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Follow on Google News | Goldman Sachs & Warren Buffett: The Scandal We Might Never KnowWhat did Warren Buffett know about Goldman Sachs betting against the mortgage market while selling mortgage securities to its clients? Is he as clean as he seems? Maybe one day we will know the answer. Or maybe not.
By: EconomyWatch.com Advisory: The following is based purely on circumstantial evidence and analogical reasoning and NOT any inside information. During the Watergate hearings of the mid-1970s – examining dirty tricks that, in today’s perspective, seem almost laughably collegiate, but were taken very seriously at the time, which only shows how degraded American political culture has since become – a dramatic moment was provided by Republican Senator Howard Baker of Tennessee, when he asked two very simple linked questions: what did President Nixon know – and when did he know it ??? Today the biggest political economic scandal on the horizon remains the near-meltdown of the global financial system that almost took place in Black September 2008, during which the venerable Lehman Brothers did in fact go under, nearly bringing with it several of its competitive collaborators, and ushering in not just a continuing global recession, but a crisis of credibility in major financial institutions almost everywhere – except, of course, Canada, which despite its physical proximity to the US, has somehow remained immune from the contagion still running rampant just below its southern border. That the Canadian situation – so close, and yet so far – is practically NEVER discussed highlights a sad truth about public discourse regarding the causes and implications of those still-frightening events: even now we know almost as little about what was going on behind the scenes as we did at the time. [Ed: EconomyWatch.com did of course cover this topic in Canada - The Best Advanced Economy in the World.] To be sure, there have been a raft of self-justifying accounts of these events, most recently by then-Treasury Secretary, and former head of Goldman Sachs, Henry Paulson, who discussed his On the Brink: Inside the Race To Stop the Collapse of the Global Financial System on February 9 with the most successful proponent of “value investing”, the Oracle of Omaha himself, St. Warren of Buffett, in an interview streamed live on CNBC.com. Now I generally like Buffett, basically because he takes a long-term approach to investing, and never hesitates to criticize Wall Street practices he considers shady, deceptive, or dishonest, even when they are the SOP of the day. But as I watched his disappointingly unrevealing chat with Paulson, skipping here and there over various “highlights” Because despite the great deal we still don’t know about what was going on then, one thing we DO know, all-too-clearly, is that Goldman Sachs, at least so far, has come out of the still-unfolding crisis in visibly better shape than any other Western financial institution. And as indicated by two disturbing, yet brilliantly reported, articles by Gretchen Morgenson and Louise Story of the New York Times – both of which, we have argued, were seemingly “hidden in plain sight”, one on Christmas Eve, the other on the Friday night / Saturday morning of Super Bowl weekend – it also seems Goldman Sachs took a major role in “heightening the contradictions” There are several explosive tidbits in the Christmas Eve story about how Goldman – and, to be sure, other investment banks and hedge funds – sold their clients derivative packages, allegedly solidly backed by mortgages – the infamous mortgage-backed securities, or MBSs – while, at the same time, making OTHER bets against the very same items they were selling their clients. Now, to be sure, Buffett has railed against derivatives, famously calling them “weapons of economic mass destruction” But the crucial point in this context is WHEN did Goldman start playing this double game of betting against the very same debt packages they were selling their clients as if they had no doubts about their solidity ??? Worried about a housing bubble, top Goldman executives decided in December 2006 to change the firm’s overall stance on the mortgage market, from positive to negative, though it did not disclose that publicly. Indeed, the article points out that several key players within Goldman had started taking this stance even before the firm’s general policy on the housing market shifted into bear-ish precincts. So a good 18 months at least before Black September 2008, Goldman as an institution had moved against what it perceived from that point forward as a bubble in the housing market they were pretty certain was going to collapse – even as they continued to sell derivatives based on that market to their clients. What about the Super Bowl weekend story ??? Well, it was about how Goldman basically pushed AIG to the wall in a quiet but intense dispute over valuations of these very same “derivatized” The dramatic climax of this conflict, with which the Times’ story begins, took place in a conference call at the end of January 2008 – a year after Goldman had privately turned bearish on the housing market, and nine months before the explosion of Black September – a major feature of which, you may recall, was the hysteria engendered by the possible collapse of the largest insurer in the world, that very same AIG. The obvious inference, of course, is that Goldman’s desire to make good on its bets AGAINST the housing market led it to put pressure on AIG they knew the insurance company could not withstand. To read the rest of this article, go to EconomyWatch.com: http://www.economywatch.com/ A definition of Mortgage Backed Securities, or MBS: http://www.economywatch.com/ And a CDO MBS: http://www.economywatch.com/ # # # EconomyWatch.com is the world's largest global, independent, economics community. Every month we serve over 750k users, who read and discuss economics, investing and finance topics. End
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