Today’s Goldman Sachs hearing in the Senate is fantastic theater. The kind of theater that makes you want to run to the restroom to vomit.
I’ve been watching the hearing on TV, and I am nauseated to report that they still don’t get it. The world came to the brink of financial ruin, and the people driving the mortgage securities death-machine still can only look back and say that at the time it all made sense. To say that the Goldman Sachs executives testifying lack introspection is like saying that the Black Death was a minor health scare.
Consider the following exchange between Senator Ted Kaufman and Daniel Sparks, who ran Goldman’s mortgage division from late 2006 until mid-2008. Kaufman wanted to know about stated-income loans—mortgages in which borrowers don’t have to prove they make the amount of money they claim to. These loans, which may make sense for rich people with variable income (an entrepreneur, say), came to be sold to all stripes of borrower, including many with subprime credit. Kaufman remarked on one securitization in which 90% of the loans were stated-income. Then he turned to Sparks:
Kaufman: What do you think of the practice, stated-income loans?
Sparks: We weren’t a big originator. I believe we securitized some of that. I believe that a loan has a risk to it that when it’s verified has a different risk to it.
Kaufman: A regulator earlier said it was anathema to the banking business.
Sparks: Again, Senator, we were not a big originator in that space.
Kaufman: But you securitized these loans.
Sparks: Yes, we did.
Kaufman went on to detail how Goldman didn’t just securitize some stated-income loans, but a lot of them. Then the questioning resumed.
Kaufman: What would you think, what would be a reasonable percentage of home-equity loans in a securitization to be stated-income?
Sparks: Well, I’m not familiar. In hindsight, those deals didn’t perform, so I don’t know what a reasonable percentage would be.
Kaufman: Take a wild guess… There was this great sucking sound from Wall Street to get more of these loans into the marketplace.
Sparks: Well, Senator, you would know from your participating in the market what types of investors wanted to buy what risk. I don’t know what the right percentage would be.
Sparks: It would depend on the deal.
Kaufman: What if I told you 90% was stated income. Would that cause you concern?
Sparks: This particular deal, in hindsight, did not perform well.
Kaufman: Couldn’t it be reasonable to believe that with [that many] stated-income loans there was a good chance a large percentage would fail?
Sparks: Senator, at that time things happened in the market and were accepted by the market that in hindsight look very different than they did at the time.
Kaufman then launched into a tirade about how, if the witnesses in front of him were to be believed, the United States had suffered some great natural disaster—an event that had been in no way been man’s doing. It was if the financial crisis was something that just kind of happened to us.
I am equally as appalled.
It’s not that I think Goldman Sachs and other mortgage securitizers are solely to blame for the real-estate bubble and ensuing financial crisis. Far from it. I think that Sparks made a really good point when he talked about demand for such securities. Investors around the world who thought that they could get more return without taking on additional risk were operating with just as delusional and destructive a mindset as the folks at Goldman Sachs.
Bubbles are bubbles because otherwise rational people start to do irrational things. In the moment, it can be really tough to tell what is a bad idea, what is one deal too many, what is compromising sound judgment in an effort to squeeze out even more profit.
After the mania ends, it is easy to look back and understand how behavior got out of hand. Three years after the credit crunch began, it is shockingly simple to review the tape and say, “Oh, yeah, we shouldn’t have been doing that.”
Unless you work at Goldman Sachs. Time and again at today’s hearing, Goldman executives refused to admit, even in retrospect, that they had crossed a line. Time and again at today’s hearing, they defended their actions by saying that they were rightly responding to market demand—as if responding to market demand somehow absolves one of the responsibility to use human judgment. I kept waiting for one of them to stand up and scream, “Look, we did things we shouldn’t have, we did things that defied common sense, but that’s the nature of an asset bubble! We’re sorry, we are, we’ve learned from our mistakes and we have better risk controls. But you have to know, we’re not bad people. Everyone got out of hand. We’ll own up to own fair share, but please understand that more people than us had a hand in this.”
Unfortunately, that moment never came. Instead, what we got was Goldman executives spending a lot of time leafing through the documents in front of them. Every time a Senator asked a question about a particular email. Leaf, leaf, leaf. “In email number 61…” “Okay, hold on…” Leaf, leaf, leaf. “Um, I don’t see that…” Leaf, leaf, leaf. “Email 61.” “Hm…” Leaf, leaf. Finally, Senator Susan Collins called them out on their little diversionary, time-consuming tactic. Good for her.
And really bad for the rest of us. Because the people who work at Goldman Sachs are terribly smart, and it would be helpful to have them seriously thinking about what went wrong and how we might better manage the financial ecosystem in order to avoid meltdowns in the future. Instead, they seem to be using all their energy to circle the wagons. Senator Kaufman’s question about stated-income loans was open-ended and non-confrontational. What might that exchange have looked like if Sparks had started with, “You know, stated-income loans are great for some people, but not for others. In the bubble, they went to the wrong people. It’s a good question—how do you design products so that they’re not misused?”
What really frightens me in all of this is that it didn’t seem like a legal or PR strategy. It seemed like these Goldman executives genuinely had no ability to take a step back and make observations about the system in which they operate. It seemed like they had been so thoroughly inculcated in the culture of high finance that it was literally impossible for them to do the thing intelligent people are supposed to be able to do in the wake of a systemic breakdown—re-evaluate the assumptions that went into building that system.
Perhaps I was expecting too much out of my fellow human beings. We are deeply shaped by our environments, after all. I just thought—especially after hearing that the Goldman executives agreed to testify without being subpoenaed—that we might learn something useful in these hearings. That we might actually gain some insight instead of just another reason to want to bring these people down a peg.
I was wrong.