article

08.02.09

Stop Blaming Goldman Sachs

A recent Rolling Stone article attacked the powerful Wall Street firm for bursting America’s financial bubble. Charlie Gasparino on why the story is dead wrong.

I'm sure Matt Taibbi is a nice guy, and I know he's a good writer, but it's making me ill to watch his recent Rolling Stone hit job on Goldman Sachs gain increasing credibility. (Though for what it’s worth, it’s a hell of a good read.) It's not that Goldman doesn't deserve to be blasted for getting bailed out by the government for losses tied to high-risk trading back in 2008, or for its manifold ties to the last three presidential administrations (including the current one), or for now profiting through the government's subsidy of its recent risk taking; I have done as much on these pages.

Thank God Paulson and Bernanke turned to Blankfein and not the editors at Rolling Stone for help.

But Taibbi has elevated a combination of half-truths, superstitions, and a lack of understanding about the financial crisis to what is fast becoming established as "fact”: that Goldman Sachs was the main culprit for the financial crisis and is now unfairly profiting from the various bailouts the crisis caused.

No rational person can deny the fact that Goldman is benefiting from its status as a government protected bank, as it makes big bucks ($3 billion in just the second quarter alone), acting like a hedge fund just after getting bailed out by the feds, and using its status as a commercial bank to borrow cheaply and make huge bond market bets. In fact, all of the banks are— Morgan Stanley is at the top of that list—it’s just that some, like Goldman, are doing it better than others.

It's the other part of Taibbi’s story that I have a real problem with—that Goldman either single-handedly or with very little help, was responsible for the financial crisis and committed fraud along the way. And then when it bet wrong, when the markets turned against the firm in a way its rocket-scientist traders didn't foresee, Goldman used its pull in Washington to get a bailout.

That storyline isn't just wrong, it's pretty naïve. But it's gaining credibility following Taibbi's Rolling Stone piece, first in the blogosphere and now with a growing number of what is commonly referred to as the mainstream media. It's one thing to watch half-literate bloggers in desperate need of attention jump on the Goldman is the root of all evil story; it's quite another to see respected news organizations with experienced reporters and presumably more experienced editors do it and in the process obscure the fact that Goldman, for all of its sins during the bubble years, was probably the least culpable for the system's eventual collapse. And maybe more importantly, that Goldman and all the other banks are now overtly protected by the federal government and can still roll the dice and take risk only this time under the explicit protection of the American taxpayer.

All of which brings me back to Taibbi, who is usually a really good reporter, and a provocative storyteller. In addition to his Rolling Stone piece on Goldman, I watched his performance on WNYC. What's interesting to me is (particularly after the WNYC appearance) is how much of what Taibbi is stating as fact or suggesting is probably true, is actually wrong.

During his interview, to demonstrate Goldman's role in the debacle, Taibbi discusses the $76 billion of mortgage debt that Goldman underwrote and how much of it was tied to the subprime market. What he failed to mention is that from 2004 through 2006—the years when the most toxic mortgage bonds were packaged by Wall Street, Goldman wasn’t even among the top five underwriters of mortgage debt; since 1995, it barely broke the top underwriting categories, according to rankings supplied by Standard & Poor’s.

Later, he went as far as to say that Goldman likely committed "securities fraud" because it later shorted the same mortgage bonds tied to subprime loans after it knew that billions it underwrote all those years were going bad (try proving that one), and that Goldman somehow forced the bond raters—Moody's, Standard & Poor's, and Fitch—to place all those Triple-A ratings on subprime bonds. (Given the huge fees for rating mortgage debt, I know for a fact that Goldman hardly had to twist any arms on this one.)

Then, in the mother of all conspiracy theories, Taibbi argues that during those dark days of 2008, right after the Lehman collapse, and with AIG on the verge of death, Goldman CEO Lloyd Blankfein picked up the phone and called his old partner, then-Treasury Secretary Hank Paulson and asked to be bailed out because Goldman is holding soon-to-be-worthless subprime debt insured by AIG.

In the radio interview, Taibbi concedes he can't verify that's exactly what happened, but then goes on to say that the people at Goldman, because of their power and connections, get “pretty much what they ask for."

Okay, sure, maybe there's some evidence somewhere proving that the entire regulatory apparatus of the Fed run by an appointee of a Republican president, Ben Bernanke, to the Treasury Department run by a lifelong Republican (Paulson once worked for Richard Nixon) to perhaps the Republican president of the United States himself would drop everything to save Goldman Sachs, a firm that overwhelmingly supported Barack Obama as president. But if there is good evidence to that effect, I haven't seen it. A more plausible explanation for the Goldman bailout via AIG's bailout (borne out by my reporting for my upcoming book The Sellout) goes something like this: There was panic in Paulson's office (Fed Chairman Ben Bernanke's, too) not because they saw their retirement money tied up in Goldman stock ready to disappear, but because after Lehman fell, the other dominoes would be teetering.

Was Blankfein in the room when they discussed this and how to save the system? Of course he was. Was Goldman saved from extinction in the process? Undoubtedly, but so were Morgan Stanley, Citigroup, Bank of America. Say what you want about the bailout—it was fast and dirty, but it was necessary. If Goldman and all of those firms had gone under, there would have been no trading or lending whatsoever. Wall Street was finished, but connect the dots; Main Street, which needs Wall Street to borrow from, would be next in line. Commerce as we know it would have stopped and then you can come up with the scenario I’m sure Paulson and Bernanke envisioned of a greater Depression than this country had ever seen.

And thank God Paulson and Bernanke turned to Blankfein and not the editors at Rolling Stone for help. I hate to break it to everyone out there in a class-warfare mood, but if AIG is imploding and you're the government and you need help restructuring the company or figuring out ways the government can fix the problem, Goldman is a good place to start. Of course the firm had conflicts of interest—given its exposure to AIG insured debt and all its connections in government—but so did just about everyone else in this sordid mess, and at least the guys at Goldman are smart as hell. As I see it, the real reason Goldman shorted the subprime market back in late 2006 and early 2007 (one of the many evils cited by Taibbi and other Goldman detractors) was that it was simply smarter than the rest of Wall Street in seeing the possibility of the housing market collapsing early. Then it did what smart people do and hedged their bet--because Goldman knew it held those same mortgage securities on its books and would be taking losses with the rest of the Street. (Ben Stein, it should be pointed out, once made a far more reasoned and persuasive attack against the firm in a column suggesting that Goldman had used its research to drive down the subprime market when it put on the short sale).

Now here's the reality of it all: Goldman did all this--it shorted and hedged its position in the subprime market when some public research started to build that the housing market was coming unglued—while other firms like Bear Stearns, Lehman Brothers, Merrill Lynch, and Citigroup all made opposite bets. In fact, while Goldman hedged, these clowns doubled-down on their losing bets. During this same time, for instance, Bear Stearns was holding some $30 billion in mortgage debt on its books and borrowing in the volatile short-term "repo" more than just about every firm on the Street. Meanwhile. Citigroup, a bank that in my mind was truly an evil empire because it mixed radical risk taking with a commercial bank that put in danger deposits of average Americans shared honors (along with Merrill) for being the largest underwriter of the riskiest mortgage-related bond ever created, the Collateralized Debt Obligation.To be sure, Taibbi makes some interesting points; he says that it was "manifestly obvious" that those Triple-A mortgage bonds weren't the equivalent of Treasury bonds when Goldman was underwriting them, and of course shorting them. Maybe so, but if that was the case, why did Wall Street, including, in the end, Goldman, hold so much of this crap on their own books? What brought down the financial system ultimately wasn’t the shorting of mortgage debt or the selling of the stuff to as Taibbi puts it "unsuspecting" investors, but the firms underwriting mortgage bonds, and carrying them on their books, something known as the "carry trade."

The carry trade made Wall Street big bucks in 2004, 2005, and 2006 as the firms pocked the difference between the money they borrowed to create the mortgage bonds and the high yields on mortgage bonds. But when the mortgage market began to shake in early 2007, and new rules forced them to vigorously mark these holdings to market prices, losses started piling up, and the financial crisis began.

I have to admit I love to beat up on Goldman; I do it for The Daily Beast and on CNBC every chance I get. I also have to admit cheering Matt Taibbi on when I first read his Rolling Stone article.

But in the end it does no one any good to travel in conspiracy theories. Is Goldman too powerful? Maybe. Was it too big to fail back in September? Given the size of its balance sheet, Goldman's demise would have made Lehman's look insignificant. (And while we’re at it, conspiracy theorists, let’s put to rest once and for all that Lehman was allowed to die to remove one of Goldman’s main competitors. Yes, Lehman was competitive with Goldman in the bond market, but the only reason to bail it out was to keep the systematic risk from infecting Goldman. In letting Lehman go under, the government actually put Blankfein and company in greater peril.)

A bigger issue lost in all the back-and-forth about the firm's connections, trading habits, and where Lloyd Blankfein was the night of September 15, 2008 when Lehman went bust, is that the American taxpayer is right this very moment subsidizing Goldman's risk taking. That's a scandal no one seems to want to talk about.

Charles Gasparino is CNBC's On-Air Editor and appears as a daily member of CNBC's ensemble. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His forthcoming book about the financial crisis, The Sellout, is scheduled to be published later in 2009.