The July issue of Rolling Stone has an article about a different type of rock star: the Goldman Sachs investment banker. The article, called "The Great American Bubble Machine," was written by Matt Taibbi. In it, he viciously attacks Goldman Sachs through a series of arguments, blaming the bank for engineering virtually every bubble, and pseudo-bubble, that has plagued the economy over the past hundred or so years.
I can't link to the article, because Rolling Stone does not put their content online. But it's an amusing read, so you might want to pick up a copy. I was pleasantly surprised to see that it was pretty nonpartisan and well-researched. I found myself agreeing with a fair amount of the article as well, but I think it ventures a little too far out into conspiracy theory land.
The article essentially has seven sections. Here's my interpretation of the general idea of each:
Intro
- Goldman's bankers, past and present, are pervasive in every aspect of leadership and power in the nation, if not world.
Bubble #1: The Great Depression
- Goldman was one of the banks running a sort of Ponzi scheme during the Great Depression that helped cause it.
Bubble #2: Tech Stocks
- Goldman was the biggest underwriter to push eventually worthless technology stocks into the market through initial public offerings.
Bubble #3: The Housing Craze
- Goldman was involved in creating and selling collateralized debt obligations, one of the securities that helped create the financial crisis.
Bubble #4: $4 A Gallon
- Goldman helped to ignite commodity prices, which led to oil prices going way up.
Bubble #5: Rigging the Bailout
- Goldman had alumni in place throughout the government to make sure it benefited from the bailout.
Bubble #6: Global Warming
- Goldman is pushing cap and trade because it stands to make money hand over fist once carbon trading begins.
Let's start with the intro. It's absolutely true that Goldman alums seem to be all over the place in positions of power. I'm not sure there's anything wrong with that, unless they all had some kind of explicit grand plan as a cooperative axis of evil to rule the world. That's silly.
It makes perfect sense that Goldman Sachs alums would end up in positions of power across the world for two reasons. First, they are some of the smartest people in the world -- that's why they get hired by Goldman Sachs, the premier investment bank. Smart, ambitious people always end up in positions of power, as they should. Second, they make boatloads of money at Goldman Sachs. As everyone knows, once you've got enough money, the next thing you want is power. That's why they end up pursuing such positions post-Goldman.
Then there are the bubbles. Taibbi essentially says that Goldman engineered -- not just participated in -- all of these bubbles. I think that's a whole lot of crazy. Goldman's relationship to these bubbles has a lot more to do with correlation than causation. There's no question -- none -- that Goldman made oodles of money off of these bubbles. But so did others. They just made more, probably because they were smarter. The idea that Goldman created even one of these bubbles is pretty ridiculous.
Some of Taibbi's arguments are stronger than others. I think his argument that Goldman engineered the housing bubble is particularly weak, as they were never a major player in the mortgage space. Sure, they sold lots of CDOs, but so did others, like Merrill. This demonstrates my point: rather than create the bubble, they probably saw profit to be made, and did so.
You can ask the question of whether or not it's evil to exploit something that you know is a bubble. While Taibbi can't really prove that Goldman always knew what they were doing in exploiting bubbles that would ruin the lives of others, several people he interviews claim they must have. I agree, because if they are so smart, how could they not?
I believe Goldman's bankers probably had the attitude: "If we don't profit from this, somebody else just will." Is that deplorable? A little. It's also completely rational, but that doesn't make it okay.
What's the solution? One obvious attempt might be to regulate the advantages that Goldman has out of the market. But that would probably involve destroying the market entirely; and besides, they'd just find other aspects to exploit within the new framework. Maybe they're the New York Yankees of banks, and the government could create laws requiring banks to "draft" MBAs like in basketball. They could also have salary caps like in football, so no one bank becomes too strong.
But that spits in the face of capitalism and the free market, so would shake the very foundation of the U.S. Allowing incentive and competition sometimes creates winners and losers, and Goldman knows how to win better than anyone else.
Much ado about nothing. I've never worked for GS, but really, the finger-pointing is getting old, really, really old.
Don't hate the playa', hate the game.
If there is only one dominant "playa" it's not a game anymore or a capital market. The term Theft would be too kind and the term Treason more appropriate.
I have seen first hand communities, companies, and individuals devastated in the GS pursuit of their bonuses.
Here is a link to the article:
http://www.scribd.com/doc/16763183/TaibbiGoldmanSachs
I have a larger problem with the missing parts of the story than I do with the overall article.
The parts on housing, TARP and commodities are weak. They leave out a long list of other factors and assign all of the blame to GS. Bubble #1 was probably common practice. I don't see how GS's role was anything out of the ordinary.
Bubble #2: Parts of it sound shady, but investors chose to buy those stocks. The prospectus clearly states that these companies didn't make any money. Do your due diligence people. The climate change part is interesting, but he acts as if GS is the only firm pushing for a cap and trade. AIG had reserves on the books to cover the outstanding CDS to GS. Some of the money might have been TARP money, but they have a legal obligation to satisfy the contract that they entered into. TARP doesn't have the power to void contracts (Not to my knowledge). AIG didn't use TARP money to pay off GS. AIG had collateral set aside for their CDS contracts with GS.
http://www.businessinsider.com/why-goldman-didnt-need-an-aig-bailout-and-why-it-didnt-make-a-fortune-off-aig-either-2009-4
He assigns almost zero blame to Greenspan, CFC, FRN, FME or the rating agencies for their role in the housing bubble. The banks are the ones that loosened their lending standards, not GS. GS just packed up the loans that CFC created and sold them off to investors that outsourced their risk monitoring to S&P and Moody's.
Paulson didn't let LEH fail to knock out a competitor to GS. If were to make a hierarchy of I-banks LEH would a competitor of BSCs, not GS. MS, UBS, CS and Lazard are competitors of GS, not LEH. LEH was a bond shop and nothing else.
GS didn't fudge its 1Q09 earnings numbers. GS changed their reporting dates because, as a bank holding company, they had to. And the proper disclosures were there. They didn't hide or manipulate anything.
GS is probably guilty of a lot of stuff. But they are not some magical company that can create a bubble whenever they get bored. He just went out with a list of the most recent bubbles, discovered what GS did during that time period and then places all of the blame on GS.
Don't let these minor quibbles obscure the main point: Washington policy is set by Wall Street people (largely Goldman) for the benefit of Wall Street (including Goldman).
The bailouts and stimulus are generational theft on an unprecedented scale, selling our children into debt to enrich today's bankers.
Example: Hank Paulson as head of Goldman lobbying Congress to get rid of leverage limits, then cashing out hundreds of millions of dollars of stock at the peak, then going to Treasury to bail out his buddies when the leverage-fueled bubble inevitably ended badly.
"probably because they were smarter"
Oh snap, that must be it! And the reason the Bush and Kennedy families have so many offspring who have held powerful political positions is superior genetics. You've convinced me.
Goldman Sachs absolutely deserve to be called out for over-profiting on Americans & we all need to be aware of how they will benefit from the Cap & Trade proposal.
The facts are Hank Paulson was their ex-CEO & not only gave them $10 Billion tax dollars, but a healthy part of AIG's $150+ Billion went into their vaults.
Obama is also going against his own word & aiding Goldman, by permitting their head lobbyist to be Tim Geithener's cheif of staff @ Treasury. What happened to the NO LOBBYIST in my administration promise??
Maybe Daniel Indiviglio thinks it's cools that GS is the head Wall Street parasite.. But, I think they have gone overboard in profiting from their connection in GOV. & they should not profit one penny from the Cap & Trade proposal.
Goldman is indeed a remarkable case, but I think it teaches somewhat different lessons than "Goldman exploits its power for evil". And suggests a different understanding of how bubbles build and bust and the government-Goldman relationship.
What's truly remarkable is that although Goldman's fingerprints are all over episodes of financial excess over the past century, Goldman itself is never part of the carnage that leaves countless financial institutions as corpses when the excesses are finally accounted for.
That's because Goldman is a first mover into new products or markets. It's the rest of the financial system that follows. Since bankers are proven lemmings, the last ones into the new arena arrive when all the rents have been wrung out of the innovation, and they are invariably among the casualties when the bubble bursts. The product has been commoditized or the new market segment has become efficient so the early high margins are gone, and all that's left is the increasing risk of bubble-busting.
By that time, Goldman has moved on -- or at least has limited its commitment to the product line or market segment. It doesn't ramp up to become a "permanent" leader in the product line, like a Countrywide, thinking it can continue forever to milk early high-margin business simply by scaling up its business model. It never bets the farm on a market remaining super-profitable through monitizing its franchise like the bond insurers or exploiting regulatory loopholes or market inefficiencies like AIG with CDS.
Historically, of the major US financial institutions, before the bursting of the latest bubble, I would have put only put Morgan Stanley and JP Morgan into the same class as Goldman. And surprise, surprise, look who's left standing after the current round of blood-letting.
Does Goldman use its influence in the corridors of power? Sure. It pushes for as much elbow-room as it can get to innovate. But even when restrictive rules are placed on the financial sytem, it figures out ways to get clients the outcomes they want or finds new trading opportunities that exploit those rules. When systemic messes need to be cleaned up, it becomes a powerful voice for the financial services industry, advocating public measures that allow the markets in which it operates to recover in a fashion that leaves a place in the system for Goldman. And during the clean-up, it finds new opportunities to apply its skills for the good of the system while making a buck in the process.
It may be unseemly that they seem to be able to profit whether the market is going up or crashing. But none of that is "evil". In fact, we need a well-functioning financial system, and Goldman's view point and skill set are valuable, as long as they aren't controlling.
It's way too simple to make Goldman a bogeyman. They're responsible neither for the creation or maintenance of bubbles nor for the excesses of financial institutions that get into trouble. The villains are to be found in monetary policy that fails to take away the punch bowl and in the lemming behavior of financial institutions and clients (especially the retail sector in the later stages of bubbles -- tech stocks or housing or even Latin American and Russian bonds of the 19th century). And since the 1960s, we can also point fingers at periods of excessive forbearance or collusion of regulators, sometimes with the encouragement of Congress (e.g. savings & loans).
Should we be on our guard that Goldman will advocate government support or regulatory measures that benefit their business? For sure. But that's a sideshow. From the standpoint of systemic health, not important. As Goldman continues to remind everybody, Goldman itself didn't need a bailout -- although it needed a bailout process for the rest of the system. What's important is how going forward regulatory structures and rules will effect the run-of-the-mill bank or brokerage or investment management firm.
Goldman has an unusual if not unique culture that has time and again spared it the worst of the downside of market meltdowns -- so the regulatory lesson is don't use Goldman as a model. Design rules and regulatory processes for the lemmings, not for the first movers.
Should we avoid policies that might create new market opportunities for Goldman such as a carbon trading market? Absolutely not. If the policy we want anticipates a market response in order to work -- which cap-and-trade does -- it's going to require clever folks using their capital to make the market response work quickly and efficiently. And Goldman has a pretty impressive history of innovation as well as an amazing track record in trading markets.
So we should want firms like Goldman to take leadership roles. All the while watching that we're not encouraging a market structure in which early rents are locked in for the first movers, or that the new market is bubble-prone or creating new forms of unregulated, poorly understood systemic risks.
So you think it was a good idea that they pushed the congress to allow banks to borrow at substantially-leveraged positions? This is not being innovative in anyway!! This allowed the problems to become exemplified!! I love your leadership Goldman!! Thank you for lining your pockets and leaving the American public holding the big bag of shit. They have too much influence in the political environment and it is definitely not for the publics benefit. I hope the politicians and Wall Streeter's burn in hell for their intended misdeeds!
With all due respect, I decline to look to today's Goldman Sachs for "leadership."
Goldman Sachs's CFO stated in an earnings conference call in August 2007, "... we took significant markdowns on our long [mortgage] inventory positions during the quarter as we had in the previous two quarters. However, our risk bias in that market was to be short and that net short position was profitable."
Think "Glengarry Glen Ross" with Ivy League degrees.
As Malcolm Gladwell notes in his excellent profile of Sidney Weinberg, the former janitor's assistant who, between 1930 and 1969, turned Goldman Sachs "from a floundering, mid-tier partnership into the premier investment bank in the world," "Wall Street needs a few less Waddill Catchingses and a few more Sidney Weinbergs."
Actually, you've provided an excellent illustration of the point I was making about first movers and lemmings. If more banks had followed the GS trading strategy, and shifted their balance toward net short rather than continue to pile into a market that was reaching unsustainable asset prices, the bubble wouldn't have lasted as long, reached such epic proportions, or brought down so many financial institutions as it burst.
I'm not trying to make GS out to be heros. Regardless of the ethical standards or lack thereof of individuals who make their living on Wall Street, financial markets are remarkably indifferent to moral considerations or heroics. But you seem to be suggesting we should condemn GS for repositioning itself for the increasing market risks it was able to perceive, unlike many of its competitors. Or are you suggesting that the fact that GS was in on the beginning of innovations that turned out to be so hazardous is a reason, in itself, to condemn them?
If we're assigning blame, I think a much larger share should go to those firms that, unlike GS, kept ramping up the MBS business year after year, whether as originators or distributors or insurers, pushing ever greater volumes, and moving into higher and higher risk segments that could only be rationalized on the assumption that housing prices were going to continue to rise forever.
When we perform post-mortems on financial crashes, we have to look not only at the actions of a firm taken as a whole -- we have to look at when they did what. From that vantage point, introducing a new type of instrument which eventually blows up isn't in and of itself wicked. That's the case whether we're talking about 19th C railroad bonds or 20th C MBS, each of which innovation made very socially useful contributions. The problems with financial innovations develop over time as the market evolves. In the case of bubble and busts, it's usually the slow-pokes who get lured by an apparently easy way to mint money who not only wind up getting burned but spoil the party for everybody because they didn't understand the business or its risks. That's why lemmings are so dangerous.
Back to "leadership". If we want to see a trading market set up -- as is the case if we go for a cap-and-trade system -- it seems to me we'd rather have people with a role in kick-starting the market who have been successful over the long haul, in lots of different market conditions, in running a major trading business.
Yes, traders are pretty indifferent to the social consequences of their trading activities. But that's true regardless of the firm they're associated with or regardless of what they're trading. But those firms that are successful over the long haul tend to be somewhat sensitive to rule compliance and reputation -- at the very least they don't want to mess up their own playpen. So as long as someone is setting market participation rules that don't give permanent first-mover advantages, and as long as there's a market overseer who can monitor for systemic risks, I'd rather leave the task of launching a new market to folks with a successful track record like GS who can figure out how to make the market attractive and, yes, profitable.
As to the Gladwell comment, personally I'd prefer for both the future of GS and its broader societal role that the trading side of GS have less power within the firm relative to its current dominance over the investment banking side. Different mentalities, different priorities. If I had my druthers, I'd also like to see GS revert to a partnership. I think the compulsion for the investment banks to go public and, along with the multinational banks, compete on the basis of bulge bracket standings that entailed gargantuan balance sheets and off-balance-sheet shenanigans, with lots of prop trading to goose or smooth quarterly returns, was a contributing factor to the severity of the current bust.
But though I confess to a bit of a bias against the trading side, let's be clear that investment bankers face their own conflicts of interest every time they bring a new issue to market. There's often no "clean" way to bridge the interests of both the sell and buy sides while still making a buck, so the investment bankers can be just as vulnerable to the Glengarry Glen Ross pressures as traders are. With or without Ivy League degrees.
Nadezhda,
Thanks for your thoughts. Some responses:
"If more banks had followed the GS trading strategy, and shifted their balance toward net short rather than continue to pile into a market that was reaching unsustainable asset prices, the bubble wouldn't have lasted as long, reached such epic proportions, or brought down so many financial institutions as it burst ... That's why lemmings are so dangerous."
I imagine that GS is quite happy that all those lemmings piled in; otherwise, they couldn't have divested themselves so timely of such brilliantly conceived financial innovations as Goldman Sachs Alternative Mortgage Products. One might as readily conclude that the lemmings would never have piled into an unsustainable market if GS had not lead the way. Changing animal metaphors here, who was more "dangerous" to a herd of bison: the Blackfoot who stampeded the animals over the cliff? or the cliff-jumping bison? It's a bit academic, isn't it? In order to get a good pile of carcasses at the bottom of the cliff, you need both the leaders and the followers.
"that's the case whether we're talking about 19th C railroad bonds or 20th C MBS, each of which innovation made very socially useful contributions."
I will grant you that those 19th century railroad bond proceeds that actually found their way into non-duplicative track and rolling stock (as opposed to those that became walking-around-money for people like Jay Gould) were socially useful. What "very socially useful contributions" have been made by 20th century CMBS? For example, it sure looks like we're going to be doing without it for the foreseeable 21st.
"If we want to see a trading market set up -- as is the case if we go for a cap-and-trade system -- it seems to me we'd rather have people with a role in kick-starting the market who have been successful over the long haul, in lots of different market conditions, in running a major trading business."
I share Mr. Taibbi's skepticism regarding a cap-and-trade system, and I'd rather see a carbon tax, anyway, with the money going to the actual elected government, where the US taxpayers stand at least some chance of affecting where the money goes. In any event, I'm not sure whether I'd call GS "successful over the long haul," certainly not without at least two government inventions that redounded to GS's benefit (i.e., AIG bailout plus instant FDIC insurance by becoming a bank holding company -- and that's not even mentioning the piddling $12B that seems to have been forced on those unfortunate souls). If I were President (heavens forfend) and needed someone to "kick start a market," then I would consider bringing up some bright-eyed latter-day Sidney-Weinberg-esque janitor's assistant and giving him or her a shot.
"... those firms that are successful over the long haul tend to be somewhat sensitive to rule compliance and reputation"
That's true, and my sense is that Sidney Weinberg led GS for almost 40 years with that principle in mind. But the abiding principle there now seems to be "You can fool some of the people all of the time, and all of the people some of the time," without adequate regard to the end of that aphorism.
"I think the compulsion for the investment banks to go public and, along with the multinational banks, compete on the basis of bulge bracket standings that entailed gargantuan balance sheets and off-balance-sheet shenanigans, with lots of prop trading to goose or smooth quarterly returns, was a contributing factor to the severity of the current bust."
I agree. I also agree with Michael Lewis: GS has enjoyed, and continues to enjoy, disproportionate political influence. I suspect that, like all other phenomena, that's going to end someday; it's just a matter of when.
"investment bankers can be just as vulnerable to the Glengarry Glen Ross pressures as traders are. With or without Ivy League degrees."
True enough.
Madoff's Mistake
Bernie Madoff with billions
And got a hundred and fifty years.
All those bankers who lost trillions?
Getting on with their careeers.
Blankfein and Thane and Pandit
The boys at AIG and Countrywide
Though every one a bandit
Each of them has a free ride.
Bernie's mistake was to break the laws
While Blankfein and his bretheren
Paid Congress to pass legislative flaws
Ensuring the law cannot break THEM.