Goldman vs Congress

Do you think Goldman saw this coming?

Markets all over the world reacted with red to last Friday's news that the U.S. Securities and Exchange Commission (SEC) had lowered the boom on Goldman Sachs. The SEC has technically accused Goldman of fraud. It alleges that Goldman helped create a collateralised debt obligation (CDO) made up of subprime mortgages.

Of course there's no fraud in that. A lot of people were doing it back then. The alleged fraud comes from the fact that the security in question was partly designed by Paulson and Co., a hedge fund that then took an enormous position betting against subprime backed CDOs. Goldman did not disclose to investors that the people partially responsible for the securities selected in the CDO were themselves betting against the subprime market.

There are lots of ways of reading this. One is straightforward. Maybe it was fraud. Maybe not. The lawyers will sort that out.

Another way of reading it is that it's Chicago-style politics on Wall Street. The Obama Administration would like to push a "tough" financial reform package through the Congress before the summer recess. That way, all those vulnerable Democrats who voted yes on Obamacare can change the subject and show how tough they've been on Goldman.

A third way to think about the move is that it roughly conforms to Bill's theory that large organisations seek a way to destroy themselves. It works with Empires. But why not financial institutions as well? Or economies? Goldman may have crossed a line somewhere.

But will Washington, in its haste to get back in the public's good graces, gut the rally in stocks that's been on since March of last year? It would be ironic. And moronic. And thus fully consistent with standard public policy.

The final, more cerebral way to view the suit against Goldman is as a turf war between the financial oligarchs of Wall Street and the old line Nation State Builders in Washington. As our friend John Robb asked over the weekend, "Does this signal a reversal in the titanic life and death struggle between nation-states and the global financial oligarchy? No."

"The amount of lawfare needed to reverse the course of this war before sovereign defaults litter the battlefield is immense: thousands of trials, trillions in assessed damages, and tens of thousands sent to jail. Even that might not be enough without a long campaign of financial COIN (counter insurgency) to pacify and disassemble the to-big-to-fail banks and hedge funds. "

Robb's thesis, if we understand it correctly, is that the banksters of the world have gradually taken over a larger share of the economy's profits (if not its productive aspects). They have also managed to socialise their losses while profiting immensely from the financialisastion of the economy (largely at the expense of manufacturing jobs and the Middle Class). So now the Feds are fighting back.

That all might be accurate. Personally, we'd view any attempt to put Goldman in its place with a grain of salt. The U.S. government is littered with former investment bankers. And for an institution that needs to sell over $3 trillion in debt in the next two years, Washington is going to need Wall Street on its side. Besides, who do you think funds the campaigns of national politicians? They know where their bread is buttered.

The Goldman story is important to Australia if it becomes the sort of thing that leads to another round of de-leveraging globally. Aussie indices are already trapped at the high end of a trading range they've been in for the last year. But if Wall Street is spooked about government stepping up its war on everything, so-called "riskier" assets may get sold.

It's worth noting that gold fell nearly $23 on the day. We don't view it as a risky asset. And you should have a look at Greg Canavan's article below for what else is going on with gold. But other precious and base metals took a fall as well last week. And if there is a lot of leverage in commodity prices—as there was in 2007 and 2008—a general deleveraging (and a U.S. dollar rally) could do a lot of damage very quickly. And there's China.

The Wall Street Journal is reporting that China's State Council is cracking down even harder on speculative activity in the country's red-hot property market. The Journal reports that, "In an indication that Beijing is increasingly worried about runaway property prices, the State Council, the country's cabinet, said Saturday that local governments can take temporary measures to limit the number of property purchases each investor makes within a certain period."

"The steps follow moves by the Chinese central government Thursday to raise minimum down-payment levels and mortgage rates for certain home buyers, after data showed property prices in 70 of China's large and medium-sized cities rose 11.7 per cent in March from a year earlier, the fastest pace since China began releasing the data in July 2005. The government's notice Saturday appears aimed at encouraging local governments and banks to even more strictly control credit for speculative property transactions."

This all comes after the Council last week directed banks to raise the minimum down payment on second homes from 40 per cent to 50 per cent. But if you find it strange and ironic that a communist state has become addicted to the revenues from selling land (dare we call it private property) you are not alone. Maybe if the government wasn't so busy subsidising non-competitive enterprises for the sake of gaining global market share, it wouldn't be so revenue hungry that it would have to perpetuate a property bubble.

But hey, it is tough on governments everywhere these days, from the totalitarians to the corporatists to the mildly wanna-be social welfare Statists (here in Australia). The common problem: too many promises and not enough money.