A Thoughtful Reply to Rolling Stone’s Hatchet Job on Goldman Sachs (and the facts)

Good writers have a huge advantage in the task of persuasion over mediocre or poor ones.  The famous music magazine, Rolling Stone, tasked a gifted writer, Matt Taibbi, with writing an expose on the Wall Street-behemoth of Goldman Sachs. Somehow, Mr. Taibbi’s impressive writing skills proved quite inadequate in his recent effort to demonize the famed investment bank, for sometimes, even good writing can not cover up complete ignorance, or an utter disregard for the facts.  My recommendation is that Rolling Stone stick to reviewing the next Kanye West album, for surely financial journalism is not their cup-of-tea.

Lest I be accused of one-sidedness, the writer deserves credit for what is quite honestly a very non-partisan attack on Goldman Sachs.  His venom is distributed pretty evenly to individuals on the left and the right.  One expects rock n’ roll journalists these days to stoop to the level of an MTV anchor, where political illiteracy is a job requirement.  Taibbi points out with no reservation or qualification that Goldman Sachs was the single leading campaign donor to one Barack Obama.  He pulverizes Robert Rubin, the Clinton Treasury Secretary who used to be a member of the media’s holy economic trinity (along with Alan Greenspan and Larry Summers), before the events of the last year decimated their place in history, and left the media’s glowing reports of praise and adoration looking a tad naïve and short-sighted.  Rubin deserves much pulverization, as do many former Goldman Sachs executives.  If Taibbi had been content to write an article where he showed off his knowledge of Goldman Sachs alumni job placements, not to mention his ability to incorporate the F-word into casual conversation, the article would be a smash success.  Unfortunately, he decided to delve into two practices that represent a tragic error whenever they take place: (1) He decided to talk about things of which he clearly does not have the most elementary of understanding; and (2) He decided to wear his hatred and irrational dislike for the subject of his article on his sleeve, poisoning his own intentions, and creating a literary travesty that does nothing whatsoever to persuade the public that Goldman Sachs is the anti-Christ he has set them up to be.

Hasty generalizations are usually a bad idea, though they certainly have the capability of being rhetorically effective.  I am often criticized for my use of superlatives in writing, so I do not mean to throw a stone from my own glass house.  But the very sub-title of the article, “Goldman Sachs has engineered every major market manipulation since the Great Depression”, lacks credibility from the get-go.  But I did not imagine before I picked up the article that Rolling Stone was writing a piece on Goldman Sachs to offer a defense of Wall Street.  I just had no idea their attack would be so misguided, so inane, and so ridiculous.

The initial set of facts is certainly true.  Goldman alumni are everywhere.  Many a Treasury Secretary used to work for them.  Republicans.  Democrats.  The whole gang.  Federal Reserve officials.  Staffers.  Merrill Lynch guys.  Stock exchange guys.  World Bank guys.  A whole bunch of them used to work for Goldman Sachs.  Their academic requirements for recruits, their sales ability in the recruiting process, and the unbelievable ability they have shown in multiple generations to create wealth (for themselves, their clients, their stakeholders, and their affiliates) has been very compelling.  Ambitious people seek out Goldman.  And a lot of times, elite people coming in means elite people going out.  This does not mean they are always good people.  Some are probably downright evil.  But there is no denying that Goldman’s tentacles have reached many aspects of society, and this has not happened because of an Oliver Stone-conspiracy (as this entire article suggests).  It has happened because they are an elite company, and they deal with elite people.

I knew a couple paragraphs into the article that Taibbi was more interested in rhetorical bomb-throwing than factual journalism. Of course, the previously mentioned sub-title helped, but when he referred to John Thain as “the a–hole chief of Merrill Lynch” who used “billions in taxpayer funds to help Bank of America rescue his sorry company”, I knew we were facing some liberal use of facts and figures.  Yes, Thain was the CEO of Merrill Lynch at the time that BofA bought the company.  But Taibbi is well aware of the fact that Thain did not come in until way, way, way after the financial crisis had kicked in.  He was brought in to replace the prior management whom the board held responsible for what had happened.  He was not the leader of this “sorry company”.  Merrill Lynch made money hand over fist for eighty years, and set the standard in the wealth management industry for excellence.  Thain came in after a series of blunders brought the company to its knees, and was asked to try and clean up a ship that was already taking on water in droves.  I am not a fan of John Thain, but to take advantage of the present environment and the populist rage it has created to paint the picture of Thain as a Goldman alum running a “sorry” company like Merrill Lynch is beyond dishonest.  Thain was hired in 2008, well past the time that the fatal damage had been done to this once proud investment bank.  But Taibbi was not done.  The purpose of the introductory paragraphs was to make readers hate Goldman Sachs because their most famous alumni were associated with bad headline companies.  So he throws in Ed Liddy, the “former Goldman director put in charge of bailed out giant AIG, which forked over $13 billion to Goldman after Liddy came on board.”  This is a strikingly dishonest sentence, and I reiterate that its dishonesty is something that the author of it is well aware of.  Liddy works for free. He did not bring down AIG.  He had nothing to do with AIG’s demise.  He was only hired because AIG was on its knees, and Liddy was widely viewed as one of the most qualified people on the planet to divest AIG of its assets in an effort to reimburse the taxpayers for their hideous bailout of the failed company.  Liddy was the CEO of Allstate Insurance – a fact that Taibbi neglected to share.  He did not run from Goldman to AIG and turn around and give Goldman money.  AIG owed Goldman Sachs money (along with a dozen other investment banks), and if the creditor had forced the debtor into bankruptcy, we would not be having this conversation.  The taxpayer bailout of AIG (which I oppose) was not something that Liddy fought for; it was something that preceded his hiring.  Goldman received $13 billion because the government decided to make good on AIG’s obligations – not because Liddy used to work for Goldman Sachs.  This is undeniable. These facts were not deemed important enough for Taibbi to include.

The author then lays out the corpus of his argument: that from the Great Depression, to the dotcom meltdown, to the housing craze, to oil’s price escalation, and now to global warming, Goldman Sachs has “turned all of America into a giant pump-and-dump scam”.  According to Taibbi, “all the money that you’re losing, it’s going somewhere, and in both a literal and figurative sense, Goldman Sachs is where its going.”  At this point, Taibbi has set an awfully high burden on himself.  He now has to prove that Goldman is literally responsible for “high gas prices, rising consumer credit rates, half-eaten pension funds, mass layoffs, and high taxes” (his words, not mine).  He did not remember to include chicken pox and the color of UCLA’s football uniforms in his list of societal woes that Goldman Sachs is responsible for, but he may as well have.  Naturally, I was excited to read what he had to offer.

The article’s main error is repeated in each example he chose to use, but essentially the theme was easy to follow: Accuse Goldman of doing something sinister, repeat that they did something sinister, talk about how rich their key people are, declare the committing of a sinister act again, add in some profanity, and voila – Goldman has been accused, tried, and convicted.  Cite any evidence?  Establish premises and link them to a conclusion?  Phooey.  Just repeat an accusation as if it were fact, and hope that populist rage will do the rest of the persuasion.  Genius.  But wholly inadequate for a top-notch economic journal like Rolling Stone (okay, I have made my point).

The problem goes beyond the complete lack of evidence for his assertion that Goldman Sachs “caused” the dotcom bubble.  His accusation makes no sense whatsoever, it contradicts itself on its face, and as always, it completely vindicates the real wrong-doers.  Taibbi blasts Goldman for bringing so many dotcom companies public (providing financing to a slew of internet companies, some of which are among the most profitable companies on the planet still today). The author plays into the public’s typical ignorance of how IPO processes work, and repeats the utterly stupid impression that somehow when a stock goes sky high after an IPO that the investment bank is making more money, and yet when the same stock falls apart later on it is the investor left holding the bag.  The investment bank raises money for a company, gives that money to the company, takes a hefty fee, and then the stock starts trading in a secondary market – buyers and sellers trading with one another.  Goldman’s fee is based on the money raised – not what the stock price does after the fact.  Mr. Smith buys the stock at one price, sells it to Mr. Jones at a higher price, and Mr. Jones then sells to Mr. Andrews at a lower price.  Smith made money.  Jones lost money.  Andrews fate is undetermined.  And guess what?  Goldman Sachs is not a participant in the gain or loss of these transactions whatsoever. What are the odds that Taibbi does not know this elementary fact of corporate finance?  Instead, he accuses the firm of inflating a bubble for their own profit, and costing investors $5 trillion in the dotcom meltdown that took place.  He, of course, does not blame Mr. Smith for making $5 trillion; he does not blame Mr. Jones for buying an over-priced dotcom company that did not yet make money.  Instead, he blames the investment bank that provided the initial financing to these risky enterprises.  As the truly brilliant writer, Michael Lewis, has noted: The entire media treatment of the dotcom era aided and abetted the massive problem we see today – it treated the speculators and risk-takers like they were victims.  Goldman Sachs made a lot of money during the dotcom era, and one would think they would like to still be making that money.  They no more vaporized that $5 trillion of paper wealth than they ever created it to begin with.

His treatment of the housing craze is the one section of the article that actually shocked me (the rest just disappointed me).  I have read thousands and thousands of pages of what happened to create the financial crisis, and what happened to worsen it.  I feel pretty educated about what went on, and what could have prevented it.  The idea that Goldman Sachs was a key originator of subprime or Alt-A loans is patently false (I doubt they were in the top 50 of financial institutions doing such).  The idea that their creation of CDO instruments (collateralized debt obligations that served as securitized pools of mortgages, many of which have blown up as they should have given the lack of underwriting quality behind them) caused the housing crisis is also ludicrous.  Goldman was a minor player in the CDO market, and the CDO market was not something wherein demand was manufactured.  They were, of course, idiotic instruments for institutional investors to buy.  But these evil institutional investors that Taibbi hates so much were the ones demanding these vehicles, and they were the ones who are holding these “toxic assets” on their books now.  No one has lost more money on CDO’s than the originators of the CDO’s (ask Citi).  These vehicles sit largely on the books of the firms that underwrote them, and while these investment bankers can and should be accused of incompetence, it makes no sense to merely accuse them of evil.  And it certainly is a wild stretch of the imagination to blame Goldman Sachs for the performance of the rating agencies.  Taibbi has no right to blame “deregulation” for the world’s woes on one page of the article, and then turn around and say that the problem was caused because of the very regulation he seems to want in another place.  The agencies messed up.  They messed up badly.  But there is not an iota of support for the idea that Goldman was behind this, and the mere assertion of such is unconvincing.  But the folly of this section of the article then goes over the top: He blasts Goldman Sachs for daring to hedge their risk to these pools of mortgage assets once they began to see the market cooling down. He blames Goldman Sachs for bringing down AIG.  He actually states, with no ambiguity, that the credit default swaps Goldman entered into (wherein Goldman paid an insurance fee to protect them in the event that some of their mortgage assets failed to perform) were the cause of the housing meltdown.  Of course, rock n’ roll journalists are not allowed to state the obvious: that the readers of his magazine who lied about their incomes, took loans they could not afford to pay back, and then chose to walk away from their mortgage payments – that these people caused the credit meltdown.  But even if it is not en vogue to blame individual human beings for their financial irresponsibility, it seems extremely counter-intuitive to suggest that Goldman was wrong to protect their investors and their stakeholders by hedging out risk in this crazy environment.  Goldman Sachs had $2 billion of exposure to this toxic asset space because of their defensive posturing, while some of their competitors who seemed to escape the author’s wrath had well over $125 billion of exposure.  How in the world can a firm protecting its investors be considered unethical?  There was no fraud.  There was no collusion.  There was a routine hedge, a hedge position, by the way, that cost Goldman Sachs money in the years prior to the credit meltdown.  My advice for Taibbi is that he ask the investors of Bear Stearns if they think Goldman Sachs acted prudently or not.

I do not have much to say about Taibbi’s position that Goldman Sachs caused the increase of oil prices last summer to their stratospheric levels.  First of all, I saw the same 60 Minutes episode that Taibbi did from which he “borrowed” virtually this entire section of the article.  It was as silly of a concept when they said it as it is now.  The idea that commodity traders, traders, by the way, who engage in zero-sum transactions, with buyers and sellers each taking on the same notional value of a trade, have the ability to move the world’s most important commodity price up 300% in one year is extraordinary.  It also is cartoonish. While throwing out a few conspiratorial suggestions about hidden letters and secret refineries, readers complete this section of the article with no better idea of how Goldman allegedly moved the price of oil up than they had to begin with.  Billion dollar entities who took long positions in oil trades are apparently not responsible for their poor decisions (or at least poor timing).  No, for God forbid that investors of any size be held responsible for their bad decisions.  Instead, there must have been some evil shadow movement doing the will of the devil behind closed doors.  He quotes a Congressman that we have a higher supply of oil now than we ever have (a patently false assertion), and states that every supply-demand consideration last summer would have suggested lower oil prices – not higher ones.  He never explains, then, how free market participants were able to be duped into buying oil at such high prices.  He just obnoxiously reaffirms over and over again that Goldman “manipulated” the price up.  He also never enlightens us with their reason for letting oil go back down to $40.  The facts get in the way of what is a compelling accusation.  It sounds so fancy to suggest that 33-year old commodity traders were bringing the world to its knees, and ruining families with $4 gasoline (his insinuations, not mine).  My recommendation is that Taibbi get educated in the price mechanism before he writes on this again, look at the role this little entity called OPEC plays in modern oil prices, and thinks through the implications of his statement that somehow trades where buyers and sellers are both involved in the same amount of money could cause this “manipulation”.  It would make for a more intelligent article.

I have a hunch Taibbi really did not have his facts straight in the next section, as it does not seem probable that he would purposely lie here.  Goldman Sachs did not “convert to a bank-holding company so they would qualify for bailout moneys”.  They converted to a bank holding company after Lehman Brothers declared bankruptcy (along with Morgan Stanley) recognizing that traditional funding sources were about to dry up like the world had never seen.  TARP funding was several weeks away at this point.  Goldman notoriously rejected the idea of receiving $10 billion of TARP money, wherein Paulson appealed to their “patriotic” sensibilities to force them (and the other relatively strong financial firms) to accept the funds so as to avoid identifying to the public the companies whose financial woes were really dramatic.  Goldman did not ask for the TARP money, they were the first to demand the right to pay it back, and their move to a bank-holding company had absolutely nothing to do with TARP.  If someone documenting such key historical facts as these manages to botch it up, one has to wonder what else in their article may warrant further investigation.

And sadly for Taibbi, the answer to that question is that it is the entire article that warrants further investigation.  The article relies on unsubstantiated insinuations, guilt-by-association inferences, factual inaccuracies from start to finish, and most importantly, a rank hatred of successful elites that permeates all the way through.  I appreciate the fact that it is easy to de-personalize our opponents, and blame an entity rather than human beings for things we are upset about.  Goldman is an easy target, because as he so capably demonstrates, they are a company of rich people, and frankly, they are a lot richer than us.  Taibbi and his sympathetic readers have a deep resentment of all parts of the establishment that have achieved more success than they.  Surely, the thinking goes, they must have cheated their way to the top.  My beliefs about human nature tell me that Goldman Sachs is probably inundated with bad people (past and present).  Bad people seem to permeate all societal institutions (the government comes to mind as well).  I am not writing this article to defend everything Goldman does, or has done.  I work for a major competitor of Goldman Sachs, and have no reason whatsoever to defend them.  I would be happy to write a lengthy demonization of the role Wall Street firms played in this unprecedented catastrophe.  But if I were to do such, I would focus on facts, and not rhetoric.  I would point out the extraordinary blame that can be easily shared with multiple parties to these transactions.  I would focus on reality, and not the image I am able to conjure up for an envious audience that wants blood.  In short, I would do it all very differently than Matt Taibbi and Rolling Stone did.