A simple, realist summary of exactly what Goldman Sachs is being accused.

The ideologues are great for punchlines and last-word tactics. Max Keiser and Matt Taibbi‘s provocative styles aside, they’re the realists who are doing a great job of educating the population while the mainstream media is treating Goldman Sachs as if its behavior is morally neutral and the problem is not enough law. As someone who does understand Goldman’s crimes, it’s frustrating to watch the media deliberately confuse passionate, active, concerned people. It’s all one-liner’s or too much jibber-jabber.

The problem is that Goldman’s actions were immoral, illegal and collect profits through their shares while the global population have the risk at stake. Mr. Keiser’s classification of Goldman’s actions as “economic terrorism”, therefore, is not hyperbole. The problem is lack of prosecution, not lack of regulation; it’s the difference between liability and additional overhead.

M.S. breaks it down real well for a novice, as financial crimes can be difficult to understand. This is dangerous because the ideologues control the narrative by playing on emotions while the realists are pretentiously wonky. From his “Democracy in America” blog at The Economist:

Credit default swaps (CDSs) are a type of insurance. There are two kinds of things you can’t buy insurance on…. You can’t kill yourself and collect on life insurance, or burn down your own house and collect on fire insurance….

It’s perfectly legal and morally upstanding to short the housing market. If you think housing is overvalued, and you can find a way to bet against it, you’re helping to prevent a bubble. It’s also perfectly legitimate, if you think housing is not overvalued but aren’t entirely sure, to hedge your bets by buying some derivatives that will pay off in case of a fall in housing. Hedging your bets will shrink your profits, no matter which way the market goes, but that may be an acceptable price to pay for lower risk. But what’s neither legal, nor morally upstanding, is to sell housing-based securities to clients who’ve hired you as a financial advisor, telling them the securities will appreciate because the housing market will continue to rise, while privately you’re shorting the housing market, betting that it will go down.

Goldman Sachs stands accused of doing both these things: insuring itself against something it actually controlled, and selling its customers securities based on assets it was privately shorting.

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  1. […] This post was mentioned on Twitter by LittleAlex. LittleAlex said: M.S. on 'The Case Against Goldman Sachs': http://wp.me/pnWUd-2zj […]

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