Goldman Sachs on mortgage crisis: 'Serious money' to be made

The impetus for Wall Street reform may be escalating.

A Senate investigative panel Saturday released e-mails showing that Goldman Sachs executives discussed profiting from the subprime mortgage crisis in 2007.

“Sounds like we will make some serious money,” one manager e-mailed. “Yes we are well positioned,” his colleague responded, referring to the fact that the investment firm had bet against the mortgage market.

Such revelations are red meat to those on Capitol Hill pushing financial reform.

“Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis,” said Senator Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations, in a statement.

“They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients,” said Sen. Levin.

Goldman Sachs officials are to appear before the investigative subcommittee Tuesday.

Lessons from Detroit

Meanwhile, as Republicans and Democrats maneuver toward Wall Street reform, President Obama says a look at Detroit is instructive – both as a caution and also as a guide to what government can do to help clean up an economic mess.

Major domestic automakers General Motors and Chrysler were in deep trouble last year, dropping some 400,000 jobs. Washington stepped in, providing more than $60 billion in aid.

“Many believed this was a fool’s errand,” Obama said in his radio/web address Saturday. “But we decided that while providing additional assistance was a risk, the far greater risk to families and communities across our country was to do nothing.”

Obama points to improvements in the auto industry since then: added jobs, loan payback, and profitability at Chrysler for the first time in three years.

As Obama acknowledges, “We still have a ways to go.” And there are questions about the way in which GM has paid back Uncle Sam, raised by Republican Sen. Chuck Grassley this week in a letter to Treasury Secretary Tim Geithner.

But for Obama, the segue from Detroit to Wall Street is clear: “Part of what led to the crisis in our auto industry – and one of the main causes of the economic downturn – were problems in our financial sector. In the absence of common-sense rules, Wall Street firms took enormous, irresponsible risks that imperiled our financial system – and hurt just about every sector of our economy.”

That’s why Obama went to Manhattan Thursday, telling an audience at Cooper Union college that included some of America’s richest bankers that reform is "in the interest of your industry."

Congressional debate

In Congress, debate on financial reform could begin as soon as Monday.

While Republicans acknowledge the need for reform, they’re resisting Democratic efforts to push ahead on a bill authored by Senate Banking Committee Chairman Christopher Dodd. That bill includes a new consumer protection agency, a regulatory council to monitor risk in the financial system, and a fund paid for by the financial industry that would be used to liquidate failed financial firms.

The first maneuver is likely to be a cloture vote to halt a possible GOP filibuster.

“This is a good political move for Democrats,” Larry Sabato, a political scientist at the University of Virginia, Charlottesville, told the Monitor’s Linda Feldmann. “It’s populist, it’s anti-Wall Street, it helps to compensate for the fact that voters have tagged them, however unfairly, with the bailout.”

Nobody wants to be seen as “bailing out” big banks and other financial institutions.

“Republicans are working to ensure the bill would forbid any future bailouts of Wall Street banks,” Texas Sen. Kay Bailey Hutchison said in the Republican weekly radio and internet address Saturday. “The idea that a financial institution is ‘Too Big To Fail’ perverts free market capitalism. It suggests that large firms can privatize their profits, yet socialize their risks.”