Don't never, ever trust the squid*
From the New York Times:
The conventional wisdom has it that the final report of the Financial Crisis Inquiry Commission was a low-budget flop, hopelessly riven by internal political disputes and dissension among the commission’s 10 members. As usual, the conventional wisdom is completely wrong. Actually, the report — and the online archive of testimony, interviews and documents that are now available — is a treasure trove of invaluable information about the causes and consequences of the Great Recession.
For instance, on the exceptionally important but little understood role played by the increasingly lower prices Goldman Sachs placed on the complex mortgage securities on its balance sheet — which helped determine the fate of many of its shakier Wall Street brethren — the commission report, on page 237, is crystalline:
As the crisis unfolded Goldman marked mortgage-related securities at prices that were significantly lower than those of other companies. Goldman knew that those lower marks might hurt those other companies — including some clients — because they could require marking down those assets and similar assets. In addition, Goldman’s marks would get picked up by competitors in dealer surveys. As a result, Goldman’s marks could contribute to other companies recording “mark-to-market” losses: that is, the reported value of their assets could fall and their earnings would decline.
The first victims of Goldman’s decision in May 2007 to begin communicating its lower marks to the rest of the marketplace were the two Bear Stearns hedge funds that were heavily invested in complex and squirrelly mortgage securities. Although Goldman disputes the charge, the lower marks caused the two hedge funds to recalculate the funds’ net asset value, known in the business as N.A.V., and to re-issue to investors in June 2007 a far lower N.A.V. — down 19 percent, rather than down 6 percent. All hell broke loose.
Soon enough, the funds’ investors were blocked from withdrawing their money, and by July the funds filed for bankruptcy and were soon liquidated. Investors lost much of the $1.5 billion they had invested. The liquidation of the two hedge funds led to the collapse of Bear Stearns nine months later.
In late July 2007, Goldman started a nearly 17-month dispute with A.I.G. Financial Products, a subsidiary of American International Group, the giant insurer, about the value of $23 billion of complex mortgage securities that Goldman had insured through the subsidiary by paying some $100 million in premiums. Goldman’s agreement with the A.I.G. Financial Products allowed Goldman to demand collateral payments from the firm under two conditions. First, if A.I.G., the parent company, lost its AAA credit rating, which it did in March 2005. And, second, if Goldman believed the value of the underlying securities being insured had fallen, which by mid-2007 Goldman thought — correctly — had occurred. But the consequences of Goldman’s collateral disputes with the financial products subsidiary were profound for A.I.G., and contributed mightily to the government takeover of the insurer after pumping some $180 billion into it.
The crisis commission report is chock-full of the details of how the dispute developed and progressed....MORE
*A paraphrase of our usual warning when discussing Goldman and their public pronouncements:
My usual intro to anything Goldman says about commodities is:
Mother: .....And remember, the Lord loves a working man.
Navin: ........Lord loves a working man.
Father: ......And son, don't never, ever trust whitey.
-The Jerk (1979)