A Good Case for Putting Money Under the Mattress

Yesterday, New York Times business columnist Andrew Ross Sorkin suggested that members of the Financial Crisis Inquiry Commission — the panel charged with investigating the causes of the Great Recession — drill Goldman Sachs CEO Lloyd  Blankfein over the firm’s strategy of selling bundled mortgages to other investors at the same time it was betting they would fail.

“In the process of selling them to institutional investors, however, your firm lobbied ratings agencies to assign them high ratings as solid bets — even as your firm planned on shorting them,” Sorkin wrote as mock questioner. “Could you explain how Goldman bet against these [mortgage bundles] while simultaneously trying to persuade ratings agencies and investors that they were good investments?”

Today, during the first gathering of the commission, Chairman Phil Angelides took Sorkin’s advice.

“How do you persuade [rating agencies] to give many of the tranches the highest ratings — triple A — at the same time that you have credit information that leads you to believe that, in fact, those securities may fail?” Angelides, former California state treasurer, asked Blankfein. “It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars.”

The resulting exchange between Blankfein and Angelides lends a good deal of insight into the thinking of Wall Street power brokers.

Blankfein: Every purchaser, is an institution — probably professional-only investors — dedicated, in most cases, to this business.”

Angelides: Representing pension funds which have the life savings of police officers, teachers…

Blankfein: These are the professional investors who want this exposure.

To translate, what Blankfein is saying here is that Wall Street brokers really don’t have any greater responsibility than used car salesmen, and if they can convince someone — a professional, he clarifies — to buy a lemon, well, joke’s on them, and the seller wins that round. This is just a game to these guys. Trouble is, they all played so badly that the entire country — even those with no interest in Wall Street investing — suffered the fall.

If nothing else, this is perhaps a warning to those police officers and teachers that their money is much safer under the mattress.