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Goldman Sachs, the Scapegoat of Champions

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Washington's efforts to place blame on Wall Street misguided.

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'Tis the season to pile on to Goldman Sachs (GS), in case you missed the memo. The hatchet jobs that appeared in Rolling Stone and New York magazines have apparently caught the attention of the men and women of Capitol Hill.

Not surprisingly, they want a piece of the action. In fact, it appears they're positively desperate to debunk any conspiracy theory about Goldman's influence over government -- even if it means displaying their ignorance of how Wall Street works for all the world to see.

Today's Wall Street Journal brings us the story of a Senate probe into fraud at some of Wall Street's biggest mortgage-bond-market players, including Goldman and Deutsche Bank (DB). This follows on news earlier this week that members of Congress wrote to Fed chairman Ben Bernanke to inquire as to whether Goldman Sachs was too lightly regulated.

According to the WSJ, the investigation "appears to focus on whether internal communications, such as email, show bankers had private doubts about whether mortgage-related securities they were putting together were as financially sound as their public pronouncements suggested."

Well, duh. Of course they had private doubts about whether the products were financially sound. Have the Senate aides not read a single business story in the past year?

Take The End, Michael Lewis' award-winning feature published in Condé Nast Portfolio (RIP). It chronicled the story of one especially astute investor, Steve Eisman, who managed to uncover the motives of bond salespeople at some of the biggest banks, most notably Deutsche Bank, as they shopped the toxic mortgage-backed securities around town.

Not only was the article published last November (a full 8 months ago, senators!), it painstakingly walks readers through the machinations and motivations behind the marketing of the products that precipitated the greatest financial crisis this country has experienced in nearly a century:

"I didn't understand how they were turning all this garbage into gold," [Eisman] says. He brought some of the bond people from Goldman Sachs, Lehman Brothers [later acquired by Barclays (BCS)], and UBS (UBS) over for a visit. "We always asked the same question," says Eisman. "Where are the rating agencies in all of this? And I'd always get the same reaction. It was a smirk."


Is the Senate hoping to find the email trails behind those smirks? And, more importantly, will they even constitute fraud? The fact of the matter is that banks weren't peddling these products to Grandma Ethel and Uncle Joe. They were selling them to people like Eisman, sophisticated investors who, if they'd listened to their guts instead of their bond salesmen, could have used those smirks to their advantage in choosing how to invest. This is how Wall Street works.

When the end finally came, Eisman was poised to reap windfalls based on his own due diligence of the products being hoisted by Goldman, Deutsche and the rest of them: "They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience."

The questions Congress should be asking now aren't about how the people on the inside knew their mortgage products were risky. They should be investigating where the next crisis of conscience should be being felt -- but isn't.

Join Hoofy and Boo as they take a look at how Goldman's risks paid off big.

No positions in stocks mentioned.
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