn things -- period. And that's exactly what happened.

Posted by: paul65 | April 28, 2010 7:59 AM | Report abuse

Mallaby is correct in the position that he takes regarding mortgage investments. You don't need to be a genius to understand it. However, the problem that neither the politicians nor the pundits address is connected to real genius. Investment bankers have hired Mathematics PhD's to generate new instruments that game the system for profits. The top execs do not understand them. The politicians do not understand them. The public certainly does not understand them. They are the creations of true genius that make money free from downside risk assessment and morality. They make money by peeing in the well from which everyone draws fiscal sustenance.

They are also somewhat free from public scrutiny because hardly anyone understands them. Raise your hand if you fully understand credit default swaps. They are also ahead of any regulation scheme as well and those math geniuses are still fully employed by the investment houses.

Posted by: edbyronadams | April 28, 2010 8:00 AM | Report abuse

I guess a doctor would be 'being punished for being smart" if he owned stock in a drug company, knew their drugs were unsafe but kept prescribing them to his patients while not taking them himself.
Some activities, even if smart and profitable need to be illegal. Betting against the products you sell to your clients as credible investments is one of them.

Posted by: mgferrebee | April 28, 2010 8:03 AM | Report abuse

Who the h*** is Mullaby? Never heard of him, but perhaps he's a recipient of a new WaPo policy of hiring people with cognitive and moral disabilities. Or, more likely, he's a mole for GS. As many of the commentators here have pointed out it is not GS's perspicuity in short-selling that is under attack, but short-selling instruments its employees knew were junk and would tank. That's not a difficult thing to understand, yet Mullaby seems to get it so wrong even a US congress person can see through his rationalization for the most morally bankrupt organization on the planet. WaPo, fire Mullaby. He's an embarassment.

Posted by: douard1 | April 28, 2010 8:21 AM | Report abuse

With all due respect Mr Mallaby, for a bunch of folks who are supposed to be so smart and worth all those obscene amounts of cash for bonuses, using the Sgt Schultz defense (I know nothing! NOTHING!) is not the way to impress those of us outside the Wall
St and Beltway bubbles with your acumen, business sense, ethics, or honesty.

Posted by: cadet70 | April 28, 2010 8:29 AM | Report abuse

Sabastien:

This is how Goldman's Fabrice Tourre described his role at Goldman:

"The whole building is about to collapse anytime now," Fabulous wrote in one of the e-mails that have come to light. "Only potential survivor, the fabulous Fab . . . standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those
monstruosities!!!"

These guys need free room and board at the tax payer's expense at the same hotel Bernie Madoff is enjoying.

Posted by: 5amefa91 | April 28, 2010 8:30 AM | Report abuse

"this was white collar racketeering of financial instruments."

Exactly so. These guys need to be treated as the criminals they are. Some jail time would get the attention of the other swindlers and thieves on Wall Street.

Posted by: 5amefa91 | April 28, 2010 8:34 AM | Report abuse

While Gerson is trying to wean himself of mindlessness, by traveling abroad and writing a little bit more around the world, which, as a consequence, helps him see reality better... Mallaby is trying hard to replace Gerson in being as stupid as one can get, and still get to do ocassional columns for the Post, which, by the way, is a "news paper" that reports Vatican "miracles" as they happen!

Posted by: HerLao | April 28, 2010 8:34 AM | Report abuse

If my broker did not tell me I was making a stupid buy, I would get another broker. And when I found out he profited from the sale, I would, well, I'd best not say it. These cold-blooded broker boys should sizzle in the metaphorical frying pan.

Posted by: talbritton | April 28, 2010 8:39 AM | Report abuse

I don't care what color you paint it or what fancy words you use to describe it..what GS did was criminal and the thieves should be punished... instead of laughing and patting themselves on the back for being "Fabulous" they should be crying and getting rid of worldly possessions for the they will not be needed where they should be going ..TO JAIL.. for the rest of their evillllllllll lives.

Posted by: sabrina2 | April 28, 2010 8:49 AM | Report abuse


THE WORD IS "GREED!" THE WORD STARTS WITH G AND ENDS WITH D BUT IT ISN'T "GOD!!"
MONEY, POWER, AND LIVING BEYOND ONES MEANS CREATES THESE SITUATIONS !!!!!
STRESS, PRESSURE, KEEPING UP WITH THE KENNEDY'S !!!!!!! AMEN....

Posted by: ecesareel | April 28, 2010 9:01 AM | Report abuse

It would be easier to overlook GS's unethical behavior if it weren't the taxpayers who had to bail out the losers.

Posted by: postfan1 | April 28, 2010 9:03 AM | Report abuse

Why does the link to this article from the front page say "Punishing the Smart"?

Posted by: Aerowaz | April 28, 2010 9:08 AM | Report abuse

You completely overlook the real problem: GS and its brethren are now longer investment banks or a traditional stock trading companies. They are more like a combination of bookies and bettors with fancy degrees and good suits. Fabulous Fabrice is really just a much more arrogant, snotty, grand ecole version of Nathan Detroit

The issues you missed Mr Mallaby are:

Why should America's economic well- being be dependent on these bookies and "players?"

Why should the American taxpayer bail out bookies and bettors?

Posted by: danthinc | April 28, 2010 9:22 AM | Report abuse

I see the vitriol in these comments and the senate hearings against Goldman Sachs but it just shows what fools the general pubic and Senate are. The dog and pony show yesterday was just a public flogging for Obama's benefit to deflect the fact that he is property of Goldman Sachs. Levin is just angry that Schumer got more money from Goldman Sachs then he did.In the end Goldman will make more money off the government and nothing will come of this because they did nothing wrong.

The fact that millions of idiots bought houses they could not afford with mortgages whose terms they did not read is not Goldman's fault.

Posted by: Pilot1 | April 28, 2010 9:27 AM | Report abuse

GS are not advisors; they are market makers. They create deals for their customers, they don't presume to tell their customers whether the deal is good or not. It's the difference between hiring an interior designer vs. hiring someone to present a bunch of furniture options to you. The designer is selling expertise, the other is selling a service. Of course, congress could pass a law that forbids GS from betting on the deals it sells, but it's not against the law yet.

Posted by: NNevada | April 28, 2010 9:28 AM | Report abuse

So what Mallaby is telling us is that these guys are the smart ones. These guys did absolutely nothing wrong. Perhaps a "little" unethical, but no laws were broken!

Let's see! Some of the reasons of the near collapse of our countries economic system were that Mallaby believes no laws were broken:

* Banks handing out subprime loans to unqualified home-buyers.
* Banks handing out home equity loans to insure the wave continues.
* R.E. Assessors pumping up the value of homes to keep the wave going.
* R.E. Brokers keeping potential home buyers enthused to keep the wave going.
* R.E Brokers pushing more expensive homes on buyers to keep the wave going.
* Banks making it easier to lend with initially low ARM's.
* Banks making it easier to lend with interest only loans.
* Banks making it easier to lend by accepting stated proof of income.
* Mortgage Lenders bundling loans and selling them to banks.
* Mortgage Lenders bundling loans and selling them makes them more willing to lend.
* Investment firms finding new and exotic methods to make money on bundled loans.
* Investment firms able to protect themselves through "shorts" and insurance coverage on potential losses.
* Everyone is happy because they're all making a bundle of cash.
* Whoops! The Housing Market collapses.
* Everyone loses money except the investment firms who made a killing on it, when they knew this was going to happen, hedged their bets and are now patting themselves on the back.
* The "Smart Guys" were probably a little unethical, but broke no laws.

Mallaby! I think you've just given Congress and the President good reason to impose incredibly tough regulations on banks, the Real Estate industry, and investment firms.

And as an American consumer, I really do appreciate it! Thank you!

Posted by: helloisanyoneoutthere | April 28, 2010 9:29 AM | Report abuse

Goldman Sachs will pay. In their business, trust is the byword. They gave that away.

Posted by: curtb | April 28, 2010 9:34 AM | Report abuse

Is this a parody column? Seriously, it's not even worthy of a response. It would be like arguing with the guy outside of 7-eleven who claims an alien is working behind the counter.

Posted by: sollazo | April 28, 2010 9:36 AM | Report abuse

If GS was so smart that it purged itself of mortgage mania earlier than most, why did it join the other "victims" in accepting the bailout? Smart people don't need to be bailed out.

Mallaby is right that Moody's and other ratings agencies contributed to the mess, along with other public and private sector players.

As with W's use of imaginary WMDs to justify a foreign war, the architects of the financial debacle plead incompetence and point fingers at agencies that provided them with "bad intelligence."

At some point we need to stop overlooking the implausibility of intertwined bouts of incompetence that just happen, so very coincidentally, to further enrich the wealthy and impoverish the poor.

Let's take off the rose-colored glasses of corporate-media-manufactured naivete and recognize collusion when it stares back at us. The financial oligarchs orchestrate the bubble-bust-bailout cycles.

We have at least as much to fear from concentrations of private capital as we do from concentrations of government authority.

Posted by: HumanistPatriot | April 28, 2010 9:49 AM | Report abuse

If Goldman did not want to buy rocket fuel, but someone else did, and it was legal for Goldman or any other brokerage firm to sell rocket fuel, and it was as obvious that they could either sell it, or let some other firm fill that client's order, as it was that the client had a right to buy it and Goldman's refusal to sell it might gravely harm the subject client's interest, what's the problem with Goldman selling it?

It is absurd to think that Goldman, or any other broker, should be constrained by the realities that dictate their own investment strategies in dealing in a market place with clients who are free to make their own investment decisions, formulate their own investment strategies, and win or lose while complying with investment laws.

Posted by: kflb | April 28, 2010 9:50 AM | Report abuse

Mallaby, thank goodness you are not too smart. There are plenty of "smart" folks in prison.

Posted by: wesatch | April 28, 2010 9:52 AM | Report abuse

Even as it bet against mortgages with its own capital, Goldman was carrying on its parallel business of selling mortgage securities to those who still wanted to buy them. The way Wall Streeters see things, there is nothing wrong with this: How you bet with your own money and what you sell to your clients are unconnected...

...Goldman was carrying on its parallel business of selling mortgage securities to those who still wanted to buy them!

...to those who still wanted to buy them!!!!

caveat emptor. the bail out worked. now, get back to work...

Posted by: mloaks | April 28, 2010 9:54 AM | Report abuse

Goldman made money by packaging and selling securities --- backed by really bad mortgages. Some investors, mainly other large financial institutions, were dumb enough to buy those securities.

Goldman decided that the mortgages were a bad risk, so they bet against them. I see Goldman exploiting their role in packaging and selling securities as a way to earn higher rates of return on their own (and possibly some of their clients') investment portfolios by opting to stay out of the purchase of the securities backed by the mortgages and instead betting against them.

Is that illegal? I honestly don't know. Did Goldman violate any laws, again, I don't know. What I do know is that yesterday's hearing did nothing to better inform me of the legal lines Goldman may have stepped over --- but it did show me how inept our Congressional overseers are and how out of touch Wall Street wiz kids can be.

But we already knew that -- so what was the point of the hearing?

Posted by: jeffreyshovlin | April 28, 2010 10:01 AM | Report abuse

There is an important difference between "pricking" a bubble, and profiteering off the bubble. I have nothing against smart people. I've got a problem with smart pirates.

Posted by: bertram2 | April 28, 2010 10:11 AM | Report abuse

Yonkers, New York
28 April 2010

When the dust finally settles on the investigation into the financial hanky-panky allegedly committed by Wall Street's "Masters of the Universe," which investigation is being conducted by the Senate Committee led by Senator Carl Levin--more likely than not Goldman Sachs and the other mega-banks are not going to come out smelling like roses.

They're gonna smell like long-dead fish!

They may not have breached the law, but probably engaged in totally risky and highly irresponsible behavior which cannot stand public scrutiny on ethical grounds.

Their actions pretty nearly brought America to the edge of the pricipice. That should never be allowed by the Congress, representing the larger interests of the American people, to ever happen again.

Mariano Patalinjug

Posted by: MPatalinjug | April 28, 2010 10:11 AM | Report abuse

Oh man... this may be the single lamest apology piece for Goldman Sachs and Wall Street in general, that has ever been published. "Smart guys"? Really? Seriously? I'm thinking more along the lines of "greedy morons".

Posted by: CardFan | April 28, 2010 10:11 AM | Report abuse

The CDOs allowed Goldman to appear to be "holding" these stocks for all public purposes, while they were actually in a perfectly hedged position. that means that they don't think the position is going to be net positive, and are willing to pay alot of money to make sure they don't lose their shirts when the market goes sour.

then the earn transactional income from selling the stock to other folks, who check the filings and find that Goldman is Holding.

they should have sold their own, pure and simple, if they thought it was risky. buying CDOs was a mask to their investment position.

Perhaps not illegal, but definitely immoral.

Posted by: anneforster1102 | April 28, 2010 10:11 AM | Report abuse

Good god, where did Fred Hiatt find this ethics-free Wall Street apologist?

Hey Mallaby, you worm-like cheap hack, the "smart" guys ARE the bad guys here.

Smart people go to prisong all the time, because they lack honesty and ethics. Goldman should have a few dozen of its "smart guys" behind bars.

Posted by: losthorizon10 | April 28, 2010 10:24 AM | Report abuse

I'm beginning to believe that the average person who thinks the brokers, money managers, etc. can be trusted is a falsehood. I've had some of my money put into a fund or investment that just lost, lost, and lost. It all reminds me of the fund manager (in the commercial) who told his brokers to put some lipstick on the pig and get out and sell, sell, sell. Unless you get a thrill out of gambling, I'd be very careful about who I trust to invest my money. These financial wizes wouldn't give me the time of day (I work for my income), but it's all the wannabees I worry about. A few years ago I asked the founder of the company I worked for where to put my money (he was worth several million). He answered "in your mattress."

Posted by: MNUSA | April 28, 2010 10:29 AM | Report abuse

I'm beginning to believe that the average person who thinks the brokers, money managers, etc. can be trusted is a falsehood. I've had some of my money put into a fund or investment that just lost, lost, and lost. It all reminds me of the fund manager (in the commercial) who told his brokers to put some lipstick on the pig and get out and sell, sell, sell. Unless you get a thrill out of gambling, I'd be very careful about who I trust to invest my money. These financial wizes wouldn't give me the time of day (I work for my income), but it's all the wannabees I worry about. A few years ago I asked the founder of the company I worked for where to put my money (he was worth several million). He answered "in your mattress." A month ago I sold my one Goldman Sachs fund.

Posted by: MNUSA | April 28, 2010 10:31 AM | Report abuse

Amazing how people try to justify certain people and their "mistakes". Please these people make millions and thousands of dollars and write about how smart they are. They're not mistakes it's greed and the feeling that they're so smart no one can figure out the wrong they're doing.

Posted by: rlj1 | April 28, 2010 10:53 AM | Report abuse

Law1946 has it right. It does no good for this journalist to try to whitewash the fraudsters at Goldman Sachs. He's also trying to sell the convenient Wall St. Journal "truth" that the meltdown was caused by the subprime market alone. The bad investments in commercial property outweigh the bad debts of home-owners by far. Take a look at the empty casinos and hotels in Las Vegas or Atlantic city for example. Some of these loans are so worthless that the buildings will be torn down before they're even completed.

Goldman Sachs was involved in the bundling of these bad debts with the home mortgages. This little "mistake", as Mallerby so quaintly calls it, made certain Men a lot of Gold in commisions, boni, and consultancy fees. This is only the tip of the Goldman iceberg. They are heavily involved in property speculation in Germany as well as the swindle that bankrupted the department store chain Karstadt. The usual technique of asset strippig has been refined to an art, with inside board members allowing firms to sell off the property their buildings are sitting on to a new "company" that jacks the rent 300% and busts the company.

I won't go on any longer but just briefly mention Greece (again Goldmans) and the front-company Cerberus. Speculations on oil, currency and property are all made to siphon money out of the system.

Banksters all. Chris Brown in Hamburg

Posted by: chrisbrown12 | April 28, 2010 10:54 AM | Report abuse

Law1946 has it right. It does no good for this journalist to try to whitewash the fraudsters at Goldman Sachs. He's also trying to sell the convenient Wall St. Journal "truth" that the meltdown was caused by the subprime market alone. The bad investments in commercial property outweigh the bad debts of home-owners by far. Take a look at the empty casinos and hotels in Las Vegas or Atlantic city for example. Some of these loans are so worthless that the buildings will be torn down before they're even completed.

Goldman Sachs was involved in the bundling of these bad debts with the home mortgages. This little "mistake", as Mallerby so quaintly calls it, made certain Men a lot of Gold in commisions, boni, and consultancy fees. This is only the tip of the Goldman iceberg. They are heavily involved in property speculation in Germany as well as the swindle that bankrupted the department store chain Karstadt. The usual technique of asset strippig has been refined to an art, with inside board members allowing firms to sell off the property their buildings are sitting on to a new "company" that jacks the rent 300% and busts the company.

I won't go on any longer but just briefly mention Greece (again Goldmans) and the front-company Cerberus. Speculations on oil, currency and property are all made to siphon money out of the system.

Banksters all. Chris Brown in Hamburg

Posted by: chrisbrown12 | April 28, 2010 10:55 AM | Report abuse

Congress is trying to pick a target other than itself. But how do you put congress in jail? When you change the ruling class this leds to blood on the streets and presently things are simply not that bad. So we watch the play acting knowing full well who are guilty and knowing it is better to stay with the actors rather than change. But if things do get worse than all bets are off.

FDR saved the system in the first great depression but the system is not likely to be saved the second time. It is still not clear that it is saved. Things really don't repeat themselves as they have new things in them and take a different turn. Nations raise and fall like the sea.

Posted by: artg | April 28, 2010 11:08 AM | Report abuse

I'm reassured to to read how many other comments easily grasp Mallaby's canard.

Shorting is NOT the problem. That's merely the shiny object being used as misdirection in this sleight of hand trick.

If you fell for it, read the initial comments above, watch the trick again until you note the misdirection.

What's most galling is that Mallaby published this offal.

Posted by: boscobobb | April 28, 2010 11:24 AM | Report abuse

I think Mallaby is mistaking "smart" for "cynical" and "corrupt" for "sane".

GS sold mortgages to customers who were high risk, and then bet that those borrowers would default on those mortgages. They sold those mortgages to investors without telling them that they consider them high risk.

In the testimony, GS said that their investors wanted to buy "exposure". I'm pretty sure that you won't see that word used in any GS investor literature.

GS gave out risky mortgages and tried to swindle the market by betting against their own devices. They made out like bandits and held the taxpayer hostage to their risk-taking. GS's biggest defense was that "everyone was doing it", something their mothers should have taught them was never an excuse.

Posted by: AxelDC | April 28, 2010 11:26 AM | Report abuse

Punished for being smart?-NO-Punished for being a greedy arrogant criminal-YES.

Posted by: alyd69 | April 28, 2010 11:33 AM | Report abuse

Wonder if Mr. Mallaby is on Goldman's payroll as a paid lobbyist?

No one should be penalized for being smart. They should be penalized for using their intelligence to scam the financial system the way Goldman and other firms on Wall Street did.

Under the cover of being "a market maker" and "hedging risk" Goldman engaged in a very obvious set of behaviors to double deal. At the same time it was creating sophisticated CDOs predicated on the supposed (I say supposed because it is obvious Goldman and many of its employees engaged in due diligence were aware of all the fraud and criminal behavior in building sub prime portfolios) it was creating vehicles and instruments to undermine these investments and,cricitcally, using its position as a market maker and the firm's own capital to put downward price pressure on the investments it was selling to other insitututions and investors. If that is not double dealing and a conflict of interest, what is?

Tons of intelligence and creativity is no subsitutue for an ounce or two of integrity and judgment based on some notion of morality. It was this glaring omission of character which was on full display yesterday in Washington and which is Exhibit A in the need for massive and fundamental regulation and oversight by an outside and independent agency not burdened by the inherent conflicts of interest which Goldman sites as fundamental to the way it must conduct business in the brave new world of global financial engineering.

Posted by: bobfbell | April 28, 2010 11:37 AM | Report abuse

BWAHAHAHAHHAHAHAHA SIMPLETONS....

It was goldman's RESPONSIBILITY TO short...

it was their ethical RESPONSIBILITY.

shorting the position SHOULD HAVE led other to realize the market was on a bubble... but YOU DIDN'T LISTEN....

I did, wanna see the new vette? paid for by cash for clunkers...

you idiots, did you really think the rich wouldn't be 20 steps ahead of you?

really.... you will always pay for us.

but you need to be nice to get anything back.... idiots.

Posted by: docwhocuts | April 28, 2010 12:10 PM | Report abuse

I was going to post a rant but Law1946 did it for me admirably. Thanks.

Posted by: arancia12 | April 28, 2010 12:14 PM | Report abuse

Wow! You actually wrote this stuff down in the permanent record. That was kind of not so smart on your part. Now it becomes clear that you have no clue about reality or are working with the enemy.

Either way, you become a worthless hack. It's out there for all to see. How dumb is that?

Posted by: ejwenger | April 28, 2010 12:30 PM | Report abuse

All of Goldmans shenanigans goes back to that old addage,"O what a tangled mess we weave when we decieve".

Posted by: ctharwick | April 28, 2010 12:37 PM | Report abuse

So, Goldmens ends up the the banks assets and the depositors get paid off with the FDIC monies. How many more banks will liquify and end up in "investor" hands at a steep discount before Congress figures out all that has gone on.

Posted by: idahone | April 28, 2010 1:22 PM | Report abuse

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