1-14-2010

The Real Cash for Clunkers

Congressional hearings today exposed the “Real Cash For Clunkers” program when former California state treasurer, Phil Angelides, compared Goldman Sachs CEO, Lloyd Blankfein, and his cronies of acting like used car salesmen. Investors’ “cash” was solicited to purchase mortgage backed securities and derivatives - “clunkers”- sold by salespeople on Wall Street. At the same time these securities were being sold, it was often the case that Wall Street firms were making money being short the same instruments. 

Blankfein explained that Goldman is not a fiduciary and that they had no obligation to tell customers what their positions were.  Blankfein explained that “Goldman has obligations to disclose what it's selling, but not, in effect, to make sure buyers make money.” He went on to say that "That's what a market is.” Angelides assured him that he knew what a market was and went on to respond: “Sounds a little bit to me like selling a used car with faulty brakes, and then buying an insurance policy" on the driver, Mr. Angelides responded. 

The bottom line is that the Congressional panel was really not buying Blankfein’s explanation as to why Wall Street sold what turned out to be garbage to customers while avoiding these securities for their own accounts. John Mack from Morgan Stanley struck a conciliatory posture, admitting that “In retrospect, many firms were too highly leveraged, took on too much risk and did not have sufficient resources to manage those risks effectively in a rapidly changing environment." Jamie Dimon from JP Morgan was also contrite, stating, “No institution, including our own, should be 'too big’ to fail.” 

The hubris of Goldman Sachs, as represented by Mr. Blankfein’s remarks, continues to be amazing. Suffice it to say that neither Congress, nor the public at large, understands or agrees with Goldman’s assertion that they were not doing anything wrong, and didn’t need taxpayers’ assistance.  The U.S. population at large is absolutely “freaked out” by the reports of Wall Street bonuses against a backdrop of taxpayer bailouts. Goldman’s people and franchise are so strong that it would certainly benefit from a dose of humility. Goldman’s attitude and assertions will increase the odds of significant re-regulation. The other banks seem to understand this, but Goldman doesn’t see this from their vantage point on top of the pedestal. 

 

Fred S. Fraenkel
Vice Chairman and
Chairman of Investment Policy
Beacon Trust Company

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