It’s been quite a while since we spent so much time thinking about Ben Stein. And when we say we’re thinking about Ben Stein we mean, as is so often the case, laughing about Ben Stein. His “Everybody’s Business” column is so consistently—we almost want to say insistently—muddled that we sometimes find it hard to even comment on it. There’s no reply to his arguments because, well, there are so few actual arguments in his arguments.
Yesterday’s column on the perfidy of Goldman Sachs selling collateral mortgage products while shorting the mortgage market is a masterpiece of the style of Stein. His major premise—which is apparently borrowed from a recent piece in Fortune by Allan Sloan*—is that there is something deeply unethical about “peddling” collateralized mortgage obligations while shorting this market through index sales.
The ethics of shorting a market while selling related financial products to those who are long that market reminds Stein of KGB ethics. We’re not going to pretend to understand this analogy. Instead, let’s get straight to the heart of the matter: Stein is criticizing Goldman for hedging its bets.
One of the more popular criticisms of many Wall Street institutions is that they didn’t manage their risk in credit markets well enough—mostly because so many of them were so long in credit markets. Goldman was one of the few that managed to avoid serious losses because while it participated in the credit boom—by lending into the LBO market and by selling collateralized mortgages, among other things—it was also taking positions that profited when this turned around. This is actually what we expect of a well-managed, diversified investment bank. Stein says it’s not an example of “sterling conduct” but that is exactly what it looks like to us.
Other banks and brokerages have found that they've taken a double hit from the credit markets because they had both long positions in credit and were dependent on the revenues from selling credit products to see profits. If this is what Stein considers "sterling conduct" we'll take the Teflon coated Goldman version any day.
Perhaps more importantly, the buyers of Goldman’s CMO products were not even remotely close to the kind of people who bought tech stocks that were pumped up by sale-crazed analysts in the late nineties. The CMO investors were sophisticated institutions, perhaps some wealthy individuals and hedge funds. Goldman is entirely entitled to take a position that differs from customers who are drove up the demand for credit products.
By shorting the market for these things Goldman may well have created a downward pressure on the prices for credit products. Without that short pressure, investors who stayed long in the market may have well continued to pay even higher pressure. At least short interest in indexes such as the ABX created a warning signal that the prices were not reflecting the risk of these products. Goldman may have actually lessened the pain of the collapse of the CMO market by shorting it early.
*We haven’t read Sloan’s article yet because apparently our subscription to Fortune has lapsed—or maybe our neighbor, Moby, has been stealing our copies. We plan to get to it later this afternoon.**
**Admitting we haven’t read the article yet is probably a breach of journalistic ethics—which seem to require that you pretend to know everything about everything—fortunately we’re very short journalistic ethics and aren’t peddling that junk to anyone.
The Long and Short of It at Goldman Sachs [New York Times]
Earlier on DealBreaker: Ben Stein's One Good Point