The Financial Crisis Commission Doesn't Understand Finance

More

Today I'm watching the Financial Crisis Inquiry Commission hearing. So far, it's been troubling. Its leader Phil Angelides starts his questioning with Goldman Sachs CEO Lloyd Blankfein. It's pretty clear that Angelides simply doesn't understand how finance works. That's not a good indicator for anything productive coming out of this commission.Angelides's first line of questioning had to do with the much written about story where Goldman Sachs sold products to investors that it held a negative view of. In other words, its customer bought a security that says A will go up, and Goldman held an opposing security that said A would go down. This sounds really bad if you don't understand finance.

But if you do understand finance, then you know it's a zero-sum game. You can't make a bet for something unless someone else makes a bet against something. As a market maker, Goldman creates these bets. In some cases, it sells both sides. In other cases, it holds one side of the bet. That's literally its business as a principal.

So when Angelides uses an analogy like, "It sounds to me like you're selling someone a car with faulty brakes and then buying an insurance policy on that car that pays you when it crashes," he's demonstrating that he really doesn't understand something very fundamental about finance. You can't be a market maker without sometimes holding a security interest in opposition to the performance of the securities that you sell to investors. And if there's investor demand for that security, then it's insane to blame a bank for capitalizing on that demand, no matter what its view of the performance of that security. Unless Goldman is doing something to influence the performance of the securities its sells -- and it isn't as far as we know -- then it's crazy to hold it accountable for investors making bad bets in buying the products it sells.

Jump to comments
Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
Get Today's Top Stories in Your Inbox (preview)

A Delightful, Pixar-Inspired Cartoon About the Toys in Your Cereal Box

The story of an action figure and his reluctant sidekick, who trek across a kitchen in search of treasure.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Juice Cleanses: The Worst Diet

A doctor tries the ever-popular Master Cleanse. Sort of.

Video

Why Did I Study Physics?

Using hand-drawn cartoons to explain an academic passion

Video

What If Emoji Lived Among Us?

A whimsical ad imagines what life would be like if emoji were real.

Video

Living Alone on a Sailboat

"If you think I'm a dirtbag, then you don't understand the lifestyle."

Feature

The Future of Iced Coffee

Are artisan businesses like Blue Bottle doomed to fail when they go mainstream?

Writers

Up
Down

More in Business

Just In