Taibbi missed a Goldman bubble

July 8, 2009

In his colorful piece blaming Goldman Sachs for blowing every major financial bubble of our time, Matt Taibbi actually left out a rather big one: the Penn Central commercial paper debacle in 1970.  WSJ:

Goldman was nearly driven out of business…when the Penn Central railroad went bankrupt in 1970. Because it was Penn Central’s commercial-paper dealer, Goldman was sued not only for losing investors’ money but also for not informing clients that its privileged information had caused the firm itself to dump Penn Central’s paper. Goldman was censured by the Securities and Exchange Commission and lost tens of millions of dollars in the aftermath.

Eerily similar to the subprime implosion, no? In 2007, Goldman was a chief underwriter of CDOs, the most toxic of assets. And it profited substantially in the early stages of the crisis by shorting same. James Grant has much more on the Penn Central Affair in a short chapter of his book, Money of the Mind, beginning on page 290. A great line:

All in all, it was a spectacle that called to mind the truth that progress in financial affairs is cyclical, not cumulative. Putting a man on the moon, scientists had stood on the shoulders of giants. Overlending to Penn Central, bankers had re-created the [Depression-era] errors of their fathers.

It’s unfortunate that we’re talking about a Consumer Financial Protection Agency, as if regulators in Washington can somehow control how dangerous financial products (think Option ARMs) are marketed and sold. Seems to me it would be better if we had more stringent suitability standards and/or fiduciary requirements for financial advisors, mortgage lenders, et al. We should hold them legally accountable if they sell financial products they know aren’t appropriate for particular clients.

Giving trial lawyers another issue to litigate isn’t a preferred solution. It would be better if finance types had the integrity to forgo quick profits, to not sell (even better: not create) complicated financial products unsuitable for clients. But that will never happen.

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