Housing crisis, Thucydides, Shakespeare and Job

Fellow Reading Odyssey members,

Three and a half years ago I started warning my clients and council members about problems in the housing market. I noticed that at a time when home prices had nearly doubled the average homeowner had significantly *less* equity in their home. Normally if home prices go up, equity goes up. For home prices to rise dramatically and equity to go down it means that homeowners are taking money out of their homes through refinancing at *huge* levels. Pair that with the fact that the consumer savings rate had dropped to almost *negative* numbers (and then preceded to go negative) while consumer spending was at a 75-year high (as a percentage of GDP) and anyone with eyes willing to read the data knew the party could not last. (Note: e-mail me if you want me to better explain this data or how structured finance like mortgage-backed securities work.)

While I could not forecast what would happen to end the party, that it would end somehow someday was evident.

I now see that I missed an important part of the picture: the violation of trust by the big banks.

Goldman Sachs, following the Athenian ethic expressed in the Melian dialogue, aggressively shorted the same mortgage-backed securities they were selling to investors. This means that they betted *against* – and they seem to have betted *heavily* against – the same products they were selling to unwitting investors. It would be like Mattel selling bad toys to consumers on the one hand and then betting that the toys harmed kids (and then making money if kids were in fact harmed).

Ben Stein writes in the Sunday December 23, 2007 New York Times about Goldman and this ethic.

The biggest of the big names were among the most aggressive in betraying their clients’ trust, as I see it.

No reading of the numbers cited above could have uncovered that “trusted” Wall Street firms like Goldman – while securitizing and selling these flimsy mortgage-backed securities – would actually turn around and hope that those same securities failed.

Ben concludes his article not by quoting Thucydides but rather Shakespeare (who, of course, read Thucydides) –

“We surely cannot remain a republic under law if there is no law except the axiom from ‘Richard II’ that ‘they well deserve to have, that know the strong’st and surest way to get.”

Perhaps the only positive way to end this note is to quote Job 20.18-19, which reading group 1 is reading right now.

…from the profit of their trading,
they will get no enjoyment.
For they have crushed and abandoned
the poor
They have seized a house they
did not build.

Phil

02. January 2008 by Arrian
Categories: Commentary, Shakespeare, Thucydides | Tags: | 1 comment

One Comment

  1. <p>Mark,</p><p>I’m running out now – so my quick response is that the SEC, NASD and US court system have it wrong.</p><p>Consumers or even institutional investors don’t care about divisions within a company. They only know that Goldman Sachs sold them a security that Godman then turned around and did massive shorting against. This went beyond simple hedging or safeguarding strategies.</p><p>Thucydides would not be surprised, nor would Job.</p><p>Phil</p>