Tuesday, April 27, 2010

How the Economy Tanked and It's Not Whether Goldman Was Short or Long

Carl Levin testified this morning on Goldman and how the economy tanked.
This is a translation of how the economy went down in lay terms: Banks such as Wamu bundled junk subprime mortgage loans--loans without proof of income, essentially loans to people who couldn't afford a house-- and then dumped them on Wall Street.
Wall street prettied up those subprime mortgages, dressed them up fancy.
Credit rating firms gave them good ratings.
Goldman profited from the unrecognizable junk subprime loans because it knew they were junk.
The economy crashed because Wall Street created nothing but worthless junk, which always leads me back to my contention that Americans were responsible for the crash as well.
Many people inadvertently participated in the crash by not understanding that they couldn't afford a house and by being duped by mortgage brokers. Others took advantage of easy loans.
Planet Money has a great post today. It doesn't matter if Goldman was short or long. Goldman was obviously immoral. The question is: did Goldman disclose the fact that it bet both ways to its clients? Did it disclose its immorality?
So the key question isn't whether Goldman was net short or net long the housing market. It's whether the company told its clients everything it should have told them.

The issue of disclosure is at the center of the SEC's fraud lawsuit against Goldman. The SEC says Goldman wrongly failed to tell its clients about the role of a hedge fund that took a short position on a mortgage-related security. Goldman denies the charges. PM