Goldman Hysteria: Put Away Childish Things

Kenneth Griffin, head of the Citadel hedge fund, says it's "childish" to use the uproar over Goldman’s Abacus deal as a basis for regulatory reform.

I feel ya, Ken. There are good reasons to be angry at Goldman, but this is turning into an extended Congressional tantrum aimed at just one of the many players we should be mad at. And when I look at some of the silly things Congress is doing, I want to pat it on the head, hand it a Dum Dum Pop and say: “Run along now and let the grownups talk.”

Silly Thing #1: Punching out Goldman for trading "against clients."

Sorry to burst your giant Ground Ball Grape flavored Big League Chew bubble, Congress, but this is what happens in the big leagues. Some clients go long and some go short, so as long we live in this universe – you know, the one where the Volcker rule doesn’t exist and proprietary trading at banks does – dealers will often take positions opposite to a client's.

Sure, I still want to send Goldman to detention and confiscate its Gameboy Advance. But the (alleged) misconduct in the Abacus trade wasn't about the firm's trading positions; it was about playing games and keeping secrets. In this great post on Interfluidity, Steve Waldman explains why Goldman should have told Abacus investors that John Paulson, a "speculative short," had helped choose the assets to which the CDO was linked:

That information would not only have been material, it would have been fatal to the deal, because the CDO’s investors did not view themselves as speculators.

(Bethany McLean also hit on the disclosure point in her New York Times op-ed today, as we did here at TBDO last week.)

But folks in Congress keep trying to spin the Abacus case into a broad condemnation of proprietary trading/market-making practices that, even if they make some people hopping mad, are widespread and legal.

Silly Thing #2: Punching out Goldman for shorting the mortgage market and thus losing fewer billions than folks who went long.

Oh, come on, Congress. If you were a Goldman shareholder, you’d be applauding the firm's genius. (Especially compared to, say, Citi.) As Lloyd the B said in his recent letter to shareholders, doubts about "the future direction of prices" inspired the firm to cut its mortgage-related investments back in 2007. Having attended a high school where it was totally uncool to be smart, I don't think Goldman deserves a wedgie just for being less stupid about the housing market than its competitors or its institutional clients.

As Felix Salmon wrote today (after watching Senator Levin punch Goldman on TV for selling mortgage products while shorting them):

If Goldman wants to go short mortgages and its clients want to go long mortgages, then it makes perfect sense for Goldman to sell mortgages to its clients.

Silly Thing #3: Endlessly yakking, yakking, yakking about Goldman, Goldman, Goldman...

As if no other financial institution around here ever did a shady structured deal or shorted something while selling it to investors. Yes, maybe in the same universe where Joan Rivers is the only celebrity who’s ever had plastic surgery.

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