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Peter Brimelow
May 16, 2011, 2:58 a.m. EDT
By Peter Brimelow, MarketWatch
NEW YORK (MarketWatch) "” The lynch mob may be gathering for Goldman Sachs, but what about the government too?
While the Crash of 2008 was in full swing, I noted that after the Panic of 1907, the U.S. Congress had set up the Pujo Committee to inquire into the "Money Trust" and suggested trying again. But I warned that the earlier investigation had resulted in the Federal Reserve, now arguably part of the problem "” so this time investigators should look at Washington as well as Wall Street. ( See Sept. 29, 2008, column. )
Apparently the recently released Senate Subcommittee on Investigations report, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, took only part of my advice. It has focused on Wall Street alone "” specifically on Goldman Sachs Group Inc. /quotes/comstock/13*!gs/quotes/nls/gs GS +0.03% (The report can be downloaded in pdf. form here .)
Despite this failure, it's still pretty devastating and, unfortunately for Goldman, has provoked Rolling Stone's Matt Taibbi into one of his celebrated jeremiads. ( "The People vs. Goldman Sachs," posted May 13).
Taibbi skillfully mines the report to make two points. First, as the housing bubble began to burst in 2007, Goldman deliberately dumped its problematic mortgage-related securities on trusting clients, while simultaneously shorting them.
As Taibbi colorfully describes it: "Goldman was like a car dealership that realized it had a whole lot full of cars with faulty brakes. Instead of announcing a recall, it surged ahead with a two-fold plan to make a fortune: first, by dumping the dangerous products on other people, and second, by taking out life insurance against the fools who bought the deadly cars."
Second, Taibbi uses subpoenaed emails to make a pretty damning case that Goldman executives lied to Congress about their activities when required to testify in April 2010. Subcommittee Chairman Senator Carl Levin is quoted as saying flatly: "In my judgment, Goldman clearly misled their clients, and they misled the Congress." The penalty is up to five years imprisonment.
Taibbi can't wait. He asks hungrily: Where is the Justice Department?
Unfortunately, Taibbi has a simple-minded (if newly fashionable) answer to all this: more regulation. But regulation has problems too. In fact, government regulation was a key inflator of the Housing Bubble "” specifically, Washington's bipartisan multi-decade determination to force mortgage lenders to drop credit standards because they were seen as a barrier to minority home ownership.
Indeed, Peter J. Wallison, a member of the parallel Financial Crisis Inquiry Commission which reported in January, actually dissented from its similar conclusions because it ignored the role of government housing policy.
In an article that will not get as much attention as Taibbi's, Wallison writes in the May issue of American Spectator magazine: "The commission's management "” particularly its chairman, Philip Angelides, a former Democratic treasurer of California and unsuccessful gubernatorial candidate "” would not allow the staff to pursue any theories about the causes of the financial crisis other than those embodied in the standard left-wing narrative." ( "The True Story of the Financial Crisis" )
(Wallison also observes acidly: "The question I have been most frequently asked about the commission is why Congress bothered to authorize it at all. Without waiting for the commission's report, Congress passed and the president signed the Dodd-Frank Act (DFA), far-reaching and highly consequential regulatory legislation that I believe will have a strong adverse effect on U.S. economic growth "¦ perhaps following the precept of the president's chief of staff "” "?Never let a good crisis go to waste.'")
And there is an unmentioned alternative to regulation: the tort system. Don't Goldman's clients feel like suing? "” for example, the Australian hedge fund Basis Capital, which put $100 million into Goldman's dumped mortgages and now sees itself described, in a gloating internal email from its Goldman sales rep, as a "white elephant, flying pig and unicorn all at once."
That is, don't Basis Capital's creditors feel like suing? "” the deal bankrupted the firm.
Ironically, the idea that public and private sectors can share blame is central to what I call the radical goldbug thesis, which holds the gold market has long been manipulated by the federal government through chosen instruments like Goldman Sachs, in an effort to sustain the financial bubble. ( See April 5, 2010, column. )
That doesn't look so fantastic any more. Maybe we can have an inquiry into gold too.
"Peter Brimelow: Goldman lynch mob needs more nooses? http://on.mktw.net/kQ1rkV" 2:04 a.m. EDT, May 16, 2011 from MKTWBrimelow
"Peter Brimelow: Two hard-asset letters sill confident http://on.mktw.net/iWrhte" 2:17 a.m. EDT, May 12, 2011 from MKTWBrimelow
"Peter Brimelow: Does dollar strength herald another crash? http://on.mktw.net/kOYnSj" 2:29 a.m. EDT, May 9, 2011 from MKTWBrimelow
"Peter Brimelow: Market-manipulation mutterings intensify http://on.mktw.net/m2R3jb" 4:55 a.m. EDT, May 5, 2011 from MKTWBrimelow
"Peter Brimelow: Is this the Bernanke gold market? http://on.mktw.net/l6kf4X" 2:52 a.m. EDT, May 2, 2011 from MKTWBrimelow
Peter Brimelow has been an editor at Barron's, Fortune and Forbes and is the author of "The Wall Street Gurus: How You Can Profit From Investment Newsletters."
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