Kass: Ben Stein, Back Off Goldman Sachs

Stein also accuses Goldman Sachs of circulating Hatzius' report in order to buoy its short position in collateralized mortgage obligations, or CMOs. He goes on to suggest that Hatzius, like many others, was not objective, as there is "a tendency to paint what their patrons, who pay them, want to see."

Finally, he accuses Goldman Sachs of shorting the CMOs at the same time it was peddling the product to institutional investors -- it was one of the top 10 sellers of CMOs in the last two and a half years -- and he compared this practice to that of Merrrill Lynch's (MER Quote) Henry Blodget, who recommended companies that he really thought "were garbage."

My response: The concept of caveat emptor (buyer beware) is a long-standing principle in commerce that states, without a warranty, the buyer takes the risk. At times, the doctrine has been misused by Wall Street, but this is not such a time.

As Jim Grant wrote in Minding Mister Market, "Wall Street exists for a purpose, not to provide "service," not to raise capital for a growing America but to sell stocks and bonds. The higher the market, the easier it is to sell, but the more disingenuous the sales pitch beomes." Anyone who thinks otherwise is naïve: Anyone who thinks a disingenuous pitch is illegal is wrong.

There is a lesson, I suppose, why the old New York Stock Exchange was surrounded by a church on one side and a cemetery on the other -- it's a rough and competitive game. It is important to recognize that accompanying historically low interest rates in the early 2000s was a simultaneous advance in almost every asset class (bonds, stocks, commodities, residential and nonresidential real estate, etc.).

In this situation, it was the investor class that searched (and ultimately reached) for higher yields. In turn, the investor community increased its acceptance of risk and reduced its demands for due diligence. Wall Street simply gave investors what it wanted.

Thanks to the hard work of former New York Attorney General Eliot Spitzer (in part because of the abuses of Blodget and others), all research reports now are mandated to include lengthy disclaimers. The Goldman report includes such a qualifier stating that, among other things, the report "should not be construed as an offer to sell or the solicitation of an offer to buy anything, it is to be used for general information purposes and that from time to time, Goldman might have 'long' or 'short' positions in, act as principal in and buy or sell the securities or derivatives of any company mentioned."

Stein also demonstrates a limited knowledge of the Wall Street practice of packaging, selling and secondary market trading in securities. Wall Street firms routinely take short positions (again, which are disclosed in the disclaimer of the report) based on an opinion of the trading desk or an individual trader -- or to accommodate clients (in order to facilitate institutional trades or make markets).

As well, Goldman likely sold short the subprime mortgage indices, in part, to hedge their large book of credits. And even if Goldman Sachs took large short positions in its proprietary trading accounts, there is nothing dishonest or unethical about it.

To think that Hatzius' report would serve to reduce the general value of CMOs, and thus benefit Goldman Sachs, is extremely naïve. The CMO market is huge, and no one has that effect. Importantly, Stein doesn't realize that a firm like Goldman Sachs has profit centers that vie for compensation (read: very large bonuses). In this setting, profit centers are in actual competition with each other; in fact, they often want the other to fail. So, it is highly likely that the CMO agency department never even communicated with the CMO proprietary desk.

Finally, while Hatzius has maintained a negative view of the residential real estate market for over two years, his recent report was issued after a precipitous drop in the mortgage indices. (Neither Stein nor anyone else even knows for sure whether Goldman's prop desks still have their short positions on.)

During the time leading up to 2007, the subprime paper showed no degradation. Goldman's proprietary traders only could have prospered on the short starting in January 2007, so it is likely that they formed independent views from Hatzius as to the timing of the mortgage demise.

Moreover, my experience is that prop traders rely on a whole host of inputs from across the street in determining positions.

Often, their own economist (as Larry Kudlow mentioned last night) is the least important factor in the decision. And more often than not, the firm's economist is not even informed on the size and directional bets of the proprietary desks.

Stein also questioned whether Henry Paulson Jr. -- "who formerly ran a firm that engaged in this kind of conduct" -- should be serving as Treasury secretary.

This contention is as sophomoric as it is silly. I will go one step further: It is inflammatory and, again, not rooted in sound reason.

Stein also suggested that an inquiry be made into "what the invisible government of Goldman (and the rest of Wall Street) did to create this disaster" and into why Goldman simultaneously shorted the same product it pumped into the system.

Again, this is a ridiculous view of a conspiracy that simply doesn't exist. Goldman Sachs' alumni are in high places (Thain, Rubin, Corzine, et al.) because they have earned that honor through achievement, hard work and sacrifice.