Dear Wall Street,
Hey, it’s your cousin Main Street again. Hadn’t heard from you after our letter last week, and frankly we’re a little hurt. We weren’t asking for much. Just for you take some time to honestly consider how that a deal might affect Main Street. And if you come to the conclusion that the deal will likely be bad for Main Street (and bad for America), we just wanted you to move on to something else.
We don’t think that this is too much to ask. But maybe you disagree. Or maybe you’re just too busy to get back to me.
It’s been a busy couple of days for you. I saw that a number of Goldman Sachs executives, including CEO Lloyd Blankfein, testified before a Senate committee earlier this week. That must have been tough for you, despite the fact that the committee was staffed by often disorganized and confused Senators. They kind of nailed you, didn’t they? Didn't help Wall Street's image problem much, did it?
Now we know that you think that Main Street has lots of misconceptions about Wall Street, but that hearing gets to the heart of what we’re writing to you about. The big issue during Blankfein’s testimony was whether or not Goldman had the obligation to tell investors it was shorting a product that it was selling to investors as a long-term investment. In other words, Goldman put together a mortgage-backed security fund that it was selling to investors, who bought shares in that security believing that it would increase in value and that they would ultimately make money. Goldman did not dissuade them of that belief. Meanwhile, Goldman was betting against the very same investment.
Now, the way we look at it, this poses a problem. We hate to quote elected officials, but Sen. Carl “S-Bomb” Levin had a point when he told Blankfein:
“When you sell something to a client, they have a right to believe that you want that security to work for them. In example after example... we're talking about betting against the very thing you're selling, without disclosing that to that client. Do you think people would buy securities from you if you said, 'you know, we want you to know this, we're going to sell you this, but we're going out and buying insurance against this security succeeding. We're taking a short position'... That's a totally different thing from selling a security and no longer having an interest in it... Is it not a conflict when you sell something to someone, and then are determined to bet against that same security, and you don't disclose that to the person you're selling to?”
Blankfein responded with this:
“The markets work on transparency with respect to what the item is. It doesn't carry representations of what a position the seller has. Just think of buying from... a stock exchange, or a futures market. You don't even know, you're not even supposed to know who's on the other side. You could have the biggest mutual fund in the world selling all its position in something, they could hate it. You would never know that if you were a buyer of a stock... Liquidity in the market demands transparency that the thing is supposed to do what it is supposed to do. The people who were coming to us for risk in the housing market, wanted to have a security that gave them exposure to the housing market, and that's what they got. The unfortunate thing... is that the housing market went south very quickly... and so people lost money in it. But the security itself delivered the specific exposure that the client wanted to have.”
Now, we understand the point that your man Blankfein is trying to make here. And maybe he really is a true believer in the markets who thinks that demand for these toxic securities would have existed regardless if Goldman was peddling them.
Maybe that’s true, but we here on Main Street have our doubts.
Consider this example: Let’s say you’re a car dealer who is selling flashy convertibles on the cheap. You’re doing a brisk business when all of a sudden you learn that these cars will likely burst into flames when they hit 10,000 miles. You don’t know for sure, but you’re pretty confident because you spoke to the guy who installed the gas tanks and you know that they were attached using Silly Putty, which you suspect is not the ideal material. Now, the right thing to do in that situation would be to stop selling those cars right away or in the very least tell the buyers about your concerns, right? Of course. Instead, however, you see an opportunity. You quietly begin to buy up all the funeral parlors in town, because you believe that very soon lots of people are going to need caskets, urns and burial plots. Someone’s going to get rich selling that stuff and it might as well be you.
That’s what this whole Goldman mess seems like to us.
So, going forward, we just want you to be transparent with investors when you find yourself in these situations. You don’t even have to stop selling the cars that blow up. Just tell us what you know.
Like, if you’re selling a security that you think is going to fail, and could ultimately throw the country into a financial panic, don’t keep that information to yourself. Tell your buyers. Maybe they’ll disagree with you and want to buy it anyway. Or maybe they will run like the wind. It just seems to us that telling people is the right thing to do.
It sounds like our elected officials are going to be demanding some changes soon. Who knows if they’ll ever get organized enough to make that happen, but we’re not holding our breath. We’re hoping — really hoping — that you decide to do this on your own because it’s the right thing to do, not because politicians force you.
But your track record for self-imposed reform isn’t exactly stellar. I’m reminded of a commitment Citibank made a few years back to stop using the practice of “universal default” in their credit card business (universal default is when the bank can raise the interest rate on your credit card if you’re late on any kind of bill, not just your credit card bill).
Soon after they made the commitment to stop that practice, their business started to slide because of the mortgage crisis, and they realized that they were going to need the money that universal defaults generate. So they broke their promise. What happened? A few years later, Congress passed credit card reform and universal default was restricted anyway.
So this transparency thing we’re talking about… It’s happening, so you might as well do it of your own volition. You’ll come off looking better, and we think you’ll feel a bit better about yourself too. Don’t you want to stop being the butt of all of Jon Stewart’s jokes?
Talk to you soon, cuz.
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