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Goldman Sachs execs still don't get it
Posted by BARBARA KIVIAT Tuesday, April 27, 2010 at 3:55 pm
4 Comments • Related Topics: wall street regulation , goldman sachs,
senate
Today's Goldman Sachs hearing in the Senate is fantastic theater. The
kind of theater that makes you want to run to the restroom to vomit.

I've been watching the hearing on TV, and I am nauseated to report
that they still don't get it. The world came to the brink of financial
ruin, and the people driving the mortgage securities death-machine
still can only look back and say that at the time it all made sense.
To say that the Goldman Sachs executives testifying lack introspection
is like saying that the Black Death was a minor health scare.

Consider the following exchange between Senator Ted Kaufman and Daniel
Sparks, who ran Goldman's mortgage division from late 2006 until
mid-2008. Kaufman wanted to know about stated-income loans—mortgages
in which borrowers don't have to prove they make the amount of money
they claim to. These loans, which may make sense for rich people with
variable income (an entrepreneur, say), came to be sold to all stripes
of borrower, including many with subprime credit. Kaufman remarked on
one securitization in which 90% of the loans were stated-income. Then
he turned to Sparks:


Kaufman: What do you think of the practice, stated-income loans?

Sparks: We weren't a big originator. I believe we securitized some of
that. I believe that a loan has a risk to it that when it's verified
has a different risk to it.

Kaufman: A regulator earlier said it was anathema to the banking
business.

Sparks: Again, Senator, we were not a big originator in that space.

Kaufman: But you securitized these loans.

Sparks: Yes, we did.

Kaufman went on to detail how Goldman didn't just securitize some
stated-income loans, but a lot of them. Then the questioning resumed.

Kaufman: What would you think, what would be a reasonable percentage
of home-equity loans in a securitization to be stated-income?

Sparks: Well, I'm not familiar. In hindsight, those deals didn't
perform, so I don't know what a reasonable percentage would be.

Kaufman: Take a wild guess... There was this great sucking sound from
Wall Street to get more of these loans into the marketplace.

Sparks: Well, Senator, you would know from your participating in the
market what types of investors wanted to buy what risk. I don't know
what the right percentage would be.

Kaufman: 10-15%?

Sparks: It would depend on the deal.

Kaufman: What if I told you 90% was stated income. Would that cause
you concern?

Sparks: This particular deal, in hindsight, did not perform well.

Kaufman: Couldn't it be reasonable to believe that with [that many]
stated-income loans there was a good chance a large percentage would
fail?

Sparks: Senator, at that time things happened in the market and were
accepted by the market that in hindsight look very different than they
did at the time.

Kaufman then launched into a tirade about how, if the witnesses in
front of him were to be believed, the United States had suffered some
great natural disaster—an event that had been in no way been man's
doing. It was if the financial crisis was something that just kind of
happened to us.

I am equally as appalled.

It's not that I think Goldman Sachs and other mortgage securitizers
are solely to blame for the real-estate bubble and ensuing financial
crisis. Far from it. I think that Sparks made a really good point when
he talked about demand for such securities. Investors around the world
who thought that they could get more return without taking on
additional risk were operating with just as delusional and destructive
a mindset as the folks at Goldman Sachs.

Bubbles are bubbles because otherwise rational people start to do
irrational things. In the moment, it can be really tough to tell what
is a bad idea, what is one deal too many, what is compromising sound
judgment in an effort to squeeze out even more profit.

After the mania ends, it is easy to look back and understand how
behavior got out of hand. Three years after the credit crunch began,
it is shockingly simple to review the tape and say, "Oh, yeah, we
shouldn't have been doing that."

Unless you work at Goldman Sachs. Time and again at today's hearing,
Goldman executives refused to admit, even in retrospect, that they had
crossed a line. Time and again at today's hearing, they defended their
actions by saying that they were rightly responding to market demand—
as if responding to market demand somehow absolves one of the
responsibility to use human judgment. I kept waiting for one of them
to stand up and scream, "Look, we did things we shouldn't have, we did
things that defied common sense, but that's the nature of an asset
bubble! We're sorry, we are, we've learned from our mistakes and we
have better risk controls. But you have to know, we're not bad people.
Everyone got out of hand. We'll own up to own fair share, but please
understand that more people than us had a hand in this."

Unfortunately, that moment never came. Instead, what we got was
Goldman executives spending a lot of times leafing through the
documents in front of them. Every time a Senator asked a question
about a particular email. Leaf, leaf, leaf. "In email number 61..."
"Okay, hold on..." Leaf, leaf, leaf. "Um, I don't see that..." Leaf,
leaf, leaf. "Email 61." "Hm..." Leaf, leaf. Finally, Senator Susan
Collins called them out on their little diversionary, time-consuming
tactic. Good for her.

And really bad for the rest of us. Because the people who work at
Goldman Sachs are terribly smart, and it would be helpful to have them
seriously thinking about what went wrong and how we might better
manage the financial ecosystem in order to avoid meltdowns in the
future. Instead, they seem to be using all their energy to circle the
wagons. Senator Kaufman's question about stated-income loans was open-
ended and non-confrontational. What might that exchange have looked
like if Sparks had started with, "You know, stated-income loans are
great for some people, but not for others. In the bubble, they went to
the wrong people. It's a good question—how do you design products so
that they're not misused?"

What really frightens me in all of this is that it didn't seem like a
legal or PR strategy. It seemed like these Goldman executives
genuinely had no ability to take a step back and make observations
about the system in which they operate. It seemed like they had been
so thoroughly inculcated in the culture of high finance that it was
literally impossible for them to do the thing intelligent people are
supposed to be able to do in the wake of a systemic breakdown—re-
evaluate the assumptions that went into building that system.

Perhaps I was expecting too much out of my fellow human beings. We are
deeply shaped by our environments, after all. I just thought—
especially after hearing that the Goldman executives agreed to testify
without being subpoenaed—that we might learn something useful in these
hearings. That we might actually gain some insight instead of just
another reason to want to bring these people down a peg.

I was wrong.


Read more: http://curiouscapitalist.blogs.time.com/2010/04/27/goldman-sachs-execs-still-dont-get-it/?xid=rss-topstories#ixzz0mL9jnx2G


Eric D. Schwerin
Rosemont Seneca Partners, LLC
1010 Wisconsin Ave., NW
Suite 705
Washington, DC 20007
(202) 333-1880
eschwerin@rosemontseneca.com
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