It's Always Christmas for Investment Bankers

The title of this piece says most of what needs to be said. Gretchen Morgenson (IMO the best business reporter working in the U.S. today) reports in the New York Times, that Goldman-Sachs, that paragon of fiscal power and virtue, created bizarre and exotic securities (if I spelt out "synthetic CDO", would it mean any more to you?), which they sold to individuals and pension funds by the $billions. Goldman then bet against those securities, by short selling.

Purveyors of the popular wisdom will say that these exotic securities were, and are, a way to manage risk. They are not. They are a sure sign that Goldman was dealing in too much risk. Analysis of the recent market crash invariably offer at least a partial excuse for the creation of exotic financial instruments, such as derivatives; they say that such instruments help investment banks manage risk. There is no suggestion that there is too much risk to manage, especially in conjunction with the very instruments created to manage risk.

What is the real function of these instruments? To generate commissions and fees. Goldman created the synthetic CDOs, made a commission on every sale (in which they must have known that they were selling junk), then shorted the instruments. Why not? They'd already made their commissions. So, the commission paid when the derivative is sold is added to the gross domestic product. If the product tanks, the short makes money that's added to the GDP. But in some perverse way, the wealth that disappears when the derivative tanks is not subtracted from the GDP. Now that's "new math".

Let's review the bidding. When Mr. Timothy Geithner was head of the NY Fed, his job became one of trying to keep the financial system going, but it wasn't his job to know about the toxic bombs stewing in the financial pot. Of course, now that all those bankers and brokers have made their millions at age 35 (or whatever), now that Mr. Geithner is Secretary of the Treasury, he promises to pay attention. What in hell was he doing in those wood paneled digs of his in NY, when he was "Head" of the NY Fed, and why is he now in the cabinet. He may be way smarter than I am, but I'll bet I could have seen the train wreck coming long before he apparently did. All I had to do was read the NY Times business section. Was he too busy arranging all those catered lunches? The Democrats have proven themselves to be as moronic as the Republicans at picking men who can be part of the solution, or, even better, good stewards up front.

Let us be disgusted.