Clarion Content

Lewis Sachs is advising Treasury Secretary, Timothy Geithner

It should come as no surprise to historians of the American system that the banks that designed the investment vehicles that brought the mortgage market to its knees were betting against them all the while to their great profit. There is nothing in American history to augur that banks will be altruistic. There is much greater evidence that says altruism may be disadvantageous to profits in a hybrid-capitalist system. Gaming the system has proven profitable time and time again in the long run, not for all mind you, but for the best players. This is an important fundamental to consider when studying bankers out-sized compensation packages, the best get rich, the less fortunate go broke.

The New York Times reports that the SEC is studying the details of just how Goldman Sachs and Deutsche Bank among others designed these synthetic collateralized debt obligations, or C.D.O.’s and then bet against them. Unfortunately, they will be hard pressed to prove laws were broken (and ex-post facto justice is specious at best).

The Times says, "One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater...some securities packaged by Goldman...soured within months of being created...Goldman and other...firms maintain there is nothing improper about synthetic C.D.O.’s, saying that they typically employ many trading techniques to hedge investments and protect against losses. They add that many prudent investors often do the same."

The Times argues that the creation and sale of synthetic C.D.O.’s helped make the financial crisis worse than it might otherwise have been, creating a multiplier effect by providing more securities to bet against. They note that , "$8 billion [of] these securities remain on the books at American International Group."

The two most interesting revelations of the article are that, one, Morgan Stanley lost $1.5 billion to Goldman Sachs on a single deal, and two that Lewis Sachs a man who became a senior adviser to Obama's Treasury secretary earlier this year,was intimately involved in building these kind of deals. Sachs worked for Tricadia, a management company that was a unit of Mariner Investment Group. He led the team that sold products to investors that plunged more than 75% in value in a year while betting against them to the tune of a 50% profit for the firms own hedge fund.

Ugly, yes. Immoral, yes. Despicable, yes. Illegal, probably not.

Labels: economics, Politics