Role of Goldman Sachs in Economic Crisis

A June 22 article on Alternet by Matt Taibbi about Goldman Sachs' role in "destroying the world economy" was invaluable. Goldman Sachs, in 2006, underwrote $76.5M in mortgage-backed securities—7 percent of the market—77% of which were non-conforming, sub-standard, toxic. The only way those mortgages could have been sold in the first place is that the initiating local banks immediately offloaded them onto secondary buyers like Goldman Sachs who securitized them and sold them around the world. It is the ability to securitize mortgages and have them fraudulently overrated by the likes of Moody's and Standard and Poor's that enabled the housing bubble—and the economic bust.

There are a number of factors that enabled this boom and bust to happen:

  1. Government support of mortgage securitization.
  2. Adjustable rate mortgages with low initial teaser rates.
  3. Homebuyers who bought homes they didn't qualify for with mortgages they wouldn't be able to pay for after the rates reverted to "normal" levels—with the idea that their property appreciation would allow them to re-finance at an affordable rate. These homebuyers trusted the lenders and the housing bubble buzz.
  4. Secondary mortgage market which lets the initiating banks off the hook for their bad lending practices.
  5. Investment banks like Goldman Sachs who knowingly sold worthless mortgage-backed securities (MBS) as gold.
  6. AIG who sold Goldman Sachs credit default swaps to hedge their bets on the MBS sales."AIG's death spiral was triggered not so much by the bets going sour, but by companies like Goldman Sachs that demanded AIG put up cash to show its ability to pay."
  7. Buyers of the mortgage-backed securities who believed the ratings.

Revision: 6-24-2009.