Geithner Defends Goldman’s Gambling Chips

For indispensable reporting on the coronavirus crisis, the election, and more, subscribe to the Mother Jones Daily newsletter.


At a packed hearing today on the 2,200-page autopsy of Lehman Brothers, a painstakingly detailed report by bankruptcy examiner Anton Valukas, Treasury Secretary Tim Geithner was asked about a obscure yet destructive financial product called a collateralized debt obligation (CDO). In particular, the questioner, Rep. Joe Donnelly (D-Ind.), wanted to know Geithner’s take on “synthetic” CDOs, which are complex derivatives whose value rose and fall depending on the swings in the housing market. (That allegedly rigged Goldman Sachs deal at the heart of the SEC’s suit? Yep, a synthetic CDO.) Unlike regular CDOs, which are backed by pools of actual mortgage loans, synthetic CDOs take the gambling to a new level: They’re not backed by actual loans at all. Instead they were created by Wall Street’s rocket scientists when the stream of real loans ran out to fulfill the demand from investors clamoring to bet more on the housing market.

You’re probably asking, What do synthetic CDOs mean to me? Well, other than helping to explode the economy, not much. In fact, there’s been considerable doubts and hand-wrining on whether these products serve any purpose whatsoever. “With a synthetic CDO, it’s a pure bet,” Erik F. Gering, a former securities lawyer and now a law professor at the University of New Mexico, told the New York Times. “It is hard to see what the social value is—it’s hard to see why you’d want to encourage these bets.” 

Back to Geithner. What Rep. Donnelly asked the treasury secretary was this: If they’re essentially explosive poker chips that helped topple the economy, do we need synthetic CDOs? Should we get rid of them? To no one’s surprise, Geithner wavered. He vacillated. While he admitted that the logic fueling the rise of synthetic CDOs before the housing crisis—that the market would grow and grow and never stop—was horribly wrong, he chose not to disavow these products that have little, if any, purpose apart from speculative investing. “They do provide a useful economic function,” Geithner said. Whether that function benefits anyone other than the people in the casino remains to be seen.

DOES IT FEEL LIKE POLITICS IS AT A BREAKING POINT?

Headshot of Editor in Chief of Mother Jones, Clara Jeffery

It sure feels that way to me, and here at Mother Jones, we’ve been thinking a lot about what journalism needs to do differently, and how we can have the biggest impact.

We kept coming back to one word: corruption. Democracy and the rule of law being undermined by those with wealth and power for their own gain. So we're launching an ambitious Mother Jones Corruption Project to do deep, time-intensive reporting on systemic corruption, and asking the MoJo community to help crowdfund it.

We aim to hire, build a team, and give them the time and space needed to understand how we got here and how we might get out. We want to dig into the forces and decisions that have allowed massive conflicts of interest, influence peddling, and win-at-all-costs politics to flourish.

It's unlike anything we've done, and we have seed funding to get started, but we're looking to raise $500,000 from readers by July when we'll be making key budgeting decisions—and the more resources we have by then, the deeper we can dig. If our plan sounds good to you, please help kickstart it with a tax-deductible donation today.

Thanks for reading—whether or not you can pitch in today, or ever, I'm glad you're with us.

Signed by Clara Jeffery

Clara Jeffery, Editor-in-Chief

We Recommend

Latest