Page 3 of 3 Goldman good but not that bad
By Julian Delasantellis
We know now that answer, and it's definitely in the roundup of the usual
suspects. Goldman was using credit default swaps (CDS), many of them written by
the American International Group (AIG), to take profit from the declining
price, to "short" the subprime mortgages. But, once again like a reverse
version of the sword "Excalibur" from the Arthurian legends, the mere presence
of CDS seem to present moral challenges to anybody anywhere near them.
Taibbi gives a working enough explanation on how all the, as he put it "sh**ty
mortgages" were rolled up and securitized into the familiar alphabet soup of
MBS and CDO, but even he admits that Goldman was far from alone in engaging in
this activity. (In a new book, Financial Times columnist Gillian Tett says the
honor for
originator of that practice should go to JP Morgan.)
But it was in using the CDS to short subprime that made Goldman unique. Taibbi
notes that:
Not that Goldman was personally at any risk. The bank might
be taking all these hideous, completely irresponsible mortgages from
beneath-gangster-status firms like Countrywide and selling them off to
municipalities and pensioners - old people, for God's sake - pretending the
whole time that it wasn't grade-D horse s**t. But even as it was doing so, it
was taking short positions in the same market, in essence betting against the
same crap it was selling. Even worse, Goldman bragged about it in public. "The
mortgage sector continues to he challenged," David Viniar, the bank's chief
financial officer, boasted in 2007. "As a result, we took significant markdowns
on our long inventory positions ... However, our risk bias in that market was
to be short, and that net short position was profitable." In other word, the
mortgages Goldman was selling were for chumps. The real money was in betting
against those same mortgages.
"That's how audacious these (anuses) are," says one hedge-fund manager. "At
least with other banks, you could say that they were just dumb - they believed
what they were selling, and it blew them up. Goldman knew what it was doing."
I [Taibbi] ask the manager how it could be that selling something to customers
that you're actually betting against - particularly when you know more about
the weaknesses of those products than the customer - doesn't amount to
securities fraud.
"It's exactly securities fraud." he says. "It's the heart of securities fraud."
At last, Taibbi seems to have cracked the case.
For most of the rest of Wall Street, the losses from subprime came not from the
mortgage backed and derived securities they sold but from the ones they kept.
Yes, they bundled up and sold a lot of them, but still thought that they were
good enough, high-coupon interest investments, for the banks to keep some for
their own portfolio.
Not Goldman. Their taking out of CDS insurance against what they were selling
proved that, no matter how great and safe their bond salesman said the product
was, they had doubts great enough to put substantial money behind, doubts that
were eventually proved right. Once again, the morality of buying insurance
against events you can at least partially control rears its most ugly head.
It's almost as if a used car salesman, after promising a set of parents that
the car they are purchasing for their daughter is totally safe, takes out extra
insurance should the car's wheels fall off and the girl dies. Only in the Wall
Street morality of the recent past, in which the market knows everything and is
always right, could this have been accepted as something other than the worst
manner of depravity.
Taibbi's count five is essentially the cover-up for count three. It contends
that the various and sundry rescue operations initiated and funded by the US
government since last September, particularly the rescue of AIG, had but one
real purpose, that said same rescue of AIG,
What might have been a flaw in the ointment for the Goldman subprime and other
CDS strategies was the fact that the counterparty who had sold the insurance to
Goldman, in many cases AIG, had to stay in business to pay off on the policies
for Goldman to collect. Thus, according to Taibbi, AIG had to be saved, first
with $85 billion, then $50 billion more, in federal largesse.
Paulson
elected to let Lehman Brothers - one of Goldman's last real competitors -
collapse without intervention. ("Goldman's superhero status was left intact,"
says market analyst Eric Salzman, "and an investment-banking competitor,
Lehman, goes away.") The very next day, Paulson greenlighted a massive, $85
billion bailout of AIG, which promptly turned around and repaid $13 billion it
owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in
full for its bad bets: By contrast, retired auto workers awaiting the Chrysler
bailout will be lucky to receive 50 cents for every dollar they are owed.
So Goldman's CDS got fully paid off. What Taibbi does not say is that this has
been fairly standard bailout operating philosophy - stockholders and taxpayers
pay and pay, but bondholders (as long as they are not GM or Chrysler
bondholders) are held inviolate. Once again, this is Taibbi crediting a
benefit, or a financial strategy to Goldman that the company was hardly unique
in receiving or applying.
Just because so many of the people in the US government implementing the
post-September financial system rescues such as the Troubled Asset Relief
Program (TARP) were Goldman alumni, Taibbi credits the whole initiative as just
nothing more than a Goldman support operation. These include Paulson and TARP
overseer Neel Kashkari under Bush, Treasury Chief of Staff Mark Patterson,
Commodity Futures Trading Commission Chairman Gary Gensler, and New York
Federal Reserve president Stephen Friedman. Once again, how dull our lives and
futures are destined to be if we are bound through life to serve the interests
of former employers.
In 1964, historian Richard Hofstadter published in Harper's magazine "The
paranoid style in American politics." In which he noted that:
The enemy
is clearly delineated: he is a perfect model of malice, a kind of amoral
superman - sinister, ubiquitous, powerful, cruel, sensual, luxury-loving.
Unlike the rest of us, the enemy is not caught in the toils of the vast
mechanism of history, himself a victim of his past, his desires, his
limitations. He wills, indeed he manufactures, the mechanism of history, or
tries to deflect the normal course of history in an evil way. He makes crises,
starts runs on banks, causes depressions, manufactures disasters, and then
enjoys and profits from the misery he has produced. The paranoid's
interpretation of history is distinctly personal: decisive events are not taken
as part of the stream of history, but as the consequences of someone's will.
Hofstadter's main focus was then ultra-right movements at that time coalescing
around Arizona senator Barry Goldwater, but, in the 40-plus years that have
followed, this tendency to look at history through the lens of the popular
masses versus the dark conspirators has jumped the political aisle to mostly
reside with the political left. From the assassination of John F Kennedy, to an
alleged conspiracy between Iran and those connected to Ronald Reagan to hold up
the release of the embassy hostages until after the 1980 election, to the
alleged Bush conspiracy that staged 9/11, to a second Bush conspiracy that
alleges vote counting irregularities in Ohio during the 2004 presidential
election, the dark forces in the closet's shadows these days are always
present, says the left.
Taibbi's article that essentially charges Goldman Sachs with all the economic
hardship of the past century falls along these lines, but I don't think he
comes anywhere near proving his point.
This is not because, as my regular readers will attest, that I hold any
particular warm and fuzzy feelings towards Wall Street or any of its
practitioners. It's just that, by designating so much alleged power and
influence to these forces, it discourages people from actually feeling that
they can control their own destiny.
Also, the conspiracy mavens commit another grave error - they assign human
agency far more power over the terrible force of the randomness of existence
than is actually the case. For instance, to believe that the Bush
administration orchestrated 9/11 is to implicitly believe that a group of
rich-boy boobs that for five days could not deliver bottled water to a drowning
city in the wake of Hurricane Katrina would be able to silently and without
much trace commit the greatest crime in history.
Even considering the fact that the Goldman Sachs folks are far smarter than the
average Bush flunkie, I still doubt that they have been solely, or even mostly,
responsible for what Taibbi has accused them of. Goldman Sachs guys are smart,
but they're not SPECTRE, the fictional employer of many of James Bond's
nemeses. They've got their kids' pre-school tuition and old student loans to
pay before they can start working on that world-destroying stock screener.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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