Sunday, April 18, 2010

"At the Height of the Housing Boom?"

The Wall Street Journal commits the same error aa the Justice Department in this morning's story on the Paulson-Goldman Sachs fraud allegation. The Journal article begins with "At the Height of the Housing Boom......."

2007 - The Height of the Housing Boom? Are they nuts? Most subprime lenders went broke in 2006. Housing prices peaked in 2005. By the time of the Paulson-Goldman story, the housing market was coming apart at the seams. How is this the "height of the housing boom?"

That's really the point. At the time of the Paulson-Goldman CDO transaction, the housing market was getting crushed and the subprime lending disaster was front page news. That was the environment that IKB Germany and Royal Bank of Scotland purchased the CDO package from Goldman Sachs. They were betting the worst was over. They weren't making a bet during the boom. They made that bet as the market was falling to pieces. They knew perfectly well that Paulson thought they were stupid. They thought he was stupid. Where's the crime?

The media is making this look as if IKB and RBS were innocent lambs led to the slaughter. That is a complete misreading of this particular transaction. IKB and RBS both knew that the subprime lending market was a disaster and that residential housing, in particular, was getting crushed. They knew before they bought the Goldman CDO package. This was not "the height of the boom."

Why base the allegations against Goldman on a lie?

One of the allegations floating around in this mess is that Goldman mislead IKB and RBS into believing that Paulson was buying the same stuff that they were buying. Come on! Was there anyone on the planet in early 2007 that thought that Paulson would buy a package of CDOs? Paulson was on the financial news network almost daily in early 2007 blasting the CDO market and the residential housing market. Are they alleging that IKB and RBS were completely ignorant of the surrounding financial world? Another absurd allegation by the Justice Department. (This is like suggesting that Obama was backing Sarah Palin in 2008).