Wednesday, December 05, 2007

Ben Stein Takes on Goldman Sachs

The following transcript is from last night's Kudlow & Company.

KUDLOW: On this evening’s program, famed economist and author Ben Stein has very harsh words for Goldman Sachs in his latest column, comparing their subprime short selling of securities sold to customers with the tech research scandals five years ago. Mr. Stein also questions whether former Goldman Sachs CEO Henry Paulson, who is now Treasury man, should in fact, be Treasury Secretary.

And Senator Chris Dodd, Banking Committee chairman just a few moments ago, called for a formal investigation about Ben Stein’s criticism of Henry Paulson. Here’s what Senator Dodd had to say:

“I am deeply concerned about the questions raised by Mr. Stein’s story in the New York Times yesterday about the activity of Goldman Sachs in aggressively pushing sub-prime mortgages that they knew to be of concern while simultaneously shorting collateralized mortgage obligations. If these facts are indeed true, the administration’s inaction when this crisis began to emerge earlier this year, is increasingly suspect. It is in the best interest of resolving this crisis if Secretary Paulson, who was leading Goldman at the time in question, addresses the concerns raised by Mr. Stein’s article. Failure to do so may be cause for a more formal investigation.”

The Treasury Department meanwhile, responded to our inquiry about Mr. Dodd’s statement and they said, “The Secretary is working with members of both parties to develop solutions for struggling homeowners. This is where all of us need to focus our attention.”

Ben Stein joins us now. So Ben, you have stirred up quite a hornet’s nest. Let me begin with the idea that Goldman Sachs was in fact short selling subprime mortgages, collateralized debt obligations, that they sold to their customers in huge bulk. Tell us about that.

BEN STEIN: Well, wait a second. First of all, all the credit over this goes to Alan Sloan who did a brilliant piece on this whole subject for Fortune. And it was that that cued my whole interest in the subject. His piece is just brilliant journalism. But apparently, if I am to understand said Mr. Sloan right, and a further raft of comments by Goldman Sachs spokesmen further, they were selling the collateralized mortgage obligations [while] simultaneously selling short either the same obligations or an index based on the same kind of obligations. That went into high gear in 2007 as they were still selling CMOs. They were also selling, and on a big scale, indexes against those CMOs. So they were on the one hand pushing the product and on the other hand, to me, seemingly indicating that they did not have confidence in the product, by shorting either the product, or a similar basket of securities.

KUDLOW: Now Ben, some would say that this kind of shorting of securities sold out, they packaged them and sold them, essentially represents a prudent hedging strategy to defend shareholders’ capital. Your thought on prudent hedging strategies?

STEIN: Well there are two things. One, I think that’s what’s known as the green shoe operation. And it’s a fairly well known thing. I don’t consider it ethical frankly. I don’t consider it ethical to on the one hand, tell your people to whom you owe a fiduciary duty, we’ve got a product for you and we stand behind it, and at the same time, short it. I question whether that is an ethical thing to do. And I think the people to whom they owe a fiduciary duty, in the way of pension funds, nurses unions, those people, stand ahead of the stockholders in terms of fiduciary duty. That’s one thing.

Second thing is as I understand the comments by the Goldman Sachs spokesman correctly, and I may not, they shifted those short sales into very high gear in 2007, maybe even earlier, way beyond what prudent, normal hedging would be in an underwriting operation. So I think we’ve got to find out more about it. But from what I understand their operations were on both sides of the deal. And that is not, it seems to me, cricket.

But now people keep emailing me, I’ve gotten hundreds of emails about this, people keep saying, well that’s the way it’s done on Wall Street. And I say maybe so, that doesn’t make it ethical. I mean, there are a lot of things that are done that are not ethical. And I question whether a guy who was presiding over the firm that does this kind of thing, is the right kind of guy to be Secretary of the Treasury at this particular juncture.

KUDLOW: Mr. Paulson in fact, Mr. Paulson?

STEIN: Right. Now I am positive that he is a fine man. I know that he is a big environmentalist and I know he is a fine man in many regards. And maybe he just thinks he was doing what’s always done on Wall Street. I don’t think business as usual on Wall Street is the right way to be doing business right now. It was business as usual on Wall Street that got us into this housing mortgage problem. It seems to be business as usual has got to change, where they’re not pushing this stuff out the door with one hand to unsuspecting buyers and selling it short with the other hand. If they were doing that, it seems to me that’s an ethical issue and it’s got to change.

KUDLOW: Now you are comparing this taking short positions at the same time that they’re, to use your phrase, pushing subprime mortgage related securities out the door to customers, you are comparing this to the Henry Blodget et al research scandal, technology research scandal, conjuring up some names that we’d probably prefer to forget in the earlier parts of this decade. Jack Grubman being another, Mary Meeker being a third. All of that was of course prosecuted by then New York Attorney General Elliot Spitzer. Ben Stein, are you suggesting that this is a Spitzer moment now—Andrew Cuomo is the new AG—and that there ought to be investigations first of Goldman Sachs? Is that what you are suggesting? You want to investigate Goldman?

STEIN: Well I think the whole business of Wall Street in this regard, of CMOs, needs to be investigated. I think how much they knew about how dangerous this product was, how aware they were of the dangers in the housing market as they were selling this to fiduciary institutions, I think that needs to be investigated. Because it’s bad enough that they were just selling stuff that they knew to be extremely dangerous to innocent buyers. If they knew it, and also were shorting it, that’s even worse. Now if I have misunderstood this, and it’s very possible that I have, I’m just a person and I make mistakes like everyone else, then its fine. But I think some investigation is warranted.

KUDLOW: Now again, I don’t have any skin in this game. And I agree with you, I think Henry Paulson is a fine, fine person. I think he’s done a very good job as Treasury secretary.

STEIN: Well there I must say we part ways.

KUDLOW: Alright, well I think he’s giving it his best shot in a very difficult period.

STEIN: Well I don’t doubt that he’s giving it his best shot. But that’s not the same as doing a very good job at it.

KUDLOW: Alright, well, I gave him an eight out of ten last night on the program. And I will continue that rating until proven otherwise.

STEIN: Well you’re a good friend. You’re a good friend.

KUDLOW: But I want to go back to the beginning of your column. Goldman’s top economist Jan Hatzius…issued a very, very, very pessimistic report hinting at recession. You didn’t much care for the report. You call his document selling fear.

STEIN: Well I think it is.

KUDLOW: And as I understand it, what you’re doing here, you’re connecting dots: [You’re suggesting that] Hatzius is selling fear in the sort of reverse way that Blodgett and others tried to sell tech securities. He’s selling fear, which then might knock the prices down of the very subprime CDO securities that Goldman Sachs is short selling. So you see this all of a piece and you don’t much like it. Is that right?

STEIN: Well that’s my hypothesis. I could be totally wrong. I mean, Mr. Hatzius I’m sure is also a fine man and a very fine economist. But that is my hypothesis that maybe that what’s happening. These guys are business economists. They’re not Milton Friedman. They’re not Anna Jacobson Schwartz. They’ve got some skin in the game. It’s natural for an economist to please the person who signs your paychecks. I’m not saying he’s a bad person. I’m sure he’s a very fine person. But it’s natural to want to please the people who are your friends and who are paying you.

KUDLOW: You know many years ago Ben, I served as the chief economist of Bear Stearns and Company on Wall Street. And I was there on two separate occasions, actually was a senior partner twice, I may still be the only guy to have achieved that, went to Washington, came back to Bear. But here’s my basic point. All the years I had that position nobody in the top brass, the top offices, the top executive suites, ever put any pressure on me to put out a forecasting or research report either to match longs or shorts or whatever. In fact Ben, I must say with all due humility, the top notch traders at Bear Stearns, they traded on whatever they traded. Maybe they listened or read my reports, maybe they listened to my view or not, but they really did not ever depend on the scribblings of an economist. And I just can’t help wondering if you’re not overestimating Mr. Hatzius’s influence inside Goldman Sachs.

STEIN: Well maybe I am. It’s entirely possible. I make a great many mistakes. But I’ll tell you what. He’s been bearish on housing for a long, long time. If he was that bearish on housing, why is his firm underwriting so much housing based security issues? If he thinks it’s a catastrophe waiting to happen, why is his firm underwriting tens of billions of dollars in an area that’s headed for catastrophe?…He’s been being negative on it for a great many years and they’re still selling into that market that he’s negative about. If I may say so Larry, with the greatest possible respect, if you are a business economist, and you’re issuing a forecast that you know to be different and contrary to the interests of your traders, you’re a very brave man indeed and my hat’s off to you.

KUDLOW: Well again, I’ll just say that when I held that position at Bear Stearns years ago, nobody ever interfered. That’s my only point. I actually didn’t know whether the traders in the many risk taking desks were long or short or whatever. I just tried to give it my best shot. Like all other human beings, sometimes I got it right, sometimes I got it wrong.