Citing Allan Sloan's research for Fortune magazine, Ben Stein in Sunday's NY Times ("The Long and Short of It at Goldman Sachs") criticizes Goldman Sachs for underwriting securities representing packages of loans while simultaneously short-selling mortgage indexes. He also takes to task a Goldman economist for being excessively bearish on mortgages and suspects that the short-sellers were paying for that particular portrait.
There is a point of view that markets are markets and that if someone wants to buy junk from Goldman's securitization window at overly high prices, caveat emptor and good for Goldman. Similarly, if Goldman's traders (another department) want to bet that the housing market is going to continue to deteriorate, and they place their bets, what's wrong with that? If Goldman's bets win at both windows, tant mieux.
This point of view depends on a wall between departments of the kind that the Glass-Steagall Act of 1933 was supposed to put up between banking activities and investment banking. Is anything left of this wall? Is there any limit on communication between Goldman's traders and the people who investigate the quality of loans that they packaged?
On Stein's other issue, the excessive bearishness of Goldman's economist, I believe the Case-Shiller indexes and various estimates of the total likely losses support the idea that downward adjustment in housing markets has considerably further to go. But several factors will come into play to mitigate the impact:
1. Continuing infusion of central bank liquidity in the United States and overseas.
2. Local judicial insistence on seeing all the documents before permitting foreclosures, such as is occurring with Deutsche Bank in Ohio, which may slow down foreclosures - at some cost to the credibility of the American mortgage system.
3. Industry association assistance to mayors to help with easing the impact of foreclosures on local communities (the Mortgage Bankers are providing $100 per foreclosure to create a foreclosure database and to fund counseling services).
4. Congressional action to freeze interest rates on ARM interest rates that are about to float up.
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