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Eagle Eye

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Good analysis of the Goldman Sachs situation from the ever perceptive Robert Peston on the BBC.

But I would take issue with one of his comments made almost in passing on Goldman's "big short" on subprime:

"Most dispassionate observers would probably say it's a shame that more banks weren't a bit more like Goldman in respect of their risk controls: the banks that really let down taxpayers and citizens were those like Merrill Lynch, Lehman, Citigroup, UBS and Royal Bank of Scotland that made stupendous and insane bets that the bull market in debt would go on forever."


Up to a point. Goldman hedged itself against subprime by taking out credit default swaps. What they gained when their subprime investments went bad was lost by insurers like AIG and (as Peston has noted himself) RBS. If the likes of Citigroup and Lehman had shorted like Goldman, the losses of others in the financial sector would have been correspondingly greater. Someone, somewhere, would have had to eat the losses of the subprime meltdown. And such was the quantum of those losses that governments would still, in a likelihood, have had to mount a rescue of the system.

I suppose you could argue that if more banks had shorted property earlier some of the froth would have been blown off the market and the bust would have been less painful. But it was very late in the day when Goldman shorted the market. That was why Paulson was so eager to bet on a crash.

I suppose you could argue too that the losses might have been more concentrated and therefore less systemically dangerous if more banks had taken out protection on property. But this would have required the existence of a few mug firms prepared to write all those insurance policies. Even AIG might have balked at going long on property if all the banks were short.

The big issue as far as the public interest is concerned (and please note that all of this matters to the non-financial world only in so far as taxpayers end up stuck with the bill) is not when the banks began to realise a crash was coming, or whether they should have hedged against a crash, but the fact that they blew up such a disastrous property bubble and injected all these toxic securities into the market in the first place.
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