The list of losers in the sub-prime loan crisis is long: borrowers, investors, banks, anyone whose livelihood depends on the availability of credit—and homeowners whose homes are being foreclosed.
But there are winners, and one of them made a killing in a manner that reminds us that in business, as in the rest of life, there is no substitute for morality.
That winner was the powerful investment bank Goldman Sachs, whose former chairmen include the current Secretary of the Treasury, the governor of New Jersey, and the Treasury Secretary under President Clinton. According to the Wall Street Journal, late in 2006, traders in its Structured Products department convinced bank executives that the “sub-prime market was heading for trouble.”
What did Goldman do? It sold off much of its “stockpile” of mortgage-backed securities. In addition, the bank’s traders bet—what is called “selling short”—that the market would go down.
This paid off handsomely: The bank generated “nearly $4 billion of profits during the [fiscal] year ended Nov. 30,” easily erasing mortgage-related losses in the rest of the firm.
The bank’s customers? They did not do so well. Maybe that is because Goldman Sachs kept selling mortgage-backed securities at the same time it was betting that they would lose value.
Goldman’s “success at wringing profits out of the sub-prime fiasco,” the Wall Street Journal says, “raises questions about how the firm balances its responsibilities to its shareholders and to its clients.”
Ben Stein, who was a colleague of mine in my White House days, was more direct, writing that the firm continued “injecting dangerous financial products into the world’s commercial bloodstream” even after it became convinced they were “horrible.”
“It is bad enough,” Stein wrote in the New York Times, “to have been selling this stuff.” “It is far worse,” he added, “when the sellers were, in effect, simultaneously shorting the stuff they were selling.”
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