"Panel rips Wall Street titans," said the WSJ headline. Hardly. The Times was closer to the mark: "Few burns for four bankers..."
The Wall Street bankers know very well how to defend themselves. It was all a matter of bad judgment, they said. And they know you can't be held responsible for that, legally or even (arguably) ethically. Lloyd Blankfein of Goldman Sachs admitted they had "rationalized" about some of their products. Rationalizing does not make you culpable. "If you're going to do everything right in business, you're going to make mistakes," the Times quotes Jamie Dimon, head of JP Morgan Citigroup. It's just how the system sometimes works, they seemed to be saying. We make mistakes, we are human.
But what a set of mistakes! When does bad judgment become serious negligence? And when you are so well -- paid when you make mistakes -- in fact, because you make mistakes. Doesn't that suggest there is more at work here than a few errors of judgment? When one commissioner rightly suggested their was no downside to bad judgment -- those who got bonuses didn't have to give all the money back -- Jamie Dimon, whose reputation is high because he avoided mortgage-backed securities when they got too risky, argued that the bankers paid for their mistakes. You lose your jobs, you lose your reputation, he said.
That comment, in a nutshell, displayed how far removed these bankers are from the real world. It reminds me of the baseball players I watch in the dugout after they lose a big game. I am upset that my Yankees lost, but some of the players are laughing. Then, I remember. He makes $5 million a year, the other makes $12 million a year. Hard to get too upset.
When Jamie Dimon loses his job (he had been fired by Sandy Weill of Citigroup back in 1998 and was devastated for a while), he may have $10 or $100 million in the bank. When typical Americans are fired, they may not be able to meet their medical expenses or send their kids to college or got to the movies -- or even keep their homes. Do these guys have a serious sense of that? Do they think their "eating their own cooking" is remotely similar to what the rest of America had to eat because of their bad cooking?
It's important to understand that when Goldman and Morgan and Bank of America and Citigroup and Merrill wrote so-called collateralized debt obligations, they were making it possible for mortgage originators to write tens of billions of dollars worth of unscrupulous mortgages -- the sub-prime mortgages including adjustable rate mortgages, no down payments mortgages, negative amortization mortgages, "liar" loans. These originators conned home owners about low interest rates interest and often encouraged them to lie about their incomes. By late 2007, the default rate on Countrywide subprime mortgages reached 28 percent. Some of these banks had their own aggressive mortgage originators, notably Citigroup and late in the game, Merrill.
So here's at least one question that the next round of bankers should be asked. Did they know they were supporting predatory and probably criminally fraudulent lending throughout America by their activities? Was this just bad judgment? If they didn't know, how could they be qualified to be a CEO of such an influential institution?
This post originally appeared on New Deal 2.0
Goldman and MS had to purchase those mortgages before they structured the CDO's. You can't put together a non-synthetic CDO or MBS without first purchasing the underlying bonds or mortgages first. And the only reason they were issuing those CDOs was becasue people wanted to buy them. Professional investors were looking for, what was at the time AAA rated, high yielding debt instruments. It was the both the mortgage originators and the demand by professional investors that made it profitable for investment banks to structure and issue CDOs, not the other way around.