I would expect that the banks with the better talent would have weathered the housing bubble burst better than others. In fact, smart people often make lots of money during massive market corrections by betting the opposite direction when it becomes clear that's where the market's going. I would certainly expect smart corporations to do so - after all, it wasn't like people didn't see the housing bubble coming. Further, the really successful investors (the ones who have become partners at Goldman now) probably proved themselves during the last major market correction, which most of us seem to be forgetting was less than a decade ago. Heck, less than 12 years ago Russia defaulted and Long Term Capital collapsed - experienced traders definitely have seen bubbles burst. Personally, I'm glad that some banks survived the housing apocalypse - it means that shit wasn't as bad as it could have been, right?
So why then do I get the sense that this article is meant to incite and inflame? I mean, I know that Goldman has this whole "Abacus" thing going on right now, but honestly - compared to Madoff, or Bear Sterns and Lehman Brothers, or the aggressive lending practices that made these mortgages so much riskier than they should have been, is this really that big of a deal? So far, in my eyes, Goldman has been perhaps the most responsible big bank. They're not perfect, but honestly, what bank is? Do most Americans not have a realistic understanding of how their investment institutions actually are run? The current Goldman bashing I see in the media has all the flavor of a celebrity sex scandal - hypocritical moral outrage on the part of the masses for a transgression that, quite frankly, is actually the whole reason we love celebrities/athletes/banks in the first place.
Personally, I don't think its at all coincidental that this whole Goldman thing is hitting the media the moment America's financial institutions actually started performing well again, at least according to market consensus. I think the typical American's simplified story of the debacle must have gone something like this: Wall Street got themselves into a major mess and lost a lot of money, which caused America to go into a depression so that everyone lost a lot of money; America bailed the banks out, but things were so bad it was really touch and go for awhile - it wasn't clear that even with the bailout the banks would survive. However, everyone definitely knew: the banks would have died without the bailout. Thus, on some level, I think most Americans really believe that the banks owe them something. As evidence, notice the trend of debt forgiveness by big banks like BoA - most recovering banks are actually proactively rebuilding their public image through such programs, the same "we owe you something" programs they were staunchly resisting less than half year ago.
But Goldman? Unfortunately, they're a horrible exception to an otherwise perfect story. They didn't place bad bets - in fact, they took out levels of insurance appropriate to the situation, and because of that they didn't need to be bailed out. Goldman was very open and proud of this fact, too. Of course, the American People continued to insist that Goldman actually did need be bailed out, and thus Goldman was bailed out. Note that it was about this time (Q3 of 2007) that Goldman stopped emphasizing their success and started spinning the same stories of heavy housing losses as every bailout recipient. Given the first opportunity, Goldman then promptly paid back their bailout money, thus relieving themselves of any outstanding debt with Uncle Sam. At this point, I would expect the firm to be lauded - they were the only ones behaving in a fiscally responsible way and had continuously proved themselves before, during, and after the crisis - but instead, they have now become the villain. Why? Because they didn't need to be saved by the bailout, and thus now America can't hold anything over them. Because this directly challenges so many American's simplified story-like understanding of the economic events over the past 5 years, people react in the emotionally predictable way: they get angry.
Now, don't get me wrong: I'm not saying that those Abacus deals don't sound kinda fishy - at least not when described by semi-liberal news organizations whose goal is to push anti-Goldman sentiment right now because right now its selling like hot cakes. I'm curious to hear about what happened, and if there was any wrong doing I hope there's a lot of really draconian FCC laws brought to bear on whoever attempted to deceive others financially for their own profit. But, at least from what I've heard so far, Goldman was basically just taking out counter positions - insurance, basically - on financial instruments that its clients wanted to buy. Taking out insurance to mitigate risk is the whole way that banks make money. Yes, its unfortunate that in the financial markets this insurance takes the form of profiting from someone else's "loss" - most of the common people of the world have a very visceral, emotional reaction to such ideas, and will just write such things off being completely morally wrong. This is somewhat similar to how ancient Catholics considered usury (and thus Jews) morally wrong for some bullshit theological reasons, or humanity's general aversion to middle men in general. However, the fact remains that this is not wrong - all involved parties agreed to the stakes going in without coercion, so why is the way fate plays out wrong? The very same people who would blame Goldman for "betting against investments they sold" have massive hard-ons for cold-hearted Texas Hold'em tournaments where one person ultimately profits massively at the expense of thousands - especially considering that Goldman was just balancing their risks like any good bank or poker player should, how are these two situations at all different? Why don't people appreciate the dog-eat-dog game of high-stakes risk taking that is our modern financial system the same way they appreciate the exact same type of game when played with 52 cards on a green felt table? The answer is simple: plain old cognitive dissonance manifesting in irrational anger; compounded over a substantial portion of the population, and you get news stories like this.
At the same time, it could be that stories like this are actually the work of a very powerful Obama-based media machine, publishing with the intent of fomenting anger towards Wall Street, specifically the only powerful player on the street that the Government doesn't have much political sway over: Goldman. By playing up the already present emotional sentiment of the people, Obama and the Democrats can definitely win big in the polls with their current focus on big reform for Wall Street. Goldman will suffer in the media for it and temporarily lose a lot of political sway, but ultimately it will remain a ridiculously lucrative corporation and in a couple of months America's capricious focus will be somewhere else again - after the reform legislation has passed without any corporate opposition. This seems like another winning strategic play by the Obaminator and company (the O-team?), so in the end I'm going to have to attribute this Times article and the entire irrationality in the public discourse that I've ranted about today to one thing and one thing only: the stone-cold sexy political machine that is the Obaminator. God bless America.
The facts are clear: there's a definite irrationality in current American public sentiment, and there are definitely parties benefiting from it. However, the question remains: did the parties that benefited from it engineer the situation from the outset, or did they just happen to benefit from an unpredictable turn of events? Wow, I was talking about Obama there, but it also sounds a lot like a summary of the core issues at stack in the Goldman Abacus case... well, I guess that's not surprising at all, is it?
Jesus, where to begin? First, let’s quickly tick off the first handful of arguments, which you eventually acknowledge are made in feigned ignorance of the real issue:
ReplyDelete1) Anybody could see the housing collapse coming, and none of the big players on Wall Street suffer from bubble amnesia. This ignores the incentives created by transaction fees levied irrespective of performance -- a primary, if not the main avenue through which most street-level traders make their money. That strongly encourages amnesia.
2) The banks that survived did so because of their wise investments, not because they were and are propped up by government intervention. Those in the know seem pretty confident the Fed’s balance sheets tell a different story.
3) Others did worse things than Goldman and have been punished, therefore Goldman should face no repercussions for its actions. In a functionally unregulated market, Goldman does the least damage of any major player. This is not actually a defense.
4) This is just innuendo on the level of celebrity gossip, planted because Goldman is doing so well and people like scandal among the rich and famous. This argument might hold more water if every other TARP institution wasn’t refusing to acknowledge a single day of losses this year.
5) Bank of America’s debt-forgiveness program is proof that the industry is trying to help lift all boats! Believe me, the banks are spending much more time and money lobbying against cramdown or compulsions to lend.
6) Goldman didn’t need to be bailed out, they just went along with a conspiracy to force them to take the money, for … public confidence reasons, I guess? Goldman made more money by successfully lobbying for full payouts to AIG counterparties than they received in direct TARP loans. Like the other TARP banks, they are also still deep in hock to the Fed, in the sense that they are playing with a ton of Fed money at zero percent interest. The TARP-money show was all about executive compensation, as Blankfein will gladly tell you.
Although basically irrelevant, these arguments are surprisingly ingenuous. You seem to be thinking critically about the statements and motivations of every voice in this story EXCEPT Goldman, the party with the most at stake.
That brings us to the actual question the Times story explores: Not whether, as you suggest, Goldman simply hedged its clients’ risks given the complexity of the financial products they were selling, but whether Goldman specifically created financial products they knew were garbage, pitched and sold them to clients who couldn’t see what was in them, and then turned around and bet against them, knowing they would fail because, well, they designed them that way. That is not a simple case of caveat emptor; that is fraud.
You do see how that’s different from a poker tournament, right? It’s not like Goldman’s clients simply gambled on pocket kings and lost due to the random chance that the guy next to them had pocket aces; they paid their stake to the house unaware that the house had ensured beforehand that they, the client, would always be dealt the only two and seven the house hadn’t pulled out of the deck.
This particular article lays out the case against Goldman’s standing counterargument: If we rigged the system, how did we lose money? The answer, as the leaked Goldman e-mails suggest, is stupidity, along with a healthy dose of hubris and contempt for the clients whom Goldman was so vehemently protesting are its top priority, as contractually obligated.
I’ve just stumbled upon your blog, but hopefully the imminent passage of an anemic financial reform package after the deployment of 2,000 finance lobbyists to Capitol Hill has soothed your fears that the poor banks are being pushed around by the mean old government and their feckless journalist cronies. More recent revelations, on the other hand, have not weakened the Times story’s case that Goldman was actively involved in a huge -- and criminal -- bait-and-switch.