Cashing in on Broken Dreams

For those of us trying desperately to wrap our heads around the Security and Exchange Commission’s allegations against Goldman Sachs, the Wall Street Journal’s recent article on the alleged fraud is a real boon.  The article is clear and concise (or at least as clear and concise as can be expected when a describing multi-stage transaction that involved more than 500,000 mortgages in 48 states), and, perhaps just as importantly, it frames the events in a way that recognizes that the economic collapse was a fundamentally human event—caused by human greed at the cost of human suffering, and leading to even greater human suffering.

According to the article, the allegations involve a massive bet, booked by Goldman Sachs and placed by hedge fund manager John Paulson, that would pay off if people across the country could not pay their mortgages.  He allegedly took a particular interest in adjustable rate subprime loans issued to people with poor credit scores, rightly believing that the people who had taken out these shady mortgages didn’t really understand how big their monthly payments would eventually become.  As we all now know, Mr. Paulson was all too right, and he profited to the tune of more than $1 billion as foreclosure rates shot up.

The Wall Street Journal does not explicitly question the stomach-turningly cynical notion at the core of the deal—believing that people had been fooled by unscrupulous lenders, the already obscenely wealthy Mr. Paulson looked for a big score rather than a way to help—but they do include the stories of several of the owners of these mortgages, including Gheorghe Bledea, a Romanian immigrant who spoke limited English and claims he was refused a more straightforward mortgage and lied to about the terms of the mortgage he did take, and Stella Onyeukwu, a nursing home assistant who took out a loan where the interest rate nearly doubled, jumping from 7.55% to 13.55% in its first two years.  People like Mr. Bledea and Ms. Onyeukwu are too often ignored in the conversation about toxic assets and collateralized debt obligations, but they are the heart and soul of the economic collapse.

Another choice that the Wall Street Journal makes in the article is to use the term “bet” in reference to Mr. Paulson’s transaction.  The term is an important one, because it brings the transaction, and the similar transactions that may be regulated by the financial reform bill currently being debated, into the world of regular people.  Most of us don’t understand derivatives and if or how they should be regulated, but we do understand that the Nevada Gaming Commission has a role in making sure that casinos don’t rip people off.  We’re happy that three-card monte games aren’t going on on city corners anymore, and, if we think about it for a minute, we wouldn’t want three-card monte rules being applied to our homes and personal savings.

Even if Goldman Sachs is found guilty, Mr. Bledea and Ms. Onyeukwu won’t get their houses back.  But, if we can redesign the rules and enforce them more rigorously, we may be able to ensure that next time people like Mr. Paulson won’t be able to put all their chips on human suffering and walk away a winner.

Read more at The Opportunity Agenda website.

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