Rethinking Markets

First of all, kudos to McClatchy’s news service for running a slew of articles critical of Goldman Sachs during this financial crisis. The firm displays a disastrous combination of connectedness and high prestige on the one hand, and unconscionable financial practices on the other. They are not at all alone, or even the worst, but because they are seen as the best and brightest, they escape the same criticisms to which others are subjected. And their only real defense is to accuse anyone questioning their practices of sour grapes.

That said, I would take issue with this particular story about how Goldman sold tons of mortgage-backed securities to investors while shorting the housing market themselves. It is a problem endemic to any financial institution with both an investment banking function (packaging financial products to sell to investors) and a proprietary sales desk. Sometimes there have been walls between these two functions, sometimes not. But it’s unsurprising that the banks takes opposite positions to the ones it sells to clients. For goodness sake, there is evidence that they shorted their own position in the sub-prime derivatives market.

And here’s the thing: the ultimate responsibility for the losses incurred by purchasing products sold by Goldman Sachs resides firmly with the people who purchase products sold by Goldman Sachs. If you can not trust the seller, do not buy their product. Financial services companies are dependent to a shocking degree on just-too-smart-for-their-own-good managers of large pools of money all over the world. Pension fund managers, state comptrollers, corporate treasurers, there are too many people who grew up wanting to be in a prestigious investment firm just like Goldman Sachs. So when GS comes along with dog and pony investment shows, these investment managers fall for it all the time.

The book has not yet been written on how poorly these investment agents all around the world get routinely hosed by the likes of Wall Street, in turn subjecting the real economy to risks it does not want or need.