Randomly Noted

How about this -  a synthetic CDO that allowed one to go long or short the U.S. Senate Permanent Subcommittee on Investigations hearings today into Goldman Sachs and its role in the subprime mortgage meltdown. Something tells me there would be more people looking for the short position than the long position.

This subcommittee has spent 18 months looking into Goldman and its mortgage operations. A good six hours into the hearings, and in this blogger’s view, there have been no smoking guns. In fact, if anything, you come away with the feeling that these senators don’t understand what they are looking into.

For example, Chairman Carl Levin repeatedly asks the executives of Goldman if the firm had a significant short position. And they keep saying, yes we did, to offset a long position (something called hedging, Mr. Levin). And Levin replies that’s not what he asked (the long position answer).

Levin continues to hammer the point of how wrong it is for Goldman to be short while selling long mortgage positions to other investors. But clearly it is more complicated than that. Financial markets are made up of buyers and sellers. Buyers think there is more value in a security to be had and sellers think they have made all the money they can and are ready to move on. Goldman, as a market maker, must be long and short securities often at the same time. It isn’t a statement about what Goldman thinks of a market’s direction – it’s about prudent risk management.

This hearing is about taking a bunch of Wall Street executives to the woodshed. At one point, they were being blamed for playing a role in the creation of stated-income mortgage loans (loans in which there was no verification of a borrower’s income). The Goldman executives pointed out that while they securitized some of those loans, they were not originators. Where was this committee when Countrywide Mortgage, Freemont Investment & Loan and New Century Financial (not to mention Washington Mutual and others) were originating these horrible loans five and six years ago?

There is a lot of anger about the role Washington and taxpayers had to play to save the financial system – and that’s justified. But there are many people to blame for what happened in the mortgage meltdown: regulators, banks, investment banks that securitized and sold these things and of course, the person who took on a mortgage he or she had no business taking.

Carrick Mollencamp and other staffers had a great piece in the Wall Street Journal last week that looked at some of the homeowners whose mortgages were represented in the CDO that is the center of the government’s fraud case against Goldman. One homeowner refinanced her existing mortgage to one that became $786,250; her pre-tax monthly income was $9,000. Her mortgage payment was more than $5,000 a month. If she was in a 28% tax bracket, her after-tax income was more like $6,500 a month. She never should have been given that loan. But she never should have taken it, either.

Maybe we don’t need that synthetic CDO I mentioned above – the stock market actually offered a way to bet on today’s hearing. While financial stocks in general were off several percentage points today, Goldman’s shares closed slightly higher.

Goldman's shares fell when S&P downgraded Greece - but ended higher for the day. Other financial stocks fell.