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Wednesday, April 28, 2010

"Profiting from the misery of others"

Much of the country seemed transfixed by the Goldman Sachs hearings in Congress yesterday.

The government should never have paid off on Goldman's bad AIG bets, especially at one hundred cents on the dollar. And it's ludicrous that it is allowed to call itself a bank and borrow money from the US government at the Fed Funds rate. But for Senator Carl Levin and his cronies to pontificate about how Goldman has made money profiting from "the misery of America's homeowners" shows a lack of understanding of the financial markets work.

Every trade has both a buyer and seller, and one will eventually profit at the other's expense. This is simply the way free markets work. Any short seller in stocks is hoping that the price will go down. This mean he hopes to profit at the expense of all those who own the stock, be they tycoons, pension funds, or widows and orphans.

The futures markets, which are merely derivatives on underlying commodities, is a pure zero sum game. If someone sells a grain contract on the Chicago Mercantile Exchange, and profits because the cost of grain sinks, it could be said that he is "making money off the misery of the poor farmers." Likewise, if someone goes long the contract and the price of grain goes up, it might be said that he is he "is profiting from the misery of the poor, who must now pay more for their very food." Yet no one has suggested that the futures markets, which can help both farmers and food refiners hedge their bets, be abolished.

Options are another zero sum game. One's person's gain is another's loss, yet no one has suggested that these be abolished either.

The specific charge the SEC leveled at Goldman was that it misled its investors about the nature of their investments. They said that Goldman did not inform its investors that John Paulson had a say in designing the synthetic CDOs which it marketed. The merits of these charges have yet to be determined.

But much of the other pontificating that Levin and his cronies is simply naive. And given the large role that Congress played in encouraging the kinds of irresponsible no-money-down mortgages which helped caused the financial crisis, it is hypocritical as well.

Are the Senators really this obtuse? Or are they cynically grandstanding and blaming a convenient scapegoat to deflect attention from their own role in the crisis, and also fuel public support for their financial regulation bill while they're at it?

2 comments:

Anonymous said...

Lawyers and CNBC are still way ahead when it comes to profiting from the misery of others.
G

John Craig said...

Guy --
True. But when you think about it, anybody who provides a service that anybody NEEDS, as opposed to WANTS, is profiting from the misery of others (anybody who cant' have what they need is going to be very miserable indeed).