Thursday, January 14, 2010

The Financial Crisis Inquiry Commission Doesn’t Get It

The Financial Crisis Inquiry Commission thinks its role is the same as the Consumer Products Safety Commission. If it succeeds in convincing Congress that that is its proper role, the only allowable investments will be US Treasuries.
Philip Angelides, chairman of the Financial Crisis Inquiry Commission, doesn’t get it.

...Angelides has a world view that is overly constricted by the ideology of regulators. His intellectual world cannot contain “good products” that result in huge losses for their buyers. Blankfein [CEO and Chairman, Goldman Sachs] tried many times to get the chairman to open his mind. It remained decidedly closed.
A structured credit product—whether its as simple as a mortgage backed security or a complex CDO—is not necessary flawed if it produces losses. Even enormous losses. Indeed, it might be perfectly well-designed but still deliver the buyers losses.

The point of creating structured financial products is to create exposures to certain risks and opportunities. A mortgage backed security, for instance, might be designed to expose buyers to subprime mortgages. If it is well-structured it will expose its owners to the upside and downside of the mortgages pooled within it.
When Goldman was selling the financial products, it wasn’t necessary telling the buyers that these were great investments. It was telling them that they were investments that would give them the exposures they were looking for. If you were bullish on the mortgage market and a skeptic of the Bubble Thesis—a thesis that Goldman had very publicly embraced—then buying mortgage backed securities from Goldman was a way to put that bullishness into action.

Angelides, the former California state treasurer, just has too much of paternalistic world view to understand that it is possible to sell a financial product without believing the buyer’s rationale for buying it.

This really is the heart of the matter. Angelides thinks it is wrong for Goldman to underwrite financial products that create exposures it does not want for itself. As long as Goldman wasn’t lying to clients or over-hyping the financial products—and so far, no one has shown any evidence of this—there’s nothing really wrong with what Goldman was doing. If sophisticated investors want to take on risk, they should be permitted to.
From "How Lloyd Blankfein’s Brilliant Answers Befuddled The Financial Crisis Commissioners" by John Carney.

No comments:

Post a Comment