The Significance of the Marathon Goldman Hearing

There's one thing Democrats and Republicans can agree on: their hatred of Goldman Sachs.

That fact couldn't have been clearer through the nearly 11 hours of testimony yesterday when a Senate subcommittee aggressively questioned past and present Goldman bankers. Senators from Carl Levin (D-MI) to Susan Collins (R-ME) to Claire McCaskill (D-MO) to John McCain (R-AZ) all angrily censured these executives for their role in the financial crisis. The hearing amounted to little more than a modern-day witch trial.

Did Goldman Sachs play a part in inflating the housing bubble? Absolutely. But so did JP Morgan, Citigroup, Morgan Stanley, Lehman Brothers, Wells Fargo, Wachovia, and every other bank involved in the mortgage business. So did the rating agencies, foolish investors, Fannie Mae, Freddie Mac, Congress, the Federal Reserve, the Treasury, the SEC, mortgage brokers, house flippers, and dozens of other actors. To be fair, some of those parties have been grilled by Congress as well, but none were the subject of a singular hearing lasting half a day that contained so much anger and even some vulgarity.

But maybe Goldman deserves it. They did, after all, come out a lot better than most banks, due to their earlier recognition of housing's decline than their competitors. And then they continued to sell mortgage securities to investors who wanted them. That was the crime that was investigated for 11 hours. Yet, each and every other bank would have done the same. If you believe that a market is changing, you have a duty to protect your shareholders. You can't do that without lessening your exposure to a shock. How do you lessen your exposure? By purchasing protection against it or selling your long position in assets that you believe will decline.

Anyone who purchased something from Goldman that went bad didn't do so under any false premises, despite what the Senators believe. These were sophisticated investors who were provided ample information about the securities Goldman sold. By definition, if you're selling something, that means you don't want it. If you did, you'd keep it for yourself. For every security that Goldman sold because the bank believed its value would decline, there was an investor who bought it because they thought it wouldn't. Good or bad, that's the way the market works. This is the story of every stock or bond that's sold every day.

Does Congress really fail to understand this? Perhaps. But it's more likely that yesterday served as a rare opportunity to gather up some nice political capital. Main Street clearly has no love for Goldman Sachs, so that makes the bank an easy scapegoat.

The hearing might help fuel some more populist anger about the importance of financial reform. Quotations will almost certainly be used on the floor of Congress to argue for the need to crack down on Wall Street. But while it might have been politically convenient to use Goldman Sachs as a punching bag for 11 hours, nothing substantial was accomplished. Going into the hearing, we thought that Goldman Sachs consisted of a bunch of really smart guys who made winning bets about the housing market and made a lot of money. Coming out of the hearing, we believe the same thing. There were no "aha!" moments, no interesting facts uncovered, no sudden realization of how the financial crisis could have been avoided.

Some form of new financial regulation will eventually pass. Goldman will have to adjust. Congress may even be naïve enough to believe that its multi-billion dollar quarters and many million-dollar bonuses will be limited. But they won't be. If there's one thing that's fairly certain, it's that smart people will always find a way to work around the system and make a lot of money. And make no mistake: there are quite a few very smart people working at Goldman Sachs.