Foreseeing the Mortgage Bubble
Although this NY Times article gets a little gushing about Goldman Sachs, it reveals something very interesting: All the write-downs on Wall Street and the possible economic slowdown that might result from historic billions were foreseeable by a firm with intelligent risk management. However only one major investment bank involved in this area (with billions on the line) managed to properly mitigate their risk.
As a result of this overenthusiastic behavior on behalf of other investment banks, the economic system has received a shock that will have an impact on millions of Americans. As a result some heads are rolling on Wall Street, however these heads are rolling out the door with hundred million dollar plus bailouts. This raises powerful questions about the incentives surrounding high-level investment banking executives - are these incentives adequate with regard to economy-wide level risks? Does the pressure on them in the short-run lead them to inadequately cover their risk in pursuit of ever higher profits - with possible disastrous economy wide consequences? Given that we know these risks were able to be mitigated, it seems that we should be strongly asking why they weren't - and why hundreds of millions of Americans are forced to live with those economic consequences.
http://www.nytimes.com/2007/11/19/business/19goldman.html?ex=1353214800&en=c4a15cae1e01c9e2&ei=5124&partner=permalink&exprod=permalink
When it's party time on Wall Street, only the wallflowers refuse to get up and dance.
You one of them wallflowers, Derek?
November 20, 2007 5:17 PM | Reply | Permalink
$h!t flows downhill...and money flows up!
November 21, 2007 11:08 AM | Reply | Permalink
I wonder if Goldmann really escaped scot free on this, or if they are simply better at hiding their dirty laundry.
November 22, 2007 5:23 AM | Reply | Permalink
What you've missed in this comment is that, perhaps for the first time, a nation's mortgage industry has taken outlandish risk (that's not the first; remember the S&L '80s debacle) and internationalized it. We exported the bad debt, skimming the profit. The temptation of high $ denominated returns from housing loans proved too temopting. Yet I sat here in the US and saw Ameriquest and Coutrywide and shook my head. Where was that high-paid, incisive, investment house driven research? Just a charade? Overpaid?
For any prudent banker with experience above 20 years the situation would have been obvious. We don't value experience and we don't like critics to the pursuit of our (or your) immediate wealth.
That's it. Tell me I'm wrong.
December 2, 2007 12:33 AM | Reply | Permalink