Vultures know a meal when they see one, thank goodness

PUBLISHED : Tuesday, 27 April, 2010, 12:00am
UPDATED : Tuesday, 27 April, 2010, 12:00am

When credit rating agencies downgraded many billions of dollars of mortgage-backed investments in October 2007, Goldman executive Donald Mullen was unabashedly pleased. 'Sounds like we'll make serious money,' Mullen wrote to Michael Swenson, another executive, in one of the e-mails released by the Senate Permanent Sub-committee on Investigations.

Associated Press

Published in SCMP, April 26

I could have picked many excerpts from other news publications over the last week to highlight comments like these. The sentiments were all the same - those horrible thieves at Goldman Sachs, they shorted the market when they thought it would go down. What criminals! Let's clap them all into jail.

I have always thought Goldman Sachs a class act. I was therefore a little disappointed over the weekend to read in Michael Lewis' The Big Short that Goldman Sachs had been long on those poisonous collateralised debt obligations until quite a late date and went the other way only in 2007.

Really? That wasn't very classy. The Goldman Sachs I always had in mind would have been short the things while I was still asking why anyone should want to add the 'obligation' to the word 'debt'. Debt is already an obligation. You don't have to say it twice.

The reason for this, by the way, is that there is already a financial instrument called a CD and so they decided to make this one a CDO and then went looking for something they could make 'O' stand for.

Furthermore, Rule No3 (or No4, I can't quite remember which) of the investment business says that for every adjective you add to the instrument, you add 1 per cent to the sting you charge customers for that instrument (5 per cent if you come from New York). Nouns count as adjectives for the purpose of this rule.

Okay, okay, time to stop being so pedantic. Here is my point. I have enormous respect for the people who went to the trouble of actually investigating those CDOs and then shorting them, the earlier they did it the greater my respect for them. I thought Goldmans would have been among the first. They were not.

And to anyone who made money from shorting CDOs I say: 'Congratulations. You deserve every cent of your reward. You saved the financial system of the United States and the whole world owes you its thanks.'

Mind you, I am not saying here that the vulture is a beautiful bird. When the documentary on TV zooms up close on a vulture plunging a gore-stained head into the corpse of a cow and ripping out the entrails, well, let's go vegetarian tonight, shall we, dear.

But vultures do not feed on live meat and neither do shorts. However nasty they may look, when the shorts all flock together and descend on a financial instrument you can be sure that this instrument is already doomed. Like vultures, the shorts then get rid of the corpse and keep the landscape clean of infection.

The CDOs that they cleaned up in this case only managed to live at all because the big ratings agencies of the United States declared them fully healthy without ever calling them into the clinic for a health check. The CDOs were given top investment grade ratings although made up of low grade mortgages that were almost certain to fail and in fact were structured to fail.

But the vultures were not fooled. They saw, they flocked, and as default rates on the underlying mortgages began to rise, they descended. If they had not done so, irresponsible mortgage lenders would have continued in business much longer and CDO originators would have continued to poison the financial system. Instead of a crisis, the US economy would have run into a calamity.

Perhaps the US Securities and Exchange Commission can be excused some of the blame for the regulatory failure here. The SEC does not boast the brightest brains on Wall Street and the private ratings agencies were certainly more at fault.

There was nonetheless a regulatory failure and, as chief regulator of securities in the US, the SEC cannot walk away from all responsibility.

It certainly seems to be trying to do so, however, when it leaks subpoenaed e-mails out of context to focus attention on an easy bogeyman.

I shed no tears at the discomfiture of a big investment bank like Goldman Sachs. In fact I normally enjoy the sight. But I simply cannot see anything wrong in a Goldman Sachs executive being 'unabashedly pleased' that his firm should make money from a short that helped remove a dire threat to the US financial system, however short-sighted that executive's real motives may have been or however long it took the firm to side with the angels.

And I think it's definitely a class act for Goldmans to tell the SEC straight up that it will not fold to legal threats on this one.