Long-term rates — the ones guaranteed to rise — fell again. The 10-year Treasury note made it briefly to 3.73 percent, with the 30-year-fixed mortgage rate holding steady at just above 5 percent for the week.

The action was largely due to Greek default, the possibility of a failed bailout (see "’Bazooka Backstop’ targets mortgage mess" — the dud in summer ’08) and contagion to the rest of the Europe’s "Club Med" nations (see "The debt is a real threat"). Today’s Euro-zone assistance is holding, for the moment.

On the letter of the law, The U.S. Securities and Exchange Commission’s fraud lawsuit against Goldman is weak. However, the light shed by the filing is already a help to pros and civilians alike.

For three years Wall Street has tried to sell the idea that it was tricked by mortgage brokers into buying bad mortgages.

Now everybody understands the suction machine that ran out of control on the Street, hungry for bad loans in volume so immense that the Street finally invented imaginary ones, "reference notes" and synthetics.

At the core: the Street’s discovery that it could make more money shorting bad loans than holding good ones.

In Mel Brooks’ 1968 fraud epic, "The Producers," arch-promoter Max Bialystock (portrayed by Samuel Joel "Zero" Mostel) was struck by revelation: a Broadway show that went bust could make a lot more money than a hit.

The scheme required two things: the chutzpah to sell a play many times to investors, and then finding a play so bad, so dreadful, that it was guaranteed to close after its first performance. Then keep the excess sales proceeds.

Thus Max and his frightened but greedy accountant (portrayed by Gene Wilder) sat in an empty theater thumbing through piles of rotten scripts, until the grand, "ah-HAH!!" at discovery of awful perfection: the song-and-dance production, "Springtime for Hitler."

Goldman Sachs helped to invent ABACUS 2007-AC1, a collateralized debt obligation (CDO) that billionaire hedge-funder John Paulson’s Paulson & Co. hedge fund allegedly shorted via credit default swaps (CDS).

This CDO, parts rated AAA (huh?) by folks at Moody’s, its bad mortgages earnestly (and cluelessly?) assembled by those at ACA Management LLC, bought by those at Germany’s IKB bank, the credit default swap provided by ACA’s sister company, ACA Capital, re-issued by ABN Amro Bank and the Royal Bank of Scotland back to Goldman.

Upon the collapse of the CDO, valueless in five short months, the CDS through Goldman lost more than $840 million, most of which was allegedly paid to the Paulson & Co. hedge fund, according to an SEC complaint.

Part of Goldman’s defense: Many SEC rules do not apply in dealings with sophisticated investors. Like these. Another defense, different deal: According to Goldman’s head of German operations, Alexander Dibelius, banks "do not have an obligation to promote the public good."

In an alternate — yes, fictional — script, let’s imagine Goldman Sachs Chief Financial Officer David Viniar, appearing at Chairman Lloyd Blankfein’s door.

VINIAR: Lloyd, fixed income has come up with a new structure — huge volume and profit. The deals are going to crash, stuff we stopped doing last year, but AIG London and other dopes will CDS ’em, the short-side swaps rich to us. OK? …CONTINUED

BLANKFEIN: David, how huge is "huge" volume?

VINIAR: With copycats, one or two trillion, I guess.

BLANKFEIN: How soon will they crash?

VINIAR: Oh, a year … some less.

BLANKFEIN: In that volume, would that crater AIG?

VINIAR (laughs): Oh, yeah, but we’re safe.

BLANKFEIN: David, a hole that big, that fast … is that a risk to the system?

VINIAR: Yeah, maybe … could be.

BLANKFEIN: Well, then. A lot of money for us in those swaps. Damned shame. I’ve got two calls to make. To warn AIG’s chairman about his London boys. And Ben Bernanke … if it’s this big, then he doesn’t have much time to make his own calls. Tell our guys I’m sorry.

Impossible script, of course. In 1968, it was perhaps Wall Street normal. By 2007 … it could never happen.

Without integrity writ large — without some sense of responsibility to society — then markets cannot function. All of this "moral hazard" and "too-big-to-fail" is just amusing noise. Right?

Neither reform legislation nor regulators can force good behavior upon those who intend to evade, edge, quibble and prevaricate their way around integrity.

Integrity is a cultural matter, long in formation, not easily lost. But, when it is lost … that’s what we call a "failed nation."

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.


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