Why your banker is smiling

There's a lovely article in the New York Times this morning about how Goldman Sachs, Deutsche Bank, and other large commercial banks were selling mortgage backed securities to their customers and simultaneously betting heavily against them. They made billions of dollars in short-term profits by this ruse. The information was uncovered in a study made by UBS, which the article doesn't specifically state (but the implication is patently obvious) was one of the big "losers" in this same shell game.

It's a long article (4 pages in the online NYTimes), and it's presented in a very low key manner, but it's devastating in the way it points out the amoral behavior of the banks around whom-- and some might say because of whom-- the financial crisis swirled. One particularly damning thread looked at the way short-sellers of mortgage securities (i.e. Goldman) manipulated the market in such a way that owners of mortgage bonds were required to take losses on those securities (thereby enriching the short sellers) immediately whenever some adverse event affected them negatively. Where previously it took a major (and rare) "credit event" to bring about a booked loss, Goldman and company made sure it happened whenever there was a re-evaluation of the bond by a rating agency or elsewhere.

So, in a nutshell, the scenario is this: a Goldman salesman slides into your office, pulls out a sheaf of shiny flyers touting their new mortgage based bond fund, and gets you to sign on the dotted line by assuring you of the rock solid value and historical growth of that type of instrument. At the same time the salesman's colleagues are selling the instrument short, betting aggressively that the thing is going to plummet in value, and simultaneously devising plans to make sure they can squeeze the value out of the buyers in a step-by-step fashion rather than wait until the things implode into a black hole of valuelessness that could put Goldman's funds at risk.

Snakes, shell game operators, highwaymen, flim-flammers-- these are some terms that have described this type of behavior in the past. Today, sadly, these are just known as commercial bankers. Fie on the whole lot of them.