Goldman Sachs, Subprime Mortgages And Minority Communities

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Crisis Key executives of Wall Street titan Goldman Sachs testify on the Hill this week about whether company practices contributed to the financial crisis. The subprime mortgage mess was responsible for many foreclosures, many of them in the black and Latino communities. Host Michel Martin talks with Alvin Hall, Tell Me More’s regular financial contributor, and Michael Calhoun, President of the Center for Responsible Lending.


I'm Michel Martin, and this is TELL ME MORE, from NPR News.

Coming up, by now most people know about the terrifying death toll caused by the narco war south of the border. But Americans have been caught up in the violence, too. We'll hear from the sister of an American, a security specialist who was abducted in Mexico in 2008. He's not been heard from since.

Before we get to that, though, today the Senate hears from executives at Goldman Sachs. The Wall Street firm has been charged with fraud by the Securities and Exchange Commission, who says it misled investors and contributed to the financial meltdown. Here's Michigan Senator Carl Levin, who chairs the permanent subcommittee on investigations.

Senator CARL LEVIN (Democrat, Michigan): Yet the evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients and our communities. Its misuse of exotic and complex financial structures helped spread toxic mortgages throughout the financial system. And when the system finally collapsed under the weight of those toxic mortgages, Goldman profited from the collapse.

MARTIN: We wanted to know more about what Senator Levin is talking about and exactly what role this is believed to have played in the economic meltdown. So we've called our money coach, Alvin Hall. He's our regular contributor on matters of personal finance and the economy. He joins us from NPR's bureau in New York.

Also with us on the phone is Michael Calhoun, president of the Center for Responsible Lending. He joins us from his office in Washington, D.C. Welcome to you both. Thanks for joining us.

Mr. MICHAEL CALHOUN (President, Center for Responsible Lending): Thank you. Good to be with you.

ALVIN HALL: Glad to be here.

MARTIN: So, Alvin, why are Goldman Sachs testifying - why are Goldman Sachs executives testifying on the Hill today? They've already been charged in a criminal proceeding before the SEC, so why are they on the Hill?

HALL: They're on the Hill today to explain their role in this whole crisis. Increasingly, people see them as the big, bad demon because they played both sides of the investment spectrum. On one hand, they were marketing these toxic assets made up of mortgages that a client of theirs had put together. Meanwhile, the client was betting against the actual product that Goldman had put together for them.

So they're going to explain that and try to talk about how they have been so responsible, why they have been true to their clients, all of which sounds like a great spin game, really.

MARTIN: Really? Why do you say that?

HALL: Because the more you read about what Goldman did, it seems as if they decided that they were so powerful, that they were so beyond the reach of regulatory, appropriate behavior, that they could create their own world. And if you think about them, they're in this big building that's their fortress, so eventually, the world spirals inward rather than outward. And so they can justify anything with their compliance team, their PR team, their investment team, then it's valid in their world.

MARTIN: Well, obviously, the legal system's going to sort out whether they were - whether their behavior, you know, breached, you know, the criminal code. But I want to dig in more, Michael, into this whole question of how - the allegation that their conduct within the firm contributed to the broader economic collapse. Can you just explain how that is believed to have worked? Specifically, Senator Levin saying that they spread toxic mortgages throughout the system. How'd that work?

Mr. CALHOUN: And I think that's really the big picture here, in addition to this specific episode that's the subject of the SEC lawsuit, is that Goldman was one of the substantial players and they were involved in a couple ways. They provided financing for a lot of the big subprime lenders, who many of them are no longer in business: the New Century, the Ameriquest. They were getting the money to make these toxic mortgages through Goldman Sachs and other Wall Street investment banks.

And the whole system was operating in an absence of regulation and in shadows. For example, Goldman was one of the big participants in the so-called credit default swaps with AIG that, even today, the government doesn't know how many are out there, who owns them. But we do know that the government and the taxpayers stepped in and bailed out AIG, which accrued to Goldman's benefit. They had contracts with AIG for insurance on these mortgages, saying that if the mortgages went bad - as they came to know they would and as we had predicted for some time they would - that AIG would pay them off. When AIG didn't have the money to pay off Goldman, the government and the taxpayers stepped in and made Goldman whole on those contracts.

But - and the other big picture here is there are two different scenarios trying to be painted: Those who oppose financial reform are saying the problem is that borrowers got loans when they should've never tried to become homeowners. And it's what really happened, is that borrowers who could've succeeded as homeowners got these incredibly toxic loans that almost no one could afford, that had teaser payments and hidden fees, where your monthly payment tripled in the course of a couple of years. Well, there are just not many households who can afford that kind of payment shock.

MARTIN: But - and let me just jump in to say, if you're just joining us, you're listening to TELL ME MORE from NPR News. I'm speaking with our money coach, Alvin Hall, and Michael Calhoun, president of the Center for Responsible Lending. We're talking about the Senate hearings today, where executives from Goldman Sachs are being questioned by lawmakers about their mortgage-lending practices and their investment practices in general.

The allegation is that they contributed, through irresponsible and perhaps unethical behavior, to the global economic crisis. But, Michael Calhoun, they're not - they didn't - Goldman didn't write the mortgages. And, Alvin, I'm going to ask you this question, too, but I'm going to ask Michael this first. They didn't write the mortgages. So in what way are you saying that they contributed to the spreading of these so-called toxic mortgages - mortgages with terms that people were unlikely to be to afford in the long term?

Mr. CALHOUN: The fact is that Goldman and the other Wall Street banks, in effect, did dictate the terms of the mortgages in that the New Centuries, Ameriquest, all of the people making these loans, one, couldn't make the loans unless Goldman would buy them and sell them - package them and sell them off to investors.

Ameriquest didn't have enough money to buy - to make these loans and hold them on their own books. They were just a conduit to send the loans to Goldman. And then Goldman and the other Wall Street banks were dictating what types of loans they wanted. And it was not an accident that we ended up with these exotic, toxic loans. Those loans paid far larger fees and bonuses for everyone up and down the stream, but particularly up at the Goldman level. They could make two to three times as much money if borrowers got these exotic loans than if borrowers got the traditional, say, 30-year, fixed-rate mortgage.

MARTIN: Alvin, what's your thoughts on this?

HALL: It was a modern form of redlining, where they targeted people in a certain income bracket, in a certain neighborhood. And the typical loans that would be available in other neighborhoods were not made available in those. And Michael is absolutely right. What the organization's announcing is that we had no say in making the mortgages.

But when you are buying up mortgages from these organizations, you tell them: We would like to buy this type of mortgage. We want a balloon mortgage. We want a variable-rate mortgage. And therefore the organizations that made those mortgages received fees for them. And they would push those mortgages on people. I know, personally, people who earned - a good job, who work in the financial sector, and when they went to get mortgages on houses in New Jersey, in areas of Pennsylvania, they were not given the choice of a plain vanilla, simple mortgage. They were given one of these toxic mortgages.

MARTIN: You know, there's an email that - there's been this exchange of emails over the weekend which were leaked from Goldman Sachs among executives there describing their decisions and why - how they came to the decisions. One of the - the only individual charged so far as an individual is Fabrice Tourre, the investment banker.

And the Journal reports, the Wall Street Journal reports today on an email that he sent, saying: What if we created a thing which had no purpose, which is absolutely conceptual and highly theoretical and nobody knows how to price? Which he wrote to a friend in January 2007. It seems to indicate that they knew that these instruments had no real value or were unconnected to value in the real world.

So, Alvin, does the - how, then, you know, as we know, separately, Congress is battling over a financial reform package. Currently, they're at a political impasse because the Republicans have united to stop the bill from going forward. But how is that argument over this legislative package related to this hearing on Capitol Hill?

HALL: In the legislative package, there is this consumer protection agency that President Obama wants to put in place that would force the firms to disclose all the fees, all the costs associated with getting a mortgage, a credit card. They would also have to do more what-if planning. You know, if interest rates go up to this, here's your potential mortgage payment. If it goes up again, here's your potential mortgage payment.

None of that was done in this case. People took out the mortgages, and it was not explained to them what would happen if interest rates would go up. Instead, they were told, yes. When it comes due, you'll be able to refinance into a fixed-rate mortgage, which proved not to be the case. So there would be far more disclosure for the average person.

MARTIN: Michael Calhoun, is your view of this, is this a matter of a lack of regulation, that this conduct, that these instruments simply should not have been allowed? Or do you think this is a matter of ethics, which is that these executives should have known that these financial instruments would have a negative effect on the economy overall and that they should have policed their own behavior?

And I do want to mention that their argument, which they are making on Capitol Hill today and will certainly be making in court filings, is that they were merely balancing risk for their firm, and that they were not pushing these instruments, that they were not overexposed to these instruments, that that was not their primary purpose, was to create instruments that they knew would fail, betting against the market, as it were. So that's their argument.

So, Michael, what's - a final thought from you, is this a matter, in your view, of ethics, or is this a matter of regulation, or some of each, or something else?

Mr. CALHOUN: It's primarily a failure of regulation and transparency. Our big banks, and in particular our Wall Street banks, have become financial casinos rather than companies that provide capital to businesses and families across the country. And they've done their work in a totally opaque, hidden manner. No one knew, for example, even sophisticated investors, all the different positions and transactions and holdings and risk that Goldman and others had.

I think it's important to remember that just, you know, two years - less than two years ago, Goldman had to take a financial bailout from the U.S. government in the form of both loans - cash loans to them and loans also through the Federal Reserve, as well as the bailout through AIG. So we're having to clean up the mess, but they get all the benefits.

MARTIN: All right, we'll talk more about all this, I'm sure. Michael Calhoun is the president of the Center for Responsible Lending. He talked to us from his office in Washington, D.C. And Alvin Hall, our regular contributor on matters of personal finance and the economy, was with us from our bureau in New York. Gentlemen, I thank you both.

HALL: Thank you.

Mr. CALHOUN: Good to be with you.

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