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Home Publications Blogs Beat the Press Why Is It Front Page News That Goldman Bet Against the Housing Bubble?

Why Is It Front Page News That Goldman Bet Against the Housing Bubble?

Sunday, 25 April 2010 04:34

The Washington Post's most widely cited source on the housing market during the run-up of the housing bubble was David Lereah, the chief economist of the National Association of Realtors, and the author of Why the Housing Boom Will Not Bust and How You Can Profit From It. In many articles, Lereah was the only expert cited. This was ungodly bad reporting.

Today's paper has a front page story, the main point of which appears to be that Goldman Sachs made bets against the housing market and stood to profit from the collapse of the bubble. (The story actually leaves this conclusion in question.) It's not clear what in this story would be newsworthy and especially what would make it front page news.

If Goldman did bet against the housing bubble, then its actions were helping to bring the bubble to an end before it caused even further damage to the U.S. economy. Goldman's actions would have the effect of making homes more affordable for new buyers. It would also help to increase the national saving rate (a top Washington post priority), by eliminating bubble generated wealth that was spurring consumption. In short, while Goldman's actions were undoubtedly taken for profit, they would be beneficial to the economy as a whole.

Goldman has been accused by the Securities and Exchange Commission of misrepresenting its issues of collaterized debt obligations in order to get investors to take the long-end of the housing market. This is a serious accusation and presents the possibility of substantial civil, if not criminal penalties. However, there is nothing at all improper about placing a bet against a bubble in the market. It is not clear what the Post thought to be the news in this story.

Comments (12)Add Comment
written by izzatzo, April 25, 2010 7:39
The long and short of it is,
When the bubble is longed with fizz,
It's never shorted and aborted,
Just longed some more with enforted,
Stories of how shorting is contorted.

The bubble needed some shorts,
But shorts were offset by longs,
A car without brakes, sold to the pawns,
Insured for the take, that went to the cons.

When Lereah went long,
Offsetting bets were few,
Then eventually grew,
Until cannibilized along,

Lines of junk, picked by Paulson,
Betting it would bust, sold by Goldman,
Passing it on to keep the bubble long,
Each winking to the other, this can't be wrong.

The story was the deed,
Actors acting wrong,
Net shorts on the downside,
A boring non-story.

Who cares if markets fail,
When everyone wins, there is no wrong,
It's a very long tail, an all inclusive one,
A David Lereah tale, of long live the long.
SEC Press release
written by AndrewDover, April 25, 2010 8:22

written by zinc, April 25, 2010 9:11
"If Goldman did bet against the housing bubble, then its actions were helping to bring the bubble to an end before it caused even further damage to the U.S. economy."

The issue is not about the benefits of shorting, per se, the issue is about fraud in manipulating the markets, first up and then down. The deeper issue speaks to the role of the market maker as trader, the specialist using their market making capacity to defraud other investors. The issue is the use of asymetrical and insider information to entice less endowed investors to invest in securities, while mis-representing the nature and pupose of the securities, then harvesting the ill-gotten gains. The issue is about profiteering by corrupting an established system, designed and built to provide investors with a certain expectation of integrity.

By your logic, Bernie Madoff was shorting the market. In the Madoff case, Madoff sold worthless securities but the investor loss was limited to funds invested. The investment banks also sold wortless securities but then employed substantial leverage to buy insurance, magnifying the losses which were eventually imposed on the American taxpayer who never even invested in securities sold by Goldman Madoff. There is no good side to what the investment banks were about. I hope you soon leave the "GS was doing a good deed" thing alone.
written by skeptonomist, April 25, 2010 10:00
The problem with operations by Goldman and others, aside from possible ethical if not legal fraud in misrepresenting the nature of the things they were selling, was not short selling in itself but the excessive use of CDSs and other derivatives to extend leverage - and basically gambling - to absurd levels. The NYT today has a reprint of an op-ed from 12 months ago by Michael Lewis and David Einhorn which points out how media and regulatory effort was misdirected against short selling - as Dean had been saying all along.

But short selling is not really an effective regulatory mechanism or something which can be relied on to prevent bubbles - it would not make markets self-regulating. Bears without inside information (which Goldman is accused of using) tend to get wiped out during extended periods of market mania.
written by AndrewDover, April 25, 2010 10:21
After reading through:

I believe Goldman will have to settle, as the fact seem damming to me. Goldman lied to their investors, and lied to ACA.
written by PeonInChief, April 25, 2010 3:44
What the whole Goldman brouhaha points up is that investors are often sold investments where the entity doing the selling has a lot more information that the investor does. I'm not so concerned about people who should know what they're doing, but more about people who are "managing" their own retirement funds and get hooked into something like what Goldman was doing.

If some idiot rich person wants to invest in Goldman securities or with Bernie Madoff, fine. But we shouldn't have a system where people who are more concerned about or interested in weaving or reading long Russian novels have to figure this stuff out.
written by Elvin, April 25, 2010 5:13
Cleaning out my office last fall I found a presentation that Goldman made in 2005 about the housing market. They said that it was looking like a bubble and they were avoiding mortgages backed securities.

There was nothing secret about their position.
Why Is It Front Page News That Goldman Bet Against the Housing Bubble?
written by rickstersherpa, April 26, 2010 12:49
The Post's editorial board still seems in denial about the whole housing bubble. For them (perhaps because so many own homes in the D.C. area) it was a natural law that housing prices only go up. Hence, I think they take it very personal (their own net worth decline between 2006 to 2010) that Goldman was rejoicing as housing prices fell. Not very rational, but an explanation.
Yes it is newsworthy
written by McMike, April 26, 2010 1:56
It is newsworthy for two reasons, first there is a public perception about the role of investment bankers (a perception held by far too many investors including mid-sized pension funds) in which they impute a level of fiduciary role to Goldman that does not exist. It is in fact news to many Americans, including some investment professionals, that investment sales executives were actively marketing securities that the firm itself thought were garbage and were betting against, along with conspiring with insider clients in deals built to fail.

And while I understand your desire to point out that bursting bubbles is in fact betting "for" the country, not against it, this does not change the fact that under current conventional wisdom, the TBTF banks are rescued by the taxpayers on the premise that they are important to the country, and under this premise, the fact that they are making bets contrary to our "well being" is therefore newsworthy.

I think we both agree that GS should be allowed to make whatever bets they want, but that they should do so without taxpayer subsidies or backing, and they should be allowed to fail if they miss their bets.

In any case, if this crisis serves to wise up the masses about the fact that the investment bankers may be taking opposite trades to their own products, then it is newsworthy indeed.
written by scott, April 27, 2010 9:44
The scandal is that fiduciary responsibility requires that Goldman offer advice consistent with their own beliefs. If they thought that they had a fund that "was one shitty deal." Then they have broken the trust of their principal.

Stupid DR. BAKER this is grounds for disbarment being thrown out of a profession. This is felony fraud in many states. That's why Dr. Baker.

Hey, why don't you go take a few real estate brokerage classes. There YOU too can learn about fiduciary responsibility, and the bundle of laws and expectations that flow from it. I guess they didn't teach that in math class.

You see, simple addition doesn't work when the inputs are being skimmed off the top due to professional malfeasance. Where is your waste factor? I tend to think of it as friction, energy/money lost in the system.
written by scott, April 27, 2010 9:55
Again, I don't wish to say a firm can't hedge their bets. I don't want to ban any financial instrument. However, I do have concerns about shorting or hedging where there is no stake. We aren't allowed to buy insurance on property we don't own a stake, perhaps shorting should be limited to stakeholders.

I would appreciate you thoughts on this. It seems to me we should have rolled back all the stakeless short claims, refunded the premiums and clawed back the bonuses. People object that would be a monumental task, though have those funds/firms moved on?
written by Peggy dobbins, April 28, 2010 1:28
I am stunned that Dean Baker goes on record supporting Goldman Sachs' exploitation of the rest of us patsies as the pyramid they played a major role in building collapsed
Are you also an Ayn Randist? So there is no mainstream American economist for us ordinary folks to trust

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.