A few years after the first major meltdown of this millennium, the pieces of the puzzle are starting to coalesce into a better understanding of what happened. For better (a select few) or for worse (most of everybody else), Goldman Sachs played a central role in the collapse.
Depending on who you choose to believe, Goldman Sachs is either a tremendously successful investment outfit or a monument of corruption and profiteering.
Back in February, Gretchen Morgenson and Louise Story published in NYT (1) suggesting that Goldman Sachs obtained insurance from AIG on favorable terms because of a friendly relationship – there was talk of a merger a while back – then worked against the insurance giant, precipitating its downfall. The tone is more accusatory, contrasting with the earlier celebratory article signed by Jenny Anderson and Landon Thomas (2) which had stated:
Money soothes a lot of concerns, of course, and Goldman has had plenty to spread around. Through the third quarter, Goldman's $16.9 billion compensation pool — the money it sets aside to pay its employees — was significantly bigger than the entire $11.4 billion market capitalization of Bear Stearns.
Consider a few choice quotes from the former:
- A.I.G. executives wanted some of its money back, insisting that Goldman — like a homeowner overestimating the damages in a storm to get a bigger insurance payment — had inflated the potential losses. Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities.
- In just the year before the A.I.G. bailout, Goldman collected more than $7 billion from A.I.G. And Goldman received billions more after the rescue. Though other banks also benefited, Goldman received more taxpayer money, $12.9 billion, than any other firm. In addition, according to two people with knowledge of the positions, a portion of the $11 billion in taxpayer money that went to Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman under a deal the two banks had struck.
- Goldman stood to gain from the housing market’s implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured. The further mortgage securities’ prices fell, the greater were Goldman’s profits.
Slate joins the party describing how Goldman Sachs fared in the public chastising done in the Senate toothless public inquiry (3):
- If Team Goldman wasn't going to talk about its business, the senators would talk about it for them—using Goldman's own words. Levin first quoted an e-mail from a Goldman trader describing the instruments as "junk." He later cited references to the so-called "crap pools"—again, a Goldman employee's words—that the firm tried to sell. He also managed to repeat the phrase "shitty deal," used by another trader in an e-mail to describe a security Goldman Sachs was selling, more than a dozen times. "When your employees say, God, what a shitty deal. God, what a piece of crap. How does that make you feel?" Levin asked Goldman CFO David Viniar. Viniar replied: "I think that's very unfortunate to have that on e-mail."
- Even as senators slipped away to cast their votes on financial regulatory reform along party lines, they united in bipartisan support of populist grandstanding. Sen. John McCain asked Blankfein if he realized that Americans were hurting, and what he planned to do about it: "Has Goldman tried to do anything to help smaller banks?" Sen. Claire McCaskill, D-Mo., compared Wall Street to Las Vegas, telling one Goldman employee he "had less oversight than a pit boss"—prompting Sen. John Ensign, R-Nev., to take offense: "In Vegas, you know the odds. On Wall Street, they manipulate the odds while you're playing the game." Sen. Mark Pryor, D-Ark., noticed another difference: "People in Vegas are betting with their own money."
- But that's a separate question from whether investment banks should be able to bet against their own clients. Because there's no law against being a jerk, public shaming would have to do. "You say nothing you heard today troubled you," Levin said to Blankfein toward the end of the hearing. "That concerns me, and it concerns a lot of people in this country. You shouldn't be selling junk. You shouldn't be selling crap. You shouldn't be betting against your own customer you're simultaneously selling to." It's not a crime. It's just a shitty thing to do.
Back in my University days, I got a t-shirt from them for attending one of their recruiting presentations. It was all white with a small black square, featuring the firm’s logo. I liked its simplicity. Yet the deals and their inherent moral ambiguity are nothing but simple. Some (including me) believe that some of the apparently contradictory moves the firm makes can be justified through “Chinese Wall” rules and regulations which force the corporate advisory hand to know nothing about the trading / brokering hand (4).
The Economist has mostly superlative articles about them (5, 6, 7, 8) while the rest of the press (9, 10, 11, 12, 13). There is even a blog dedicated to badmouthing them (14). Wikipedia presents a rather scary list of GS alumni:
- Henry H. Fowler - 58th United States Secretary of the Treasury (1965–1969)
- Robert Rubin - Former United States Treasury Secretary, ex-Chairman of Citigroup.
- Henry Paulson - Former United States Treasury Secretary.
- Joshua Bolten - former White House Chief of Staff
- Jon Corzine - CEO of MF Global, Inc., Former Governor of the State of New Jersey.
- Michael Cohrs - Head of Global Banking at Deutsche Bank
- William C. Dudley - President of the Federal Reserve Bank's New York Branch
- Jim Cramer - host of Mad Money on CNBC
- Ashwin Navin - President and co-founder of BitTorrent, Inc.
- George Herbert Walker IV - member of the Bush family and current managing director at Neuberger Berman
- Robert Zoellick - United States Trade Representative (2001–2005), Deputy Secretary of State (2005–2006), World Bank President.
- Mark Carney - Current Governor of the Bank of Canada 
- Michael D. Fascitelli- President & Trustee of Vornado Realty Trust.
- Neel Kashkari - former Assistant Secretary of the Treasury for Financial Stability
- Charlie Haas - Wrestler, who is working for World Wrestling Entertainment.
- Malcolm Turnbull - Australian politician, former federal leader of the Liberal Party of Australia.
- John Thain - former Chairman and CEO, Merrill Lynch, and former chairman of the NYSE.
- Robert Steel - Former Chairman and President, Wachovia.
- Reuben Jeffery III - Under Secretary of State for Economic, Business, and Agricultural Affairs (2007-)
- Romano Prodi - Prime Minister of Italy twice (1996–1998 and 2006–2008) and President of the European Commission (1999–2004)
- Mario Draghi - governor of the Bank of Italy (2006- )
- Massimo Tononi - Italian deputy treasury chief (2006–2008)
- Guy Hands - CEO of Terra Firma Capital Partners
- Dambisa Moyo - Zambian economist and author of Dead Aid: Why Aid is Not Working and How There is a Better Way For Africa
- R. Scott Morris - former CEO of Boston Options Exchange
- Lawrence Bancroft - President and CEO Bivium Capital
- Olusegun Olutoyin Aganga - Nigerian Finance Minister
Are all these individuals in positions of power a sign of conspiracy, or simply a proof of the cohesive culture at the firm fostering “competitive co-operation” and ultimately massive success?
These are not questions to answer here, on this blog. What we shall try to find though is answers to a few simple questions. If basic finance concepts are foreign to you, start with the Sketchpad (17), where all the important concepts are drawn simply, in diagrams, on napkins. Try to follow the advice of a dying banker and keep your money in passively managed investments, such as bonds and index funds (18). You can then yearly rebalance your portfolio, by selling the winners and buying more of the losers. Finally, Gold continues to be hot; one way you can ride it is with gold certificates which can be purchased from almost any bank. The present Gold Fever is a symptom of the deep distrust most people have in our financial / banking system and the way it is managed (19). In his op-ed on Ireland’s bailout, Paul Krugman suggests that there is no need for a bailout (20): Iceland, who did not pass on bank losses to its taxpayers, is doing much better now.
Finally, I owe you a correction. Gold, after all, is not that bad. Just Gold-man Sucks.
Sources / More info:
- 15. wiki:Goldman_Sachs
- 16. wiki:subprime_mortgage_crisis
- 17. http://goo.gl/bbyTP
- 18. http://goo.gl/chTfw
- 19. http://goo.gl/wZ326
- 20. http://goo.gl/7yRRX