Senators vs. Goldman Sachs - WSJ.com

Senators vs. Goldman Sachs - WSJ.com: "Senator Claire McCaskill of Missouri veered closer to the truth when she described Goldman's facilitation of trading in mortgage-related instruments as 'pure gambling' and told the executives: 'and you are the house.'

This was a valuable contribution. It reminded spectators that the transactions getting all of the attention—synthetic collateralized debt obligations (CDOs)—did not contain any mortgages. These were side bets. One could argue, as an astute reader did in a recent letter to the Editor, that investors like Mr. Paulson may even have helped reduce the impact of the housing crisis because they allowed stupid housing bulls to make their bets without actually creating any more bad loans.

If yesterday's hearing had any value, it was the recognition, even by the Senate inquisitors, of the real root causes of the crisis: too many bad mortgage loans with poor underwriting, and too many pools of these bad loans carrying a triple-A rating. Exploring the creation of junk loans should lead Senate investigators to the same place where most of the taxpayer losses are occurring—Fannie Mae and Freddie Mac.

Former Fannie Mae Chief Credit Officer Edward Pinto calculates that as of June 2008, the toxic twins and other government entities were responsible for more than $2.7 trillion in subprime and Alt-A mortgage exposure. Goldman's mortgage business was small potatoes in comparison; in fact this figure is three times Goldman's entire balance sheet.

The Senate's pending financial-regulation bill has no reform of Fannie and Freddie. Fresh off their meeting yesterday with the marketplace, the committee members might start on the road to useful reform by insisting on a rewrite."