CLT UPDATE
Wednesday, July 15, 2009
The Wizard behind the curtain of Oz?
If America is circling the drain,
Goldman Sachs has found a way to be that drain — an extremely
unfortunate loophole in the system of Western democratic capitalism,
which never foresaw that in a society governed passively by free markets
and free elections, organized greed always defeats disorganized
democracy.
They achieve this using the same playbook over and over again. The
formula is relatively simple: Goldman positions itself in the middle of
a speculative bubble, selling investments they know are crap. Then they
hoover up vast sums from the middle and lower floors of society with the
aid of a crippled and corrupt state that allows it to rewrite the rules
in exchange for the relative pennies the bank throws at political
patronage. Finally, when it all goes bust, leaving millions of ordinary
citizens broke and starving, they begin the entire process over again,
riding in to rescue us all by lending us back our own money at interest,
selling themselves as men above greed, just a bunch of really smart guys
keeping the wheels greased. They've been pulling this same stunt over
and over since the 1920s — and now they're preparing to do it again,
creating what may be the biggest and most audacious bubble yet....
The history of the recent financial crisis, which doubles as a history
of the rapid decline and fall of the suddenly swindled-dry American
empire, reads like a Who's Who of Goldman Sachs graduates. By now, most
of us know the major players....
After the oil bubble collapsed last fall, there was no new bubble to
keep things humming — this time, the money seems to be really gone, like
worldwide-depression gone. So the financial safari has moved elsewhere,
and the big game in the hunt has become the only remaining pool of dumb,
unguarded capital left to feed upon: taxpayer money. Here, in the
biggest bailout in history, is where Goldman Sachs really started to
flex its muscle....
The government might let other players on the market die, but it simply
will not allow Goldman to fail under any circumstances. Its edge in the
market has suddenly become an open declaration of supreme privilege. "In
the past it was an implicit advantage," says Simon Johnson, an economics
professor at MIT and former official at the International Monetary Fund,
who compares the bailout to the crony capitalism he has seen in Third
World countries. "Now it's more of an explicit advantage." ...
Fast-forward to today. It's early June in Washington, D.C. Barack Obama,
a popular young politician whose leading private campaign donor was an
investment bank called Goldman Sachs — its employees paid some $981,000
to his campaign — sits in the White House. Having seamlessly navigated
the political minefield of the bailout era, Goldman is once again back
to its old business, scouting out loopholes in a new government-created
market with the aid of a new set of alumni occupying key government
jobs....
And instead of credit derivatives or oil futures or mortgage-backed CDOs,
the new game in town, the next bubble, is in carbon credits — a booming
trillion- dollar market that barely even exists yet, but will if the
Democratic Party that it gave $4,452,585 to in the last election manages
to push into existence a groundbreaking new commodities bubble,
disguised as an "environmental plan," called cap-and-trade. The new
carbon-credit market is a virtual repeat of the commodities-market
casino that's been kind to Goldman, except it has one delicious new
wrinkle: If the plan goes forward as expected, the rise in prices will
be government-mandated. Goldman won't even have to rig the game. It will
be rigged in advance.
Rolling Stone - Issue 1082-83
July 2, 2009
The Great American Bubble Machine
By Matt Taibbi
Goldman Sachs Group Inc.'s second-quarter profit surged as
Wall Street's largest surviving investment bank delivered record results in
trading and stock underwriting.
The results signal a remarkable turnaround for the firm less than a year after
the credit markets seized up and forced many of its competitors out of business.
Goldman, the first major U.S. bank to report quarterly results, parlayed
improving market conditions to post record revenues and net earnings....
The fact that Goldman has rebounded so strongly during the first half of the
year could raise questions from lawmakers who have funneled hundreds of billions
of dollars into the ailing financial system. Just weeks after repaying rescue
funds, Goldman reported that compensation rose 41% since the first quarter....
Shares of Goldman, which are up nearly 80% so far this year, rose 88 cents to
$150.34 in midmorning trading on the New York Stock Exchange.
The Wall Street Journal
Tuesday, July 14, 2009
Goldman's Profit Soars on Record Trading Results
For decades now, as a writer, economist and scold, I have
been receiving letters from thoughtful readers. Many of them have warned me
about the dangers of a secret government running the world, organized by the
Trilateral Commission, or the Ford Foundation, or the Big Oil companies or, of
course, world Jewry.
I always scoff at these letters. The world is far too complex a place to be run
by any one group. But the closest I have recently seen to such a world-running
body would have to be a certain large investment bank, whose alums are routinely
Treasury secretaries, high advisers to presidents, and occasionally a governor
or United States senator.
This all started percolating in my fevered brain last week when a frequent
correspondent, a gent in Florida who is sure economic disaster lies ahead (and
he may be right, but he’s not), forwarded a newsletter from a highly placed
economist at Goldman Sachs named Jan Hatzius....
So I started an e-mail correspondence with Dr. Hatzius, pointing out what I
believed were a few flaws in his paper. Among them were his hypothesis that home
prices would fall an average of 15 percent nationwide (an event that has never
happened since the Depression, although we surely could be headed in that
direction), and that this would lead to a drastic increase in defaults and
losses by lenders....
Maybe it’s time for an investigation of just what Wall Street and Goldman did to
make money as they pumped this mortgage mess into the economic system, and
sometimes were seemingly on both sides of the deal.
The New York Times
December 2, 2007
Everybody’s Business
The Long and Short of It at Goldman Sachs
By Ben Stein
Chip Ford's CLT
Commentary
In the past few political
dog days of summer I began hearing of a lengthy and in-depth article
recently published in -- of all places -- Rolling Stone magazine.
It's been referenced on a couple of talk-radio programs I've caught and
elsewhere as some sort of explanation for the craziness that's been
going on in America and continues within our government institutions. I
thought it was worth finding the source and reading it for myself.
After digesting Matt
Tiabbi's latest financial exposé (I'd come across
an earlier article by him some time back, "The Big Takeover" also in
Rolling Stone, and found his hypotheses then intriguing), some
further research was warranted. Next I came across a New York
Times article from 2007 by columnist Ben Stein that added to my
curiosity -- especially since 18-months after its publication we can
gauge the accuracy of this former speechwriter for presidents Nixon and
Ford, weigh his skepticism.
When I
heard on Monday's news that Goldman Sachs was expected to release
its second quarterly report, which would show incredible profits, the intrigue
thickened.
Sure enough, despite "the
worst recession since the Great Depression," miraculously Goldman
Sachs managed to
produce "record results," driving its stock "up nearly 80% so far this
year."
I don't want to be
considered one of those marginalized "conspiracy nuts" -- but I do have
to pause and wonder: Just what is going on here, and does Taibbi
explain the inexplicable? I think these are important enough
questions for each of us to ponder.
It's a long read -- but
now's the time to invest in some good summer reading, to consider
perhaps the implications and any ramifications.
It does make one wonder,
doesn't it?
Next will come
the Democrats' cap-and-trade laws -- and guess who'll profit once again?
Rolling Stone
July 2, 2009
The Great American Bubble Machine
By Matt Taibbi
Matt Taibbi on how Goldman Sachs has engineered every major market
manipulation since the Great Depression
In Rolling Stone Issue 1082-83, Matt Taibbi
takes on "the Wall Street Bubble Mafia" — investment bank Goldman
Sachs. The piece has generated controversy, with Goldman Sachs
firing back that Taibbi's piece is "an hysterical compilation of
conspiracy theories" and a spokesman adding, "We reject the
assertion that we are inflators of bubbles and profiteers in busts,
and we are painfully conscious of the importance in being a force
for good." Taibbi shot back: "Goldman has its alumni pushing its
views from the pulpit of the U.S. Treasury, the NYSE, the World
Bank, and numerous other important posts; it also has former players
fronting major TV shows. They have the ear of the president if they
want it." Here, now, are excerpts from Matt Taibbi's piece. . .
Goldman Sachs' Big Scam
The first thing you need to know about Goldman Sachs is that it's
everywhere. The world's most powerful investment bank is a great vampire
squid wrapped around the face of humanity, relentlessly jamming its
blood funnel into anything that smells like money.
Any attempt to construct a narrative around all the former Goldmanites
in influential positions quickly becomes an absurd and pointless
exercise, like trying to make a list of everything. What you need to
know is the big picture: If America is circling the drain, Goldman Sachs
has found a way to be that drain — an extremely unfortunate loophole in
the system of Western democratic capitalism, which never foresaw that in
a society governed passively by free markets and free elections,
organized greed always defeats disorganized democracy.
They achieve this using the same playbook over and over again. The
formula is relatively simple: Goldman positions itself in the middle of
a speculative bubble, selling investments they know are crap. Then they
hoover up vast sums from the middle and lower floors of society with the
aid of a crippled and corrupt state that allows it to rewrite the rules
in exchange for the relative pennies the bank throws at political
patronage. Finally, when it all goes bust, leaving millions of ordinary
citizens broke and starving, they begin the entire process over again,
riding in to rescue us all by lending us back our own money at interest,
selling themselves as men above greed, just a bunch of really smart guys
keeping the wheels greased. They've been pulling this same stunt over
and over since the 1920s — and now they're preparing to do it again,
creating what may be the biggest and most audacious bubble yet.
Goldman Sachs' Role in the Housing and Internet Busts
The basic scam in the Internet Age is pretty easy even for the
financially illiterate to grasp. Companies that weren't much more than
pot-fueled ideas scrawled on napkins by up-too-late bong-smokers were
taken public via IPOs, hyped in the media and sold to the public for
megamillions. It was as if banks like Goldman were wrapping ribbons
around watermelons, tossing them out 50-story windows and opening the
phones for bids. In this game you were a winner only if you took your
money out before the melon hit the pavement.
It sounds obvious now, but what the average investor didn't know at the
time was that the banks had changed the rules of the game, making the
deals look better than they actually were. They did this by setting up
what was, in reality, a two-tiered investment system — one for the
insiders who knew the real numbers, and another for the lay investor who
was invited to chase soaring prices the banks themselves knew were
irrational. While Goldman's later pattern would be to capitalize on
changes in the regulatory environment, its key innovation in the
Internet years was to abandon its own industry's standards of quality
control.
Goldman's role in the sweeping global disaster that was the housing
bubble is not hard to trace. Here again, the basic trick was a decline
in underwriting standards, although in this case the standards weren't
in IPOs but in mortgages. By now almost everyone knows that for decades
mortgage dealers insisted that home buyers be able to produce a down
payment of 10 percent or more, show a steady income and good credit
rating, and possess a real first and last name. Then, at the dawn of the
new millennium, they suddenly threw all that shit out the window and
started writing mortgages on the backs of napkins to cocktail waitresses
and ex-cons carrying five bucks and a Snickers bar.
And what caused the huge spike in oil prices? Take a wild guess.
Obviously Goldman had help — there were other players in the
physical-commodities market — but the root cause had almost everything
to do with the behavior of a few powerful actors determined to turn the
once-solid market into a speculative casino. Goldman did it by
persuading pension funds and other large institutional investors to
invest in oil futures — agreeing to buy oil at a certain price on a
fixed date. The push transformed oil from a physical commodity, rigidly
subject to supply and demand, into something to bet on, like a stock.
Between 2003 and 2008, the amount of speculative money in commodities
grew from $13 billion to $317 billion, an increase of 2,300 percent. By
2008, a barrel of oil was traded 27 times, on average, before it was
actually delivered and consumed.
Goldman' Sachs Graduates with Government Positions
The history of the recent financial crisis, which doubles as a history
of the rapid decline and fall of the suddenly swindled-dry American
empire, reads like a Who's Who of Goldman Sachs graduates. By now, most
of us know the major players. As George Bush's last Treasury secretary,
former Goldman CEO Henry Paulson was the architect of the bailout, a
suspiciously self-serving plan to funnel trillions of Your Dollars to a
handful of his old friends on Wall Street. Robert Rubin, Bill Clinton's
former Treasury secretary, spent 26 years at Goldman before becoming
chairman of Citigroup — which in turn got a $300 billion taxpayer
bailout from Paulson. There's John Thain, the asshole chief of Merrill
Lynch who bought an $87,000 area rug for his office as his company was
imploding; a former Goldman banker, Thain enjoyed a multibillion-dollar
handout from Paulson, who used billions in taxpayer funds to help Bank
of America rescue Thain's sorry company. And Robert Steel, the former
Goldmanite head of Wachovia, scored himself and his fellow executives
$225 million in golden-parachute payments as his bank was
self-destructing. There's Joshua Bolten, Bush's chief of staff during
the bailout, and Mark Patterson, the current Treasury chief of staff,
who was a Goldman lobbyist just a year ago, and Ed Liddy, the former
Goldman director whom Paulson put in charge of bailed-out insurance
giant AIG, which forked over $13 billion to Goldman after Liddy came on
board. The heads of the Canadian and Italian national banks are Goldman
alums, as is the head of the World Bank, the head of the New York Stock
Exchange, the last two heads of the Federal Reserve Bank of New York —
which, incidentally, is now in charge of overseeing Goldman.
But then, something happened. It's hard to say what it was exactly; it
might have been the fact that Goldman's co-chairman in the early
Nineties, Robert Rubin, followed Bill Clinton to the White House, where
he directed the National Economic Council and eventually became Treasury
secretary. While the American media fell in love with the story line of
a pair of baby-boomer, Sixties-child, Fleetwood Mac yuppies nesting in
the White House, it also nursed an undisguised crush on Rubin, who was
hyped as without a doubt the smartest person ever to walk the face of
the Earth, with Newton, Einstein, Mozart and Kant running far behind.
Rubin was the prototypical Goldman banker. He was probably born in a
$4,000 suit, he had a face that seemed permanently frozen just short of
an apology for being so much smarter than you, and he exuded a
Spock-like, emotion-neutral exterior; the only human feeling you could
imagine him experiencing was a nightmare about being forced to fly
coach. It became almost a national cliché that whatever Rubin thought
was best for the economy — a phenomenon that reached its apex in 1999,
when Rubin appeared on the cover of Time with his Treasury deputy, Larry
Summers, and Fed chief Alan Greenspan under the headline the committee
to save the world. And "what Rubin thought," mostly, was that the
American economy, and in particular the financial markets, were
over-regulated and needed to be set free. During his tenure at Treasury,
the Clinton White House made a series of moves that would have drastic
consequences for the global economy — beginning with Rubin's complete
and total failure to regulate his old firm during its first mad dash for
obscene short-term profits.
Goldman Sachs' Powerful Influence
After the oil bubble collapsed last fall, there was no new bubble to
keep things humming — this time, the money seems to be really gone, like
worldwide-depression gone. So the financial safari has moved elsewhere,
and the big game in the hunt has become the only remaining pool of dumb,
unguarded capital left to feed upon: taxpayer money. Here, in the
biggest bailout in history, is where Goldman Sachs really started to
flex its muscle.
It began in September of last year, when then-Treasury secretary Paulson
made a momentous series of decisions. Although he had already engineered
a rescue of Bear Stearns a few months before and helped bail out
quasi-private lenders Fannie Mae and Freddie Mac, 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.
Immediately after the AIG bailout, Paulson announced his federal bailout
for the financial industry, a $700 billion plan called the Troubled
Asset Relief Program, and put a heretofore unknown 35-year-old Goldman
banker named Neel Kashkari in charge of administering the funds. In
order to qualify for bailout monies, Goldman announced that it would
convert from an investment bank to a bank-holding company, a move that
allows it access not only to $10 billion in TARP funds, but to a whole
galaxy of less conspicuous, publicly backed funding — most notably,
lending from the discount window of the Federal Reserve. By the end of
March, the Fed will have lent or guaranteed at least $8.7 trillion under
a series of new bailout programs — and thanks to an obscure law allowing
the Fed to block most congressional audits, both the amounts and the
recipients of the monies remain almost entirely secret.
Converting to a bank-holding company has other benefits as well:
Goldman's primary supervisor is now the New York Fed, whose chairman at
the time of its announcement was Stephen Friedman, a former co-chairman
of Goldman Sachs. Friedman was technically in violation of Federal
Reserve policy by remaining on the board of Goldman even as he was
supposedly regulating the bank; in order to rectify the problem, he
applied for, and got, a conflict-of-interest waiver from the government.
Friedman was also supposed to divest himself of his Goldman stock after
Goldman became a bank-holding company, but thanks to the waiver, he was
allowed to go out and buy 52,000 additional shares in his old bank,
leaving him $3 million richer. Friedman stepped down in May, but the man
now in charge of supervising Goldman — New York Fed president William
Dudley — is yet another former Goldmanite.
The collective message of all of this — the AIG bailout, the swift
approval for its bank-holding conversion, the TARP funds — is that when
it comes to Goldman Sachs, there isn't a free market at all. The
government might let other players on the market die, but it simply will
not allow Goldman to fail under any circumstances. Its edge in the
market has suddenly become an open declaration of supreme privilege. "In
the past it was an implicit advantage," says Simon Johnson, an economics
professor at MIT and former official at the International Monetary Fund,
who compares the bailout to the crony capitalism he has seen in Third
World countries. "Now it's more of an explicit advantage."
Goldman Sachs' Excuse
Fast-forward to today. It's early June in Washington, D.C. Barack Obama,
a popular young politician whose leading private campaign donor was an
investment bank called Goldman Sachs — its employees paid some $981,000
to his campaign — sits in the White House. Having seamlessly navigated
the political minefield of the bailout era, Goldman is once again back
to its old business, scouting out loopholes in a new government-created
market with the aid of a new set of alumni occupying key government
jobs.
Gone are Hank Paulson and Neel Kashkari; in their place are Treasury
chief of staff Mark Patterson and CFTC chief Gary Gensler, both former
Goldmanites. (Gensler was the firm's co-head of finance.) And instead of
credit derivatives or oil futures or mortgage-backed CDOs, the new game
in town, the next bubble, is in carbon credits — a booming trillion-
dollar market that barely even exists yet, but will if the Democratic
Party that it gave $4,452,585 to in the last election manages to push
into existence a groundbreaking new commodities bubble, disguised as an
"environmental plan," called cap-and-trade. The new carbon-credit market
is a virtual repeat of the commodities-market casino that's been kind to
Goldman, except it has one delicious new wrinkle: If the plan goes
forward as expected, the rise in prices will be government-mandated.
Goldman won't even have to rig the game. It will be rigged in advance.
The Wall Street Journal
Tuesday, July 14, 2009
Goldman's Profit Soars on Record Trading Results
By Joe Bel Bruno and Jessica Papini
NEW YORK -- Goldman Sachs Group Inc.'s second-quarter profit surged as
Wall Street's largest surviving investment bank delivered record results
in trading and stock underwriting.
The results signal a remarkable turnaround for the firm less than a year
after the credit markets seized up and forced many of its competitors
out of business. Goldman, the first major U.S. bank to report quarterly
results, parlayed improving market conditions to post record revenues
and net earnings.
Lloyd Blankfein, Goldman's chairman and chief executive, has been able
to boost profits as competition lessened during the past year. The
company, which posted a loss in the final quarter of 2008, used the
second quarter to reposition itself by repaying $10 billion in U.S.
rescue funds and issuing new stock to boost capital.
"While markets remain fragile and we recognize the challenges the
broader economy faces, our second-quarter results reflected the
combination of improving financial-market conditions," he said.
Goldman posted income of $3.44 billion, or $4.93 a share, up from $2.09
billion, or $4.58 a share, a year earlier. The latest results included a
$426 million dividend related to the company's paying back its TARP
funds. Excluding that dividend, earnings were $5.71 a share. Net revenue
jumped 46% to $13.76 billion.
Analysts surveyed by Thomson Reuters expected earnings of $3.48 and
revenue of $10.66 billion.
Chief Financial Officer David Viniar said "it was a basic blocking and
tackling" quarter for the company.
Top results were turned in across the company's key operations, and
might be welcomed as another sign that the financial industry is
healing. Investors are awaiting results this week from many of Goldman's
rivals, including J.P. Morgan Chase & Co., Citigroup Inc., and Bank of
America Corp. Morgan Stanley is slated to report next week.
Cubillas Ding, senior analyst at Boston-based financial research firm
Celent, said, "Delivering such stellar results in a still choppy market
is a reflection of the markets showing a period of buoyancy as well as
the firm's trading prowess."
Goldman's profit was lifted by record quarter revenues of $6.8 billion
from its fixed income, currency and commodities trading. This business,
which includes trading of mortgages and other credit securities,
benefited as Goldman took advantage of opportunities caused by the
market's disruption.
Equity underwriting boomed during the period as dozens of banks raised
money to strengthen capital and repay Troubled Asset Relief Program
funds. The business reported record revenue of $736 million.
However, investment-banking revenue fell 15% as financial-advisory
revenue dropped 54% on a decline in industrywide completed mergers and
acquisitions.
Goldman had been known as having a magic touch after a correct bet that
subprime mortgages would crater and its avoidance of other financial
sector messes. The quarter still included a loss of about $700 million
on commercial mortgage loans, an area that many analysts identified as
the next troubled spot for the market.
The fact that Goldman has rebounded so strongly during the first half of
the year could raise questions from lawmakers who have funneled hundreds
of billions of dollars into the ailing financial system. Just weeks
after repaying rescue funds, Goldman reported that compensation rose 41%
since the first quarter.
That puts the average compensation expense for each of its 29,400
employees at $226,000 in the second quarter. Quarterly compensation
levels typically fluctuate throughout the year, and can be dialed down
or ramped up during the second half to reflect performance.
"If we don't perform well, we'll reduce compensation levels," Mr. Viniar
said. "If we do perform well, our employees will be rewarded
appropriately."
Mr. Viniar also said that risk taking has remained relatively steady
after rising sharply during the first quarter. Goldman's average daily
value at risk in the quarter, an internal estimate of the losses a
bank's trading book could produce on a bad day, was $245 million, up
only slightly from the first quarter but up from $184 million in the
year-earlier period. Mr. Viniar declined to say if that will change
during the current earnings period, which analysts believe will mark a
slowdown for the markets.
Shares of Goldman, which are up nearly 80% so far this year, rose 88
cents to $150.34 in midmorning trading on the New York Stock Exchange.
—Kerry Grace Benn in New York contributed to this article.
The New York Times
December 2, 2007
Everybody’s Business
The Long and Short of It at Goldman Sachs
By Ben Stein
For decades now, as a writer, economist and scold, I have been receiving
letters from thoughtful readers. Many of them have warned me about the
dangers of a secret government running the world, organized by the
Trilateral Commission, or the Ford Foundation, or the Big Oil companies
or, of course, world Jewry.
I always scoff at these letters. The world is far too complex a place to
be run by any one group. But the closest I have recently seen to such a
world-running body would have to be a certain large investment bank,
whose alums are routinely Treasury secretaries, high advisers to
presidents, and occasionally a governor or United States senator.
This all started percolating in my fevered brain last week when a
frequent correspondent, a gent in Florida who is sure economic disaster
lies ahead (and he may be right, but he’s not), forwarded a newsletter
from a highly placed economist at Goldman Sachs named Jan Hatzius.
That worthy scholar recently wrote a detailed paper about how he thought
the subprime mess would get worse and worse. It would get so bad, he
hypothesized, that it would affect aggregate lending extremely adversely
and slow down growth.
Dr. Hatzius, who has a Ph.D. in economics from “Oggsford,” as they put
it in “The Great Gatsby,” used a combination of theory, data, guesswork,
extrapolation and what he recalls as history to reach the point that
when highly leveraged institutions like banks lost money on subprime,
they would cut back on lending to keep their capital ratios sound — and
this would slow the economy.
This would occur, he said, if the value of the assets that banks hold
plunges so steeply that they have to consume their own capital to patch
up losses. With those funds used to plug holes, banks’ reserves drop
further. To keep reserves in accordance with regulatory requirements,
banks then have to rein in lending. What all of this means — or so the
argument goes — is that losses in subprime and elsewhere that are taken
at banks ultimately boomerang back, in a highly multiplied and negative
way, onto our economy.
As the narrator in the rock legend “Spill the Wine” says, “This really
blew my mind.”
So I started an e-mail correspondence with Dr. Hatzius, pointing out
what I believed were a few flaws in his paper. Among them were his
hypothesis that home prices would fall an average of 15 percent
nationwide (an event that has never happened since the Depression,
although we surely could be headed in that direction), and that this
would lead to a drastic increase in defaults and losses by lenders.
This, as I see it, is a conclusion that is an estimation based upon a
guess. I found especially puzzling the omission of the highly likely
truth that the Fed would step in to replenish financial institutions’
liquidity if necessary. In a crisis like that outlined by the good Dr.
Hatzius, the Fed — any postwar Fed except perhaps that of a fool — would
pump cash into the system to keep lending on track.
I mentioned this via e-mail to Dr. Hatzius. He generously agreed that
there was some slight merit to my arguments and that he was merely
pointing out tendencies and possibilities (if I understand him
correctly).
But forecasting is tricky, and I have a hard time believing that
financial events to come will be qualitatively different from those that
have already happened.
I do want to emphasize Dr. Hatzius’s gentlemanliness and intelligence.
But I also want to emphasize that, as I see it, his document was mostly
about selling fear. A spokesman for Goldman Sachs categorically denies
this point and says that the firm’s economic research is held to the
highest levels of objectivity and that its economists’ views are
completely independent.
As I interpret it, Dr. Hatzius was saying that the financial system
would possibly not be able to adjust to a level of financial losses that
are large on an absolute scale but small compared with aggregate credit
or the gross domestic product. He is also postulating that lenders would
have to retrench so deeply that lending would stall and growth would
falter — an event that, again, has not happened on any scale in the
postwar world, except when planned by the central bank.
In other words, with the greatest possible respect to Dr. Hatzius, his
paper is not really what I would call a serious overview of the
situation. It is more a call to be afraid and cautious based on general
principles that he embraces and not on the lessons of history. (In this
respect, he is much like many economic journalists and commentators who
sell newsprint by selling fear. The common cause of journalists and Wall
Streeters in this regard is a subject I will address in the future.)
Now, let me make a few small points here and then get to my own big
point.
Goldman Sachs is a huge name in terms of moneymaking and prestige. I
totally understand the respect it receives for its financial dexterity.
The firm is a superstar in that regard, and I, a small stockholder, am
grateful. But it has never been clear to me exactly why its people are
considered rocket scientists in any other area than making money.
Dr. Hatzius’s paper is a prime example of my puzzlement. It shows
extreme intelligence but basically misses the point: yes, there are
possible macro dangers, but you have to go all the way around Robin
Hood’s barn to get to them, and you have to use what I think are
extremely far-fetched hypotheticals to get to a scary situation. (This
is not to diminish the real risks in today’s economy, I’m just not as
gloomy about them as Dr. Hatzius.)
Why, then, is his document circulating? Perhaps as a token of Dr.
Hatzius’s genuine intelligence, which is fine. But to me, his paper
seemed like a selling document in the real Wall Street sense of selling
— namely, selling short. (Dr. Hatzius notes that he has long been
bearish on housing, since faraway 2006, but I respectfully note that
that is a lot different from predicting a credit catastrophe. The
spokesman for Goldman also noted the company’s bearishness on housing
since 2006. He also noted that in the recent past, Goldman Sachs has
moved to a considerably larger short posture and that the firm is net
short.)
More thoughts came to me as I read a recent piece in Fortune by my
colleague Allan Sloan, a veteran financial writer. Mr. Sloan traces the
life and death throes of a Goldman Sachs-arranged collateralized
mortgage obligation. He shows how truly toxic waste was sold to overly
eager investors who now have major charge-offs, and he also points out
that some parts of the C.M.O. were indeed safe and were either current
or had been paid off.
But what leaps out at me from this story is that Goldman Sachs was
injecting dangerous financial products into the world’s commercial
bloodstream for years.
My pal, colleague and alter ego, the financial manager Phil DeMuth,
culled data from a financial Web site, ABAlert.com (for “asset-backed
alert”), that Goldman Sachs was one of the top 10 sellers of C.M.O.’s
for the last two and a half years. From the evidence I see, Goldman was
doing this for years. It might have sold very roughly $100 billion of
the stuff in that period, according to ABAlert. Goldman was doing it on
a scale of billions even when Henry M. Paulson Jr., the current Treasury
secretary, led the firm.
The Goldman spokesman would not comment on this except to note that
other firms sold C.M.O.’s too.
The point to bear in mind, as Mr. Sloan brilliantly makes clear, is that
as Goldman was peddling C.M.O.’s, it was also shorting the junk on a
titanic scale through index sales — showing, at least to me, how
horrible a product it believed it was selling.
The Goldman Sachs spokesman said that the company routinely shorts the
securities it underwrites and said that this is disclosed. He noted
candidly that Goldman is much more short in this sector than usual.
Here is my humble hypothesis, even after talking to Goldman: Is it
possible that Dr. Hatzius’s paper was a device to help along the goal of
success at bearish trades in this sector and in the market generally?
His firm says his paper, like all of its economists’ work, was not
written to support any larger short-trading strategy. But economists,
like accountants, are artists. They have a tendency to paint what their
patrons, who pay them, want to see.
From what I have observed over the years, Goldman has a fascinating
culture. It is sort of like what I imagine the culture of the K.G.B. to
be. You always put the firm first. The long-ago scandal of the Goldman
Sachs Trading Corporation, which raised hundreds of millions just before
the crash of 1929 to create a mutual fund, then used the fund’s money to
prop up stocks it owned and underwrote, was a particularly sad example.
The fund, of course, went bust.
Now, obviously, Goldman Sachs does many fine deals and has many smart,
capable people working for it. But it’s not the Vatican. It exists to
make money for the partners and (much farther down the line) the
stockholders. The people there are not statesmen. They are salesmen.
To my old eyes, the recent unhappiness about mortgages and Goldman’s
connection with them are not examples of sterling conduct. It is bad
enough to have been selling this stuff. It is far worse when the sellers
were, in effect, simultaneously shorting the stuff they were selling, or
making similar bets.
Doesn’t this bear some slight resemblance to Merrill selling tech stocks
during the bubble while its analyst Henry Blodget was reportedly telling
his friends what garbage they were? How different would it be from
selling short the junky stock that your firm is underwriting? And if a
top economist at Goldman Sachs was saying housing was in trouble, why
did Goldman continue to underwrite junk mortgage issues into the market?
Here is a query, as we used to say in law school: Should Henry M.
Paulson Jr., who formerly ran a firm that engaged in this kind of
conduct, be serving as Treasury secretary? Should there not be some
inquiry into what the invisible government of Goldman (and the rest of
Wall Street) did to create this disaster, which has caught up with some
Wall Street firms but not the nimble Goldman?
When the Depression got under way, the government created the Temporary
National Economic Committee to study just what had happened on the
Street to get the tragedy going. Maybe it’s time for an investigation of
just what Wall Street and Goldman did to make money as they pumped this
mortgage mess into the economic system, and sometimes were seemingly on
both sides of the deal.
Or is Goldman Sachs like “Love Story”? Does working there mean never
having to say you’re sorry?
Ben Stein is a lawyer, writer, actor and economist.
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