What Goldman Really Did Wrong

Unsurprisingly, apologists for Goldman and Wall Street have been coming out of the woodwork in the last few days.   Goldman CEO Loyd Blankfein himself was on Charlie Rose last week, arguing that Goldman is a “market maker” – and therefore it’s not a big deal that they were shorting the housing market while simultaneously telling people to buy.  He’s actually kind of right… There are a lot of things that Goldman did during the collapse of the housing market that could be construed as immoral, insensitive, or dishonest, but might not be “against the rules”.  We may think it’s disgusting, but Goldman does that sort of thing all the time, as does everyone else on Wall Street.  It’s called hedging, and it’s actually pretty smart, as long as you don’t mind letting people get screwed fairly often.

But that’s not why the SEC is going after them… it’s actually much worse:

A Collateralized Debt Obligation, or CDO, is advertised as something very specific: whether its Mortgage backed or Car Loan backed or Credit Card backed or whatever,  it’s designed to distribute the risk of all it’s individual components so if some of the components go bad, the CDO will retain it’s value.  That’s what people think they’re getting when they buy a CDO, and thats what Goldman told them they were getting when they bought Abacus 2007-AC1, the CDO in question.

The whole problem is that Wall Street was creating CDOs composed of the exact same crap all the way through – subprime mortgages; many of which had teaser rates that made them very likely to all go bad at the exact same time.  We know that Goldman thought these CDOs were full of crap, which is bad, but no different than the rest of Wall Street when the #$@& started hitting the fan.   But that’s not exactly what the SEC has a problem with:  Goldman is in trouble because they allegedly let a hedge fund called Paulson & Co. select the crappiest crap and put it in this Abacus CDO and then Goldman turned around and sold it to the highest bidder.

It’s like a baseball card store owner letting one of their friends open all the baseball card packs and pull out the good players.   Goldman not only knowingly sold kids packs filled with Pittsburgh Pirates, but then they let that same friend make millions of dollars betting that the kids wouldn’t get a Derek Jeter.

That’s just called Fraud.

The Skinny On Recovery

Tricks are for kids and Republicans. Here’s the real deal on the effects of the American Reinvestment and Recovery Act signed by President Obama. They say a picture is worth a thousand words but I only need one for this: wow.

The Value Added Tax

Chris is Chair of the Economic Issues Committee. To get involved, email him at econ [at] gomyd [dot] com or come to the meeting tonight (Tuesday the 27th) at 7pm at the Starbucks on 29th Street and Park Avenue.

For some reason, Saturdays on C-Span seem to be Tea-Party day.  Over the last few months, I’ve been idling flipping channels and suddenly Sarah Palin or Ron Paul will pop up on my screen and I’ll find myself dragged in for an hour of morbid fascination.  Last week, I ran across a Tax Day protest on the mall in DC…  I didn’t catch anyone particularly compelling, although I did enjoy watching former Saturday Night Live star Victoria Jackson crash and burn with a totally nonsensical Obama bashing song (video here).  Who woulda thought that she’d end up a crazy TPer?  And at this point, can she even be defined as B list or C list?  Seems like they were really stretching in the celebrity speaker category.

Another thing popped out, though:  The Value Added Tax (or VAT).  At some point, the moderator was warming up the crowd by accusing Obama of wanting to institute a Value Added Tax like all those commies on the other side of the Atlantic (heh paraphrasing there).  Well, I’d heard the term before, but I had no idea what the tax does, and it was not clear that they knew either.  So I decided to check it out.  One of my general principals is that when a rabble rousing Republican starts using European associations to trash something obscure and wonky, it probably means that someone with a lot of money is afraid.

Well, since Obama  seems to actually be looking into the VAT, I thought I would do the same, and then tell people what I found out.

After the jump:  A quick primer…

Read more

Is Higher Ed a H.M.O’s Biggest Fan ?

On the Times Economix blog, Uwe E. Reinhardt suggests that higher education and heath care might have similarities that inform the health care debate. Reinhardt was on a panel of policy experts during the 1980’s that made recommendations on how Congress should pay physicians who handled Medicare patients. He notes that doctors felt that the H.M.O model did not compensate physicians appropriately for their services.

He then moves on to dissect the doctors’ argument by looking at other goods the public deems vital, specifically education, and asks how those goods would look if they were provided in the same way as heath care.

He writes:

Correctly viewed, a modern university is a prepaid, staff-model, pedagogic group practice – the educational analogue of a staff-model health maintenance organization, or H.M.O., like the Kaiser Permanente Health Plan.

Like H.M.O.’s, which are prepaid an annual capitation for all of an insured person’s medically needed services, universities are prepaid one annual tuition fee for all the pedagogic services going into the education of the student.

But suppose universities operated instead on a piece-rate compensation basis, like the current health system. They would then be merely a pastiche of different pedagogic profit centers, each with its own fee schedules and ownership patterns.

What he describes is not a particular reassuring backdrop to figuring out how to pay for college and although his post does not solve the health care debate, I think that when we apply the same reasoning to higher education that is currently applied to heath care we see how unreasonable it is to argue that we should not reform the way doctors and hospitals currently do business.