2010 July 03 Saturday
Goldman Major Guilty Party On Housing Bubble?

With so much effort put into attacking Goldman Sachs over profiting from the housing bubble you might think that Goldman Sachs actually caused the bubble. Goldman is being held responsible for AIG's foolish bet that bubble era mortgage securities were sound.

WASHINGTON A congressional commission pressed Goldman Sachs executives Wednesday to spell out how much their company has earned from its exotic bets against the housing market, including $20 billion in wagers that helped force a $162 billion taxpayer bailout of the American International Group.

It takes two to tango. Goldman couldn't have bet on a collapse of the housing bubble without AIG there to bet that This Time Is Different. Of course, AIG was betting the same way that the US government was betting at the time. Goldman is being blamed for betting against the conventional wisdom of the day.

Many of Goldman's trades with AIG offset protection it wrote for clients on mortgage securities, but McClatchy reported Tuesday that Goldman wagered its own money on some swaps purchased from AIG.

But I have a question: Who decided to have a big housing bubble that would inevitably collapse whether or not Goldman bet against mortgage securities? Who created the conditions that made Goldman's bet possible? Was it Goldman? Nope, not really. So who did the dirty deed? Top inflators Fannie Mae and Freddie Mac led the charge. Fannie and Freddie are creations of Congress. Congress is part of the government.

Countrywide Finance, Washington Mutual, and a whole host of other retail banks (and Goldman is not a retail bank to any appreciable extent) did the field work of generating the mortgages to sell to Freddie and Fannie.

The US government promoted the housing bubble. George W. Bush and Congressional Democrats were united in their desires to see more poor NAMs take on more mortgages regardless of their credit worthiness. The Federal Reserve supplied the liquidity to make it happen.

So what is going on here? The guilty are trying to use Goldman Sachs as a fall guy. They are trying to shift attention away from their own culpability.

Share |      By Randall Parker at 2010 July 03 09:07 PM  Economics Housing

bbartlog said at July 4, 2010 8:39 AM:

I don't so much hold GS responsible for making these bets with AIG as I hold them responsible for using their influence to have those bets repaid by the US taxpayer. Remember, when AIG wasn't able to make good they sent their alumnus Hank Paulson to make sure that Congress had their back.

Mercer said at July 4, 2010 2:28 PM:

I don't think Goldman had anything to do with the housing bubble but that does not mean their activities should be exempt from scrutiny. The financial meltdown would have been milder if Wall Street players had not placed highly leveraged bets with items such as credit default swaps and synthetic mortgage bonds. Because commercial banks and AIG got in on the action the taxpayers ended up footing the bill for many bad bets. Instruments like credit defaults swaps and synthetic bonds were not created to help people buy homes. They were created to bet on housing prices. Goldman was at the center of creating these instruments of dubious value and getting the taxpayer to bail out their bad bets.

Luke Lea said at July 4, 2010 8:54 PM:

China's trade surplus also played a part. There were not enough "good" places to make real economic investments, which caused interest rates to fall and housing prices to rise. It is not clear how that could have been avoided.

Randall Parker said at July 5, 2010 2:22 PM:


China expanded its trade surplus by forcing exporters to exchange dollars for yuan and then using much of the US dollars to buy US Treasuries. This reduced Chinese demand for imported goods.

The way to avoid it: We could have tried to restrict Chinese purchases of US Treasuries.

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