Market Talk

We cringed last month when we read the FOMC’s September 21 meeting minutes, specifically the part where the committee said stresses “in European financial markets remained broadly contained,” but bore watching.

It was the first time, as far as we could tell, that they’d used the term “contained” in that context since the committee’s infamous assessment that the subprime-mortgage turmoil back in early 2007 was “relatively well contained.”

Well, we know how that worked out, right? Not contained…at all.

And neither are the stresses in European financial markets, as it turns out. In fact, it’s looking anything but contained at this point, as fears of contagion from Ireland increase.

The lesson here, of course: When the Fed says something appears “contained,” run the other way.

Notice that in the FOMC minutes released today from the meeting earlier this month, the committee doesn’t say any thing’s “contained.” They actually don’t mention much about Europe, except to say that sovereign-debt spreads had either declined or were little changed — except in Ireland, where “spreads moved higher on concerns over the fiscal burdens associated with losses in the Irish banking sector.”

The Vampire Squid is in trouble.

Goldman Sachs is getting beat up good this morning, after news broke that the SEC charged them with fraud in structuring and marketing a CDO tied to subprime mortgages. The news is ugly enough in and of itself, but what really captures the imagination are the possible implications and ramifications.

Goldman shares are down 12%, and the entire financial complex is down about 3% on the news. It’s kind of like that scene in “Training Day,” where Ethan Hawke shoots Denzel Washington, after Denzel taunts him, saying he doesn’t the guts to do it. When he finally shoots, Denzel screams in surprise (in a way that only Denzel can convey, too) “you shot me in the @#$!”

The SEC’s charges are straightforward enough: the hedge fund Paulson & Co. paid Goldman $15 million to structure and sell a CDO in 2007, just as the housing market was beginning to crack. Paulson picked the securities to include in the CDO, and then shorted them. Goldman went along, and told investors the securities were picked by an independent third party.

We’ll get all breathless here and suggest to you that this could be the biggest piece of news to hit the financial markets this year. It gets to the heart of the recriminations about Wall Street’s role in the housing bubble, the credit crisis and the financial meltdown. The big Wall Street firms weren’t just providing “liquidity,” as they claimed, they were actively gaming the system to their own benefit. That’s what this allegation says. And it’s Goldman Sachs.

It’s early. These are just allegations. Goldman has not been heard from yet. But another crack in the wall that Wall Street hides behind — that facade that says they’re so successful because they’re just that much smarter than everybody else — has appeared. No telling where it goes or how wide it gets.

It's okay Ben, just don't tell us you had nothing to do with it.

Ben Bernanke’s speech yesterday is getting a lot of press not for what he said, but for what wasn’t said.

Piggybacking off of Paul’s earlier post, Bernanke was adamant that lax regulation, and not low interest rates, was the main cause of the housing bubble. The comments aren’t surprising, especially coming from a Fed chairman. Still, Princeton economist Paul Krugman says it was a “somewhat odd” speech, as Bernanke should’ve been more forthright about the Fed’s “undoubted failures.”

Bernanke would’ve been better focusing on the Fed’s inability to acknowledge subprime lending risks, Krugman says, as well as recognizing the housing bubble as it was happening in real time.

“And I would add that focusing on unconventional mortgages is awfully 2007,” Krugman notes. “We now know that many perfectly conventional mortgages went bust; we know that commercial real estate was at least as overblown as housing.”

It’s clear the housing bubble was about much more than subprime mortgages, he adds. “Where regulation really needs to focus is on making the financial system less fragile.”

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