Don Quixote (Senate) takes on a windmill (Goldman Sachs)

I spent the day at home yesterday watching the Senate hearings with Goldman Sachs. Let me be clear I am not defending Goldman Sachs or downplaying the importance of Senate hearings. But some things need to be pointed out, because the travesty that went on yesterday was insulting.

Anyone feel like the pot was calling the kettle black? Does anyone else want to see the emails that Congress and the Senate sent around to one another when debating (I use the term loosely)health care reform?

But I digress... this is not about what Congress and the Senate has done right or wrong... this is about a sub committee interrogating a private company on internal documents that they really do not understand. It was this misunderstanding that fueled questioning that was designed to envoke anger and empathy for the finance reform they are currently trying to pass.

I will sight one example of this - specifically when Goldman was asked about Stated Income home loans. The Senate basically made it sound like the borrower simply stated their income and whatever number they provided was accepted at face value. This is simply not true.

When stated income home loans were available in the market the loan orginator asked the borrower what their monthly income was. If the number they stated did not support the home loan they were applying for they should have been denied immediately by the originating agent. But let's be honest this did not always happen, nor was it the only backstop to prevent unqualified borrowers from securing home loans. Lenders also ran internal checks on income. For example if you stated that you were a personal assistant in CA, the lender would log into a database and look up the median income for personal assistants in your area. If the number you stated was outside the range the database provided based on your profession, your loan was denied. In addition employment was also verified with a phone call to the employer. Inside this conversation the lender would ask specifically what position the borrower held. If the borrower misrepresented the position they held, their loan would be denied. Stated income loans were not what the sub committee represented them to be... perhaps if they corrected themselves and discussed no doc loans or NINA (no income no asset) loans they would have had a point, but stated income loans were not the guiding force that lead to the collapse.

This is a single example of how this sub committee stretched their position of authority and innocence. Sitting on the high chairs, speaking down, and dismissing the testimony as combative, the Senate made it seem like Goldman was the reason for our real estate woes. Realistically it was the Community Reinvestment Act that was passed by our government that forced lenders to loosen guidelines allowing more people to achieve the dream of homeownership. For lenders to stay competitive and remain in business they were forced to offer products that they probably would not have offered.... then we come to Goldman Sachs - a market maker - not a lender... they didn't originate these loans, they simply packaged and sold them to investors. These investors are not individuals with small porfolios... these are sophisticated investors that have millions of dollars at their disposal. They understand the conept of risk versus security... and the risk they took as for a higher return... rates on stated loans had interest rates that were at least a full point higher than their full doc counterparts. These investors wanted the higher rate of return, and they knew the associated risk. It is not the market makers responsibility to tell them not buy... after all there has to be a seller if there is a buyer... they wanted to buy, and if Goldman did not make the market, someone else was going to.

It is clear to me that this was a witch hunt and the prosecutors new next to nothing about witchcraft.

Moving forward, I expect (although do not support) this financial reform bill will pass leading to more regulation, more beauocracy and ultimately higher costs for all of us. This is not the solution.