The Goldman Sachs Witch-Hunt

It is no shock that Goldman Sachs’s hearing before a Senate subcommittee yesterday was an episode in subterfuge and political posturing. However, the level of bipartisan vitriol and populist grandstanding was inexcusable.

The subcommittee, chaired by Senator Carl Levin (D-MI), hounded a number of Goldman Sachs executives for the better part of the day. This was no exercise in fact finding, but a brutal cross-examination by a biased plaintiff. Nearly every Senator (except at rare moments Tom Coburn (R-OK)) came with a pre-planned agenda to portray Goldman Sachs as an epitome of a rampant Wall Street-gone-bad that wrecked havoc on the poor innocent investor and America’s economy. The Senators repeatedly waved sensational, but otherwise meaningless, documents in the air, simplifying the extremely complex issues until they were a digestible, but un-nutritious mush ready to be consumed by the populist masses.

These politicians are not stupid. While their understanding of the financial markets is clearly limited, they obviously comprehend the intellectual dishonesty that they exhibited. It is hard to believe that such a display, coupled with the recent bogus charges brought against Goldman Sachs by the SEC (a decision which in relatively rare form was controversially split), was anything but motivated by the desire to force through a regulatory reform package. Even the Republicans, such as John McCain (R-AZ), who is in a tough reelection battle, walked to the ‘bash Wall Street’ drumbeat.

The fact of the matter is that there is little evidence that Goldman did anything wrong. While to the uninitiated it may be difficult to understand the market and readily easy to misconstrue it as misguided, this does not stand as evidence of wrongdoing.

To begin, Senator Levin attempted to cast Goldman as the bad guy for making a profit. It is ironic that those that realized the housing bubble was inflated (and thus helped to mitigate its wanton expansion), are now being chastised for being ahead of the curve. The Washington Post says it best,

[If Goldman did not bet against the market as early as it did t]he firm would have lost billions, and it might have wound up needing an even bigger bailout by U.S. taxpayers than it actually got. It could have ended up like Citigroup, which tried to ride the bubble until it was too late and had to be propped up with hundreds of billions of dollars in federal cash and credit guarantees.

There is nothing wrong with this behavior. It is done all the time and is, in fact, what keeps the markets going. Short sales are necessary and proper in markets – even if against a long-position controlled by the same entity. This sort of hedging protects institutions and the economy in the long-run. If the world of finance is too complicated in this regard, one only needs to look to that of farming or commodities to see the same practice. Farmers, for instance, will bet against agriculture to insure against the risk of crop failure.

Besides the criticism of profit-via-short, the committee also bashed Goldman for selling, what was termed in one of the infamous documents, a “shitty” product. Needless to say, the definition of “shitty” is subjective and quite unscientific, but even if a product could be objectively proven to be “shitty” is it wrong for a company to sell it? How many less-than-stellar consumer products are sold on a daily basis? It is up to the consumer – and in this case they were quite sophisticated investors – to evaluate their purchases. Ultimately, Goldman’s knowledge about how the product was constructed has no bearing on the ability of an individual investor to assess its quality.

Now to be clear, there were a myriad of mistakes made at all levels of the economy; however, the targeted witch-hunt is unfair. It misguides popular attention from the real issues. As a result simplistic solutions are proposed to solve non-existent problems, while the real issues are ignored. The characteristic problem is the desire to find the causation of bad outcomes in practices which only look odious with hindsight. This is poor logic. Fraud must be distinguished from both bad business and good business that had bad luck. Every decision relies upon an analysis of the probability of certain outcomes. Even if the analysis is done correctly sometimes that low-probability outcome will occur. Politicians inability to address this non-sound-bit ready fact and instead chose to bash Goldman Sachs is quite unfortunate.

Palin Resigned to Fail?

Alaskan Governor Sarah Palin’s recent resignation is mind boggling to say the least. Every sign since she stumbled onto the national scene last fall indicated that she was gearing up for a 2012 presidential run. If there was a modern day political truism, it was that Sarah had her heart set on making Todd Palin the first ‘first gentleman’. Her resignation has thrown every understanding of her into a tailspin.

One possibility is that she is simply fed up. The daily stresses that she and her family go through could have reached a breaking point. Whether it was her ethics issues in Alaska, the constant haranguing from the media, her daughter’s pregnancy, or any other of the many issues, the private life may have simply become the priority. While this is seemingly the only ‘logical’ explanation it does not jive with her expressed and highly visible desire for the presidency. It also does not mesh with the fact that she refuses to rule out a presidential run.

However, the converse is equally implausible. If she does plan on running for president, resigning from the governorship is about the most bone-headed thing she can do. It is one thing to choose not to run for reelection in order to focus on an election campaign. Many governors, including Mitt Romney and Tim Pawlenty, have done this. It is quite another thing to quit a lame-duck position. The bottom line is that such a move is a surefire way to sink a potential campaign. It shows she lacks commitment and drive, and has her priorities out of sorts.

Regardless of what the motivation for her resignation was, it is reasonably safe to say that Palin’s political future looks dim. While we may not have seen the last of her, her position is severely diminished. This is a most fortunate event for the Republican Party. Palin was the biggest mistake of McCain’s campaign, ultimately costing him the election. While her anti-intellectualism and populism may stir a small, but vocal, part of the base; she is unappealing to many in the traditional Republican base [fiscal conservatives, security conservatives, etc.] and certainly to the independents that are needed to elect a Republican president.

The flirtation with the Palin wing of the party has done more than enough damage to the image and platform of the Republican Party. Her imminent demise is nothing short of a blessing to free us from her anti-intellectual shackles. Hopefully the GOP leadership will realize that the party must return to the big-tent party of Reagan. While many ‘Palinites’ talk in Reaganesque terms, the party is becoming the antithesis of what Reagan built. With Palin (hopefully) removed from the limelight, the party will be able to correct its image, develop new leadership, and reassert its position as the intellectual and policy leader of America.