Randomly Noted

If we think about the financial crisis as coming in two distinct waves, this second and current wave highlighted by sovereign debt issues finds politicians around the world much less concerned about upsetting markets.

When the credit crisis settled into the scariest part of its first phase (financial sector distress) in late 2008, you’ll recall the U.S. Congress first saw fit not to pass the so-called TARP legislation that set aside vast sums of money to save banks and other financial institutions.

The U.S. stock market promptly swooned and the politicians collectively rethought their position. TARP passed and despite significant criticism the aid did the trick of keeping  a credit squeeze and deep recession from turning into something worse.

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It’s been discussed as a boxing match or a win-or-lose debate.

Unsurprisingly, your view of who ‘won’ was likely determined by where you stood on the Wall Street/Main Street political axis before the show got under way.

But if we can place cynicism aside for a moment, we might agree the hours and hours of back-and-forth Tuesday between U.S. senators and a gathering of Goldman Sachs & Co. current and former executives was of immense educational value for all.

Whether you are a “sophisticated” institutional investor (the word sophisticated now in some cases being taken to mean its opposite), a mere individual with his or her nest egg in the stock or bond market or an observer who thinks Wall Street is to blame for everything that’s gone wrong with the economy, you now have a much better idea of how things really work in some of the higher, more complex reaches of our markets.

The most educational quote comes from Lloyd Blankfein, the chief executive of Goldman Sachs. ”I don’t think our clients care or they should care” about what position Goldman might have as it sells a deal to others. “As far as whether something is a weak security or going bad, we are selling securities all the time that are weak or we in the market don’t like.”

You can express outrage at this idea, as some of the members of the Senate Permanent Subcommittee on Investigations chose to do. “You’ve got a short bet against that security, you don’t think the client would care?” asked Subcommittee Chairman Sen. Carl Levin, D-Mich.

But know this. Market makers and indeed all others in the financial services industry and probably any other industry will almost always take a narrow, legalistic view towards their responsibilities to the person or people with whom they are doing business. 

You can call them customers or clients or whatever you like. If you are one of their number you ought to know what the counterparty is legally obligated to tell you and expect nothing more.

If you get more, consider it a bonus.

The Securities and Exchange Commission is claiming that in one synthetic collateralized debt obligation deal Goldman and one of its employees did less than what was required of them and so the SEC filed a civil fraud charge. The SEC says buyers of this particular CDO should have been told a hedge fund that was going short helped choose some of the contents of the CDO.

Goldman and the employee vehemently deny the charges.

If we want to change what market makers and others owe their clients as far as disclosure, let’s change it. Let’s legislatively be clear about what is demanded of various actors in the financial arena.

Once that’s settled, don’t expect anything more.

Did you read Dorothy Rabinowitz’s WSJ opinion piece on Massachusetts District Attorney Martha Coakley, the Democratic Senatorial candidate who’s up for election on Tuesday? You should, because it will make you wonder why President Obama is bothering to stump for Coakley in a last-ditch effort to save the seat for his party. Oops! That’s why he’s doing it. The Dems are in trouble as the 2010 midterm elections loom, and the party’s leader is doing what’s necessary to protect each and every Congressional vote. As I wrote yesterday in another context, desperate times call for desperate measures. But do they? If I were the president’s advisers, I’d be telling him to take a deep breath and craft a noble plan to salvage a presidency that still has a lot of potential to re-tie the fraying bonds which Peggy Noonan writes about today. All this said, I and perhaps you, too, took a bit of satisfaction from Obama’s attack on big banks this week, even as one felt slightly seamy for doing so. Rich bankers are such a cheap and easy target these days that it almost seems beneath the President of the United States to go after them when the problems afflicting our economy – including the financial services industry – are so much bigger and complex than what amounts to a payroll issue. The fundamental fin services issue before policy makers, regulators and us, the voters, is: what should a bank look like? Should it be a multi-tasking, uncontrollable behemoth like Citigroup or a slim, streamlined boutique like Lazard or the cliched Main Street deposit-taking bank? Is there a particular industrial structure, regulatory regime and compensation system that will protect us from the dangers of the just-ended decade – easy credit and easy mortgages put through the derivative department’s Cuisinart and peddled to the gullible? Aren’t we, who squandered our savings on McMansions only to get anti-foreclosure assistance,  as blameworthy as the be-suited M.B.A.s we’re flogging so publicly?

Let’s hope Nebraskans’ aversion to the cringe-worthy pork-barrel politics of Sen. Ben Nelson ushers in a new American politics this year – one where self-interest is sidelined and the national interest prevails. You may favor the Democrat’s health reform project, you may oppose it – you may, like many people, be uncertain. But it’s hard not to be repelled by the small-bore thinking that got healthcare legislation through the Senate in a pre-Christmas holiday scramble. That the people of Nebraska are put off by the Senator’s politics – forcing Nelson to justify his actions - suggests the intellectual independence of the American people has survived a generation of some of the crassest politicking on both sides of the aisle. If you’ve watched Nebraska politics for as long as I have (26 years and counting), Nebraskans’ reaction to the sweetheart deal Nelson secured for the Cornhusker State isn’t entirely surprising. This is a largely pro-GOP population which nonetheless routinely elects Democrats to the highest offices – some of them free-thinking types such as Bob Kerrey. Nebraskans’ feisty political independence has roots in 19th century prairie Populism. We may well see a (hopefully benign) 21st century Populist variant spread across the U.S. as Americans come out of the funk of severe economic recession and regain their confidence and convictions. Continue reading…