Is Goldman Sachs evil?

July 7, 2009

Is Goldman Sachs really a “vampire squid wrapped around the face of humanity”?

That’s the view of journalist Matt Taibbi in a long article in Rolling Stone magazine. Taibbi blames the firm for almost single-handedly orchestrating every investment calamity since the Great Depression. And judging by much of the reaction in the blogosphere, Taibbi’s view has become the accepted meme when talking about Goldman.

Yet that simple storyline, as compelling as it may be, is far from the truth.

The reality is Goldman is no more of a sinner than any other Wall Street bank. Is Goldman really any more responsible for the inflating and the bursting of the housing bubble than

Citigroup, Merrill Lynch, Countrywide or even New Century financial? No single bank cornered the market on greed in the current financial crisis.

But what does separate Goldman from the pack is that it consistently plays the trading game with a far more ruthless attitude.

Goldman’s rough-and-tumble style is on display in the case of a former employee accused of stealing some of its secret proprietary trading codes. According to the criminal complaint, Goldman learned about the alleged skulduggery of its former employee, Sergey Aleynikov, sometime in mid-June. But the firm waited until July 1, right before the start of the Fourth of July holiday, to notify federal authorities of the theft.

Aleynikov’s late evening arrest on July 3 forced an unusual holiday court appearance the next day in federal court in Manhattan. The terms of the bail were rather steep. And, of course, the banks were closed for the next two days — all but insuring Aleynikov would spend a few more nights in jail.

Talk about a deterrent. You can bet that Goldman won’t be dealing with any Aleynikov copycats for quite sometime — even if the former programmer is ultimately found not guilty of the charges.

Goldman’s ruthlessness also worked to its advantage in navigating the collapse of the housing market.

Back in 2007, when Goldman started turning bearish on the housing market, the firm began quietly to take steps to lighten its exposure to home loans to borrowers with risky credit histories.

Now it’s well-known that Goldman was the first of the big Wall Street banks to play hardball with American International Group, pushing the insurer in late 2007 to pay up cash collateral on some of the guarantees it had provided on mortgage-backed securities.

What’s not as well known is that Goldman, in a move to rid itself of subprime-backed debt, managed to peddle off some of its soon-to-become refuse on CIBC of Canada.

Sometime in 2007, Goldman sold off pieces of collateralized debt obligations it had in its portfolio to CIBC. The CDOs were guaranteed with credit default swaps sold by ACA Capital, a bond insurer that begin to collapse in December 2008. ACA was an early sign of things to come with AIG. But back when Goldman sold the CDOs to CIBC, the deal looked solid enough.

When tiny ACA collapsed, however, the guarantees were worthless and the value of the CDOs quickly plummeted. An embarrassed CIBC, which has never said how it came to possess the CDOs, took an initial $2.3 billion write-down and since has taken additional write-downs.

From Goldman’s perspective, the firm, since it clearly harbored doubts about the securities, did the shrewd thing by finding a buyer for them. So Goldman delivered a Trojan horse to CIBC — a firm with a troubled history in investment banking.

Is that evil? I don’t think so. But it’s the kind of one-sided deal that leaves one wondering why any firm thinks they can get the better of Goldman in a trade.


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