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Winning in a losing game

Published on: May 6, 2010



mitch02Within a span of months, Americans went from being awash in cash to being misers searching out stray pennies. The villains were cast with the ubiquitous name, “Wall Street,”; the victims were named Joe Six-pack on Main Street.
The last echoes of the boom have long since passed and even the mournful wail of the bust has faded. South County and the nation have adjusted, more or less, to the new post-boom economic realities. But the effects are visible everywhere — and serve as a reminder, a living museum of sorts, of all that went wrong. The nation is recovering and with less struggle placed on mere survival, there is, perchance, a new thirst for revenge. The United States is a nation of heroes and villains, white hats and black hats and, in the collective mind, the hero always wins in the end.
On September 21, 2008, the era of American investment banks ended. Morgan Stanley and Goldman Sachs, the last remaining major investment banks, became traditional bank holding companies. Also at the time, the entire U.S. economy was in peril with many analysts and government officials fearing for — or at least proclaiming fear for — the horrific likelihood of a complete economic collapse. Hundreds of billions of taxpayer dollars changed hands and the economy did not collapse, but the fallout was easy for all to see and understand. The jobless rate and the foreclosure rate soared. Retirement dreams and 401(k) accounts were destroyed, credit tightened and consumers, those who still had jobs, slammed shut their pocketbooks. The government gave billions of dollars to Wall Street to prevent a further meltdown; but many on Main Street felt shut out. And then shut down.
Just a few years ago, Florida was swimming in cash. There was ever-growing equity in homes and loans were easy to come by. Money was everywhere. Today, the new reality and economy is much different. But where did all that money go? Where is the Al Qaeda of the economic meltdown? Who is the financial Osama Bin Laden? America was threatened — the President and the U.S. Congress said so — but whom and where was the villain?
Finance is one of the pillars of the American economy. This nation is a world leader in money and making more money from money. It is for that reason the fear ran so deep in late 2008. It is for that reason Congress voted (against the wishes of many of their constituents) to prop up the American financial sector with $700 billion taxpayer dollars. The fear of losing a economic pillar was greater than the fear of the constituent’s wrath because if the system indeed did collapse, their wrath would be like nothing ever before seen. Of course, no one knows if it really would have happened but it was enough that people with the power of the national purse strings believed it would.


In going after Goldman Sachs — or not, U.S. Attorney General Eric Holder, left, may find winning looks a lot like losing. Mitch Traphagen Photo

Now more than a year later with the bulk of the crisis apparently in the past, Americans want justice. We want our villain. It seems the nation has found it in a company named Goldman Sachs. Last month, the Securities and Exchange commission filed a civil suit against (former investment bank) Goldman Sachs, accusing the firm of fraud. In terms far too simplistic, it seems Goldman Sachs bundled up mortgages, sold them and then turned around and bet against them. The SEC is saying the company behaved fraudulently. Goldman Sachs is saying that investors buying their products wanted risk and they got it. In the end, the company made an estimated $5.4 billion while many other banks, and certainly Joe Sixpacks, were bleeding.
Was it fraud? Were laws broken? Well, it’s no coincidence that those questions aren’t all that simple. The answers certainly aren’t. That is going to take a while to sort out — assuming it will ever be sorted out. While it certainly wasn’t the nice and neighborly thing to do, it was, for Goldman Sachs it seems, just business. There was nothing personal in it. They weren’t specifically focused on betting against America and profiting from the suffering — they just saw an opportunity to make money and they took it. It was just business.
It is one thing for the SEC to file a civil suit — that for a company like Goldman would probably amount to pocket change, anyway. Certainly they have already paid a price with estimates of $21 billion in lost stock value since the probes began. But now the Department of Justice may be getting involved with a possible criminal investigation. If there is going to be one job that no one should want, it has to be that of U.S. Attorney Eric Holder.
On one hand, Holder can go after Goldman Sachs with a pitchfork, slamming shut all of the openings that make derivatives so lucrative, tightening the screws down on the industry and putting the fear of God into everyone. He can ensure that Joe Sixpack will never again have to struggle to understand how his 401(k) had been gambled away in questionable mortgage-backed securities and exotic financial instruments referred to with acronyms.
Perhaps that would be the conscionable thing to do — to ensure that there won’t be another similar Great Recession. But in doing so, he will have to chip away at one of the pillars of our economy and our nation. FIRE used to be the acronym of success — Finance, Insurance and Real Estate. Today, that acronym could easily be FAT — Finance, Agriculture and Technology. All three are what America does best. And if the attorney general starts chipping away at a pillar, well then you have to wonder if the whole thing just might come down. Which, of course, could bring about another Great Recession. Holder, along with Mr. Six-pack, is damned if he does and damned if he doesn’t. The only question is: when should that damnation actually occur?
At some point, the nation will have to deal with the house of cards that has been built with our financial sleights of hand. Someday someone will pay — the next generation, or perhaps a generation or two after that. Pay now or pay later. Paying now will answer the call for a villain’s head but it might also vanquish an industry in which the United States excels to the envy of the world — the making of money from money; and, even more enviably, the making of money from absolutely nothing at all.
And then, of course, even Joe Sixpack got some of that action when he was lucky enough to sell his Apollo Beach home for a $150,000 profit in 2005. It’s a good gig when you can get it. And that is probably what Goldman Sachs thought. Everyone wants the easy buck — especially when there are billions of them.
What isn’t a good gig at the moment is that of the U.S. Attorney General. Goldman Sachs figured out how to win in a losing game. For Holder, winning probably won’t be nearly so lucrative. It may look a lot like losing.