Tuesday, 27 April 2010

Levin vs. Blankfein Faceoff

Some quick observations on the performance of Goldman Sachs' CEO at the roasting before Congress today:

1. Blankfein technically outpointed Senator Levin during the opening exchange, I think -- Levin doesn't have a particularly deep understanding of high finance -- but Goldman's chief lost the big point: how Goldman's actions appear to Main Street. Basically Blankfein condoned the practice of "betting against a product you're selling." That's the damning headline. Here's what it sounds like to Joe Blow: I sell you my car, and meanwhile, I bet with someone on the side that the car will break down within six months. No graceful way to put lipstick on that pig.

2. Notice how often Blankfein used the phrase "market maker" when facing off with Levin? Nice defense except -- Levin wasn't really interested in being tutored on what a market maker does. Levin was too busy cudgeling the head of the investment bank with the "conflict of interest" point. Main Street doesn't understand "market maker." It does, however, understand quite well "conflict of interest."

3. Is the successful beating up on Goldman a sign that the investment banks have been hoisted on the petard of the complexity they nurtured? They produced synthetic CDOs that the rating services couldn't understand and mis-rated; these same synthetic CDOs were so complicated, with so many sliced and diced mortgage-backed securities underlying, that arguably the disclosure standard should have been higher than normal, even for sophisticated investors; "synthetic CDOs" are raising a lot of eyebrows among members of Congress who are wondering -- "What the hell is the point of something that's this damn confusing? There's got to be a rat in this woodpile."

4. Senator McCaskill scored points, along with McCain, by noting that with a synthetic CDO, there's no real there there. It's just a side bet on actual assets that have already been sold, so you're not actually buying anything concrete. McCaskill shook her head in befuddlement before saying, "seems like a hamster in a cage trying to get to compensation." Blankfein defended the product with some mumbo jumbo about managing risk profiles. But what we're left pondering is McCaskill's image of hamsters manically tunneling through the wood chips for dollar bills.

5. Is Blankfein this dumb, or did he have a convenient "idiot" moment: Senator Pryor asked him about structured investment vehicles (actually, Pryor used clumsier wording, and then Blankfein hastily corrected him, knowledgeably saying "structured investment vehicles.") And then Blankfein goes completely ignorant, it seems, when asked why the bank would use an SIV. His reply: "I'm not sure." (Cue laughtrack at home.)

Ah, a little more cathartic financial-crisis theater ...