Pearlstein: 'Profitable Goldman Better for Taxpayers'

Post's Pearlstein Gets It Very Wrong

Much of [yesterday's Senate] hearing focused on how Goldman went from having billions of dollars of exposure to the subprime mortgage market in the first half of 2006 to posting big profits from the implosion in that same market by the second half of 2007.

The more benign way to look at this dramatic rebound is that it speaks to Goldman's knack for anticipating the market and its willingness to break from the Wall Street herd. Many of us may be jealous of Goldman's success or suspicious of exactly how it came, but surely we are all better off than if Goldman had remained long on mortgages, tumbled into insolvency and required a big taxpayer bailout.

--Steven Pearlstein, "Two planets collide for three hearings on Goldman"; The Washington Post(4/28/2010)

Of all the myths and misconceptions about Goldman Sachs' role in today's financial crisis, the one perpetuated (above) by the normally astute Mr. Pearlstein is the most infuriating and pernicious.

That's because society is patently NOT better off because Goldman Sachs profited from the housing bust.

By figuring out how to make money off of "shit" -- Goldman Sachs' word for their mortgage-backed securities, not mine -- Goldman stoked demand for . . . . more shit.

That assured that even more oceans of capital would flood into the housing market, driving prices even higher -- and making any crash harder.

Ironically, the higher the housing market went, the more potential to "short," or bet against it, which sucked in even more capital.

Doomsday machine, indeed.

Instead of viewing Goldman's obscene profits as averting another taxpayer bailout, as Pearlstein does, they need to be viewed in the larger context of causing trillions of dollars of (additional) carnage in the housing market and broader economy.

And Pearlstein is dead wrong that Goldman didn't get bailed out.

What else do you call pumping $185 billion(!) into AIG; allowing Goldman Sachs to become a bank holding company virtually overnight and borrow for free from The Fed; beggaring savers with zero percent interest rates to resuscitate the banks; using The Fed's balance sheet as a dumping ground for Goldman (and other banks') toxic assets.

And on and on . . . .

"Shitty" doesn't begin to describe it.

Withdrawal Pangs

Today's "Socialist" Housing Market

Nice summary (below) of the challenges facing the housing market in the years -- and decades -- ahead.

After the last 18 months, arguably the same issue is confronting the banking system, the auto industry, the installment credit (credit card) market, the commercial paper market, etc.

Government officials generally agree that it would be better for private lenders to resume their traditional role as major providers of finance for home loans. But policymakers now face some tough choices. They must decide how to reduce support for the mortgage market without letting it collapse. And they must decide what kind of support the government should provide in the long run.

--"Mortgage Market Bound By Major U.S. Role"; The Washington Post

P.S.: Against creeping socialism? Consider this: according to the Post, nearly 90(!) percent of all new home loans are now funded or guaranteed by taxpayers.

High-end Double Whammy

Jumbo Loan Premium to Shrink

With the collapse last year of the private mortgage bond market on Wall Street, home buyers, builders and refinancers who relied on jumbo financing were left with few sources except at punitively high interest rates and huge down payments.

--Kenneth Harney, "A Big Boost for Buyers Seeking Jumbo Loans" (The Washington Post; 3/21/09)

Ordinary economic mortals are probably not feeling much empathy for the relatively affluent these days -- especially if they have a connection to Wall Street.

However, today's housing market has delivered an unprecedented wallop to upper bracket Buyers: at the same time their wealth has been whacked -- in some cases by more than 50% -- by falling asset prices, their loan costs are at (relatively) nosebleed levels.

While "conforming" (under $417k) mortgages dropped to as low as 4 1/2% last week, so-called jumbo loans still cost 6 1/2% or more.

It's tough to be rich, huh?

Actually, that's a huge gap, and arguably, an unfair one. More to the point, closing it offers lenders some tantalizing profits.

So, as Harney is reporting in his weekly column, a number of lenders (including Bank of America and ING) are rolling out jumbo loan products that aim to slice this premium. (The impact is less in the Twin Cities than on the coasts, because home prices here are much lower.)