At about 3:30 p.m. Eastern time on Tuesday, as I was tuned in to the Goldman Sachs hearings on Capitol Hill, I received an email Real Estate Disposition LLC, a real estate auction firm. I don’t remember ever receiving an email from REDC before, but this one caught my eye.
REDC had sent me its “Deals of the Week” list, which was essentially a list of 11 successful foreclosure auctions that REDC had handledâ€”11 among 125 that the firm is conducting over 65 days.
There was the 1,466 square-foot house in Sacramento, Calif., that sold for $99,750, or 32 percent of its previous high selling price of $310,000. A 1,275 square-foot home in Charlotte, N.C., sold for $20,000, or 17 percent of its previous high selling price of $114,000. A six-bedroom, 5,434 square-foot house in Stockton, Calif., sold for $173,250, or 19 percent of the $908,000 it once fetched.
It was for me a reminder of why the red-faced Carl Levin, Democratic senator from Michigan, and his colleagues on the Senate Permanent Subcommittee on Investigations spent 11 hours haranguing occasionally flustered but generally defiant and visibly unconcerned executives from Goldman Sachs about that firm’s mortgage securities transactions. The trail of blame for the collapse of the housing market, and the broader economy, is long and wide.
Comparisons, made more than once during the hearing, between Goldman Sachs and Las Vegas pit bosses, and between the mortgage securities market and gambling in general, are more appropriate and meaningful than perhaps was intended. As a criticism of Goldman and its role in this episode as a market maker and seller of securities backed by dubious collateral, the gambling metaphor is rhetorical cheap shot.
Las Vegas is a place to which many have flocked in search of easy riches, but relatively few have been rewarded. It is the unofficial capital for a nation with many people who believe they are entitled to get something for nothing, or next-to-nothing. In his book “The City in Mind,” author James Howard Kunstler called Las Vegas a “utopia of clowns.” He has the chapter on Vegas posted online. If you read the opening, and insert the phrase “investment banking” where you see “Las Vegas,” you get sentences like “Even the casual observer can see that [investment banking] is approaching its tipping point as a viable [â€¦] system, particularly in the matter of scale,” and “This is the predicament of [investment banking]. Its components have attained a physical enormity that will leave them vulnerable to political, economic and social changes that are bearing down upon us with all the inexorable force of history.”
It’s not a perfect metaphor, but you get the idea.
Yesterday, as the senators on the dais unleashed their tirades and ignorant loaded questions upon the witnesses, the Goldman executives defended their decisions as correct and appropriate at the time they were made. You can say that you disagree with Goldman marketing securities to clients, such as IKB Deutsche Industriebank AG, that it privately believed would fail, and I would agree with you. It’s bad behavior, similar to a used car salesman selling a car he knows has a high probability of breaking down.
But such transactions are not unusual in the investment banking world, nor are they illegal (probably). And on the other side of that used car transaction, just as in the mortgage securities transaction, is the buyer, whose responsibility includes having the vehicle or security examined by a knowledgeable and reputable third-party. In the case of the car, that’s an independent mechanic. In the mortgage securities case, that third party would have been the bond rating agencies, but they really weren’t third parties, given that Goldman was paying them to rate the securities. It is safe to say in hindsight that the rating agencies’ reputations and knowledge also were questionable, but that was not necessarily known then. The fact that they were being paid to rate securities by the same people structuring and marketing those securities was known; it was just accepted.
Clients who bought the riskiest portions of mortgage-backed securities composed of questionable loans or synthetic collateralized debt obligations based on same had to know the risks. Risk is, in fact, what they sought. They could have purchased as a hedge the same credit protection that Paulson & Co. bought.
Is it Goldman’s responsibility to say, “Hey, we’ve got a synthetic CDO you might be interested in. Here’s the list of securities underlying it. Oh, and by the way, all of those securities are crap.” Or is it the responsibility of the investor to understand what those securities represent and the risks involved? The SEC’s civil fraud lawsuit against Goldman might answer that question, from a legal standpoint at least. Separate lawsuits against the rating agencies may answer other questions.
But let’s go back even one step farther on the trail of blameâ€”to the banks or loan companies that originated the mortgages on which Goldman’s “shitty” securities were based. How ethical is it to approve a mortgage or a refinance loan for a party whose ability to pay is in question from the start? On April 22, The Wall Street Journal published a story examining some of the mortgages that went into the ABACUS deal.
“Some of the people whose mortgages underpinned Mr. Paulson’s wager were themselves taking a gambleâ€”that U.S. housing prices would continue to march upward, making it possible for them to eventually pay off loans they couldn’t afford,” the Journal reported.
“One mortgage in the Abacus pool was held by Ms. Onyeukwu, a 43-year-old nursing-home assistant in Pittsburg, Calif. Ms. Onyeukwu already was under financial strain in 2006, when she applied to Fremont Investment & Loan for a new mortgage on her two-story, six-bedroom house in a subdivision called Highlands Ranch. With pre-tax income of about $9,000 a month from a child-care business, she says she was having a hard time making the $5,000 monthly payments on her existing $688,000 mortgage, which carried an initial interest rate of 9.05%.
“Nonetheless, she took out an even bigger loan from Fremont, which lent her $786,250 at an initial interest rate of 7.55%â€”but that would begin to float as high as 13.55% two years later. She says the monthly payment on the new loan came to a bit more than $5,000.
“She defaulted in early 2008 and was evicted from the house in early 2009.
“Fremont didn’t respond to requests for comment.”
Yeah, I bet it didn’t. Maybe Fremont should be forced to respond to a subpoena from the Senate investigations subcommittee.
And let’s take one more step back along the blame trail, to the individual borrowers. No doubt some were conned by shady mortgage companies into signing for loans with terms they did not understand. But plenty of others were simply opportunistic, looking to get something for nothing, or at least very little. Buy a house for $125,000, sell it a year later for $300,000. It was almost-free money, given the ridiculously low interest rates and down payment requirements. And thanks to lax income verification standards, encouraged by mortgage lenders looking to process and get paid for as many mortgages as possible before shoving those loans off their books and into the securitization maw, almost anybody could play, regardless of their ability to pay. Many did, and they got burned. Recall the Journal story: people betting they could use home equity generated by rising home prices to pay off loans they could otherwise not afford.
That’s the “long” part of the blame trail. The “wide” part includes Realtors and their public relations arms that somehow managed to pervert the notion of the “American Dream” from everyone having an equal shot at succeeding, no matter his or her background, to owning a home. Home ownership may represent part of the American Dream, but it is not the dream.
It includes real estate agents more intent on cashing in than on finding people good homes they could realistically afford.
It also includes some of the same legislators pointing fingers at Goldman, who voted to relax capital requirements for Fannie Mae and Freddie Mac to further a policy decision made during the Clinton administration to increase home ownership rates.
And it doesn’t even begin to touch on the ways banks used the ratings agencies and accounting tricks to circumvent the capital requirements and weak accounting rules that were in place.
All this was going through my mind yesterday as I watched the Goldman grilling on the Hill. Couple it with the realization that for all the bloviating everyone in that room on Tuesday stands to benefit more from the status quo than they do from any change, and the fact that Goldman has not been all that affected by any of the criticism leveled against it and I wonder, what was the point of it all? Eleven hours, all that oxygen consumption, and for what? What’s going to change?
Back to Kunstler’s piece on Las Vegas. Near the end, he writes, “A nation in denial of all its bad habits and lapsed standards of decency wanted to believe that Las Vegas was a perfectly wholesome place to take children. The themed spectacles just provided an excuse. The fact that Las Vegas pulled it off with hardly a peep from society’s moral guardians attests to the flimsy pretense of family values politics.”
Against considerable evidence to the contrary, we have believed that investment banking in its current form was, if not wholesome, at least necessary. Nobody said anything, at least, nobody credible. The clowns in the jail costumes at the Goldman hearing represented nothing more than pointless political theater, which these days is a visually appealing substitute for substance.
All the lecturing and debating and finger pointing in the world won’t change the reality that we all allowed the current systemâ€”Goldman, Paulson, securitization, etceteraâ€”to become what it is, and for a good while we all enjoyed the benefits. So unless we’re ready to really blow it up, and by that I mean mandate smaller banks that are required to keep loans on their books and remain properly capitalized and incentivized to act in the best interests of their clients as opposed to shareholders, and required to follow strict accounting rulesâ€”for startersâ€”we should drop the pretense of outrage at Goldman’s actions.