Goldman's Bet on the Housing Collapse: Back to Basic Instincts

I am always fascinated by the stream of consciousness process that takes place on a daily level as impressions of people and information upon our psyche lead to associations with past experiences. Behavioral scientists might label this as an example of our instincts at work.

• Answers.com defines instinct as: an inborn pattern of behavior that is characteristic of a species and is often a response to specific environmental stimuli.
• Merriam-Webster’s online definition is quite similar but more expanded: a largely inheritable and unalterable tendency of an organism to make a complex and specific response to environmental stimuli without involving reason.

Today, I would like to share my own instinctive impressions from reading a news report at McClatchydc.com involving Goldman Sachs’ (GS) secret bet on the collapse of the U.S. housing market. For a bit of background, here is an excerpt of the story:

"In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman’s sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation’s premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman’s failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws…"

I would encourage readers to read the story in its entirety as it is a most compelling piece of muckraking journalism. The most amazing part of the story is the insight on the lack of ethics that pervades business culture. To paraphrase Goldman’s response to McClatchy: it (Goldman) had no obligation to disclose how it was managing risk and that investors did not expect it to do so as these very same market participants had access to the same information as them. (Well now, talk about chutzpah. Those Goldman boys have it in spades.)

Reading this news report transported me back in time to a life education experience from my pre-adolescent youth and leads me to share the following personal story:

I once remember my Uncle Percy (and surrogate father) taking me to visit the office of Mr. "A", one of his poker buddies and loose business connections. Mr. "A" was a "good old country smart boy" who had shrewdly accumulated a significant amount of wealth by building a monopoly of grocery and gas station market chains in a sleepy little northeast corner of Texas. As I recall, he had some capital interests in a duck hunting camp as well, which was a good seasonal business in oil country. My uncle, having grown up in Louisiana’s bayou country, was reputed to be one of the best fishermen and alligator and duck hunters in the area and knew those swamplands better than almost anybody. (By the way, through my uncle’s example, I grasped an appreciation for the virtues of Proverbs 22:29). Needless to say, he played a vital part contributing to the profits of Mr. "A". I think you get the picture. These two old geezers, a white Cajun and a black Creole, were thick as thieves.

Getting back on point to my story, on this particular day, Mr. "A" handed me a finely polished wooden box with an engraved brass plating on the exterior that read "How to succeed in business…" and said "go ahead and open it up, son". I did and to my surprise there was a long shiny brass screw and right below it was the word: "Everybody!". Mr. "A" and Uncle Percy both turned beet red with laughter. I chuckled cautiously as the harsh realities of this life lesson were not lost upon me at a tender age.

Now for the most part, I knew my uncle to be a God fearing righteous man, but he was also no boy scout and known to ruffle a few feathers in his day. Later in the car on the way home, being puzzled at the screw, I asked him "how could this be right?" and he did not answer immediately. After what seemed to be at least 5 or 10 minutes of silence, he responded, "Son, sometimes you just gotta deal with the devil and there ain’t no getting around it. That’s just the way it is sometimes and if that’s the way it is, then at least know the devil you’re playing with and know the rules of the game". "What are the rules, Uncle Percy?", I asked innocently. He laughed and answered, "there aren’t any except just take care of yourself."

Anyway, my initial impression from the McClatchy news report triggered the memory of this story. I do not put myself on a pedestal to judge anyone, but hope that I have evolved enough to develop and ascribe to my own set of values as a man. One of them is that just because something is "legal or not illegal" does not necessarily make it right. Until this value becomes firmly re-embedded in business culture and ethics, my basic instincts will lead me to always remember Mr. "A" and Uncle Percy’s "screw-box lesson" when dealing with the likes of shrewd businesses, especially those which are too big to fail.

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Comments

[xpatriot:]

To paraphrase Proverbs 22:29 in the context of GS and this article: "Evil men will control kings by screwing everybody." This is also Goldman Sachs' mission statement and organizational philosophy.

Nov 03 05:11 AM

[Roger Knights:]

Thanks for sharing your story.

Nov 03 06:24 AM