All the Devils Are Here [166]
On another level, synthetic CDOs were a classic example of how things never really changed on Wall Street. The sellers of synthetic CDOs had a huge informational advantage over the buyers, just as bond sellers have historically had an advantage over bond buyers. Buying a synthetic CDO was like playing poker with an opponent who knew every card in your hand. Conflicts abounded. Those “buy-and-hold ratings-based investors,” as Tourre described them—or the “dumb guys,” to use Mike Vranos’s less polite words—weren’t necessarily less intelligent; they were simply less plugged in, and either unwilling or unable to do the analysis necessary to compensate for that. Stretching to get the extra yield that synthetic CDOs seemed to offer, lacking a clear understanding of what they were buying, they were the perfect willing dupes.
What’s remarkable, in hindsight, is that despite their many advantages, so many Wall Street firms, blinded by the rich fees and huge bonuses the CDO machine made possible, duped themselves as well. As one close observer says, “There was plenty of dumb smart money.” There was also some smart money that was genuinely smart.
Chief among the smart guys was Goldman Sachs. In the aftermath of the crisis, Goldman Sachs would be excoriated by the press and the public—and investigated by Congress, the SEC, and the Justice Department—for the way it used synthetic mortgage-backed securities to advance its own interests, often at the expense of its clients. There was something a tad unfair about this focus on Goldman; its mercenary behavior wasn’t all that unique. Goldman was simply more skilled than its peers in looking out for its own interests. The firm had no grand scheme to destroy Wall Street. Its executives had no idea how bad the destruction would be. Mainly, Goldman’s traders were just doing what they had always been taught to do: Protect the firm at all costs.
Yet somehow it was inevitable that Goldman would land at the center of the storm. The modern Goldman attitude—that there was no conflict it couldn’t manage, no complex product too complex, and few trades the firm should turn its back on—was bound to leave a bad taste in the mouths of people who were not part of Wall Street. Other members of the Wall Street tribe often resented Goldman for the way it ran roughshod over its clients and counterparties. But they accepted it. It was just “Goldman being Goldman.”
But for large swatches of the American public, many of whom lost their homes or jobs because of the financial crisis, Goldman’s behavior was deeply offensive. Taking advantage of clients to save its own skin—and then denying that that’s what it had done—was not the way companies were supposed to act. People were also offended as they realized that Goldman had played as big a role as the rest of Wall Street in blowing the bubble bigger. Yet unlike millions of subprime borrowers, it largely escaped the damage it helped create.
It was the mortgage market that definitively put the lie to Goldman’s famous, sanctimonious first business principle, the one John Whitehead had articulated three-plus decades earlier: Our clients’ interests always come first. They didn’t—and hadn’t for quite some time. As a 2007 training guide for the Goldman Sachs mortgage department noted, “However, this [the first business principle] is not always straightforward, as we are a market maker to multiple clients,” meaning that even when Goldman was servicing clients, it often had to choose which clients’ interests would come first. The presentation could have added that one of those clients, as often as not, was Goldman Sachs itself.
What Goldman never lost sight of was Dick Pratt’s old warning: the mortgage was the most dangerous financial product ever created. It’s what Goldman forgot that caused all its problems. It wasn’t just dealing with a financial product. It was