The fight to pass legislation that will rein in the big banks and make another recession-causing collapse of credit less likely is one the American people can surely win. Victory became even more likely last week when the SEC filed a civil suit against Goldman Sachs claiming that the country’s largest bank deliberately de-frauded investors.
“I can’t comment on the details of that investigation or on the merits,” the Treasury secretary, Timothy F. Geithner, said on “Meet the Press” on NBC. “But I can tell you that I am very confident that we’re going to have the votes for a strong package of financial reforms that will bring derivative markets out of the dark, help protect the taxpayers from having to fund future bailouts and try to make sure we’re getting Americans some basic protection against fraud and abuse.”
The argument made by the Security and Exchange Commission in its filing is that it created an investment package that depended on a carefully chosen conglomeration of risky mortgages. Shares of the package were then sold to investors. At the same time a hedge fund operator sold the package short — betting that it would fail. Sure enough, the mortgages turned out to be toxic. Those who bought the package lost their investment. The hedge fund operator made a billion dollars on his bet.
It turns out that the hedge fund operator had asked Goldman Sachs to create the risky package and had provided the bank with a list of the risky mortgages to put in it. That is the basis of the fraud charge.
Goldman Sachs contests the claim. Its executives say they did nothing wrong. If they don’t change their minds and confess, the claim and counter-claim will be contested in court.
WHAT IS NOT at issue is that mortgage-backed securities whose value depended on (1) a continually rising real estate market and (2) the integrity of the mortgages themselves.
Housing prices — like the prices of all things bought and sold — never rise forever. The bubble was bound to burst. And as has been clearly shown, thousands of bad mortgages were written across the country. Loans were made that the makers knew could not be repaid. Down payments were inadequate. Unrealisitc interest agreements were made. Loans were frequently made far beyond the ability of the borrower to repay.
Those who made the deals immediately sold the mortgages to brokers who, in turn, sold them to banks which bundled them into mortgage-backed securities — bonds — which were then sold to investors. When the mortgages turned sour, billions were lost and the credit crunch that triggered the recession struck.
Perhaps because they had been in at the beginning of this train of events, Goldman Sachs saw disaster looming, sold their housing investments short and raked in some of those billions that others lost.
With all of this before it, Congress should be faunching at the bit to leap in with stiff regulations to make certain it never happens again.
But Sen. Mitch McConnell, the Republican leader, has another scenario. After a well-publicized trip to Wall Street to confer with bankers (Goldman Sachs perhaps) and others, Sen. McConnell announced he would fight the administration bill and try to weld all 41 Republican senators into a barricade against its passage.
He wants to regulate big banks, he says, but not the way the administration wants to do it. How, then? Sen. McConnell won’t say. He’s just saying no. Again.
Surely this is a misbegotten political tactic all but certain to fail.
Of course Congress should pass regulations that will prevent a repeat of the worst recession since the Great Depression. Of course the financial industry should reform itself and put an end to a system that allows a single man to snatch $4 billion out of the economy in a single year by manipulating other people’s money. Of course Congress should use its power to tax to encourage such reform.
And it should be just as apparent to thinking Americans that these goals should be shared by all of us, regardless of party. That is what Sen. McConnell should be saying; that’s what the people want to hear.
— Emerson Lynn, jr.