Blankfein’s Theology
CEO Blankfein says Goldman does God’s work. He must have meant bingo.
The legitimate function of financial markets is to efficiently move money from savers into business investment. This is true of primary issues—a newly issued stock or bond—but also of secondary sales (I sell you my pre-existing shares of SNAFU industries) because even in the secondary sale cash is freed at the end for new investment. (Not to mention that the primary sale was possible only because the first buyer knew he could re-sell.)
A synthetic CDO trade such as the one that caused all the Goldman hoo-hah, however, does not entail the purchase or sale of any existing security. It does not move capital from savings to investment. It is a pure bet on the performance of some other existing securities. To the contrary, rather than the seller receiving cash, which could be otherwise invested, both sides must or at least should set aside cash to guarantee their performance on the bet.
Goldman received a $15 million dollar fee for it’s facilitating role, making the firm surely one of the highest paid bookies in the history of the world.
Nevertheless the government’s legal case against Goldman is absurd as is most of the moral outrage over this particular case. The outrage centers around Goldman’s failure to tell the German bankers on the other side of the trade that John Paulson, a great American, helped choose the securities he wanted to bet against. Supposedly this violated some rule of neutrality by which Goldman was supposed to abide.
But given that this trade was a pure bet, and the synthetic CDO was created just for this bet, what would “neutral mean”? That Goldman should build the synthetic CDO to favor the long bettor over the short bettor? That Goldman should construct the bet such that either side had an absolutely equal chance of losing its money, like the Red and the Black in roulette, with only the house guaranteed to cash in?
Sure Goldman should have told the truth. Sure they are sleaze bags. But the whining German bankers are worse, with their implication that Goldman was responsible for doing the bankers’ work for them. Paulson agreed to take the short position only because, knowing what he was betting on, he liked the odds. The Germans’ problem is that like all the other mega-bankers that almost blew up the world, they are a bunch of clueless bureaucrats who refused any responsibility for making sound judgments about investing the money with which they had been entrusted. They wanted to live in a world of “neutrality,” a world of “level playing fields” in which worthless, lazy, stupid, German bureaucrats can be billionaires too.
We all love to hate Goldman, but on this deal they were indeed doing God’s work: every dime the Germans’ lost was a dime taken away from the sort of witless, greedy bureaucrats that created the machinery of disaster.
Tags: Andrew Redleaf, CDO, Goldman case, Lloyd Blankfein, Richard Vigilante
