Michael Lewis asks, “What’s odd about the subprime crash is Goldman Sachs Group Inc. A single firm took a position contrary to the rest of Wall Street. Giant Wall Street firms are designed for many things, but not, typically, to express highly idiosyncratic views in the market.”

Basically, what happened was that in 2006, some smart guys at Goldman, as they did at other places, went to senior management, and said that they thought that the Subprime market was soft, and that they should short it.

This probably a bit of advice that any number of brokerages got over that time, but how they handled it was different.

As opposed to reviewing the data, coming to a decision, and issuing guidance to the subprime traders based on that decision, Goldman Sachs has some different management structures. They

The only difference between Goldman and everyone else was that Goldman had, in effect, an entirely separate enterprise, sitting on top of the firm, with the power to reverse the judgment of its own supposed experts in various markets. They were able to do this, apparently, without ever saying a word about it to their own traders. Instead of telling the fools trading subprime mortgages that they are wrong, and that they should unwind their positions, they simply offset their trades.”

Rolling Heads

All across Wall Street risk managers are being fired, reassigned or hovering under a cloud of contempt and suspicion. Heads must roll, and after the CEO, these guys are the most plausible to guillotine.

But at the same time it’s pretty clear that a lot of these so-called risk managers never really had the power to manage risk. They had to consider the feelings, for example, of the guys who ran subprime mortgages. Morgan Stanley conceded as much when it said recently it was considering changing things around so that the risk manager reported to the CFO, rather than the heads of individual businesses.

But at Goldman there were two intelligences at work: one, the ordinary Wall Street intelligence, which was allowed to get itself in trouble, just as at every other Wall Street firm; the other, more like an extremely smart hedge fund that made its living off the idiocy of big Wall Street firms, including its own people.

(emphasis mine)
There is a frightening corollary to this, that the experts operating in high finance are less like dispassionate experts than they are like those people on American Idol whose friends have told them that they can sing.