Goldman Sachs responds to Taibbi

By Felix Salmon
June 26, 2009

I just got off the phone with Lucas van Praag, the top flack at Goldman Sachs, who called Matt Taibbi’s piece on the bank “hysterical”. He also sent me an email, which makes some specific responses to Taibbi’s points:

Having read your piece about Matt Taibbi’s article in Rolling Stone, I wanted to set the record straight, particularly about “regulatory capture”.

Background: Under the Commodity Exchange Act, the CFTC (for agricultural futures) or exchanges (for energy/metals futures) established speculative position limits. As much as anything else, the limits are intended to prevent market imbalances that would result in failures of the ultimate settlement of the futures contracts.

The CFTC rules exempt “bona fide hedging” transactions from these spec limits. A bona fide hedging transaction was originally understood to be an actual producer/consumer who was selling or buying the underlying commodity and wanted to hedge risk of the price moving up or down. In 1991, J. Aron wanted to enter into one of its first commodity index swap transactions with a pension fund. In order to hedge our exposure on the swap, we wanted to buy futures on the commodities in the index. We applied to the CFTC for exemption from position limits on the theory that even if we weren’t buying the commodity, we had offsetting exposure (in our swap) that put us in a balanced/price neutral position. The CFTC agreed with our argument and granted exemption. By the way, each of the then Commissioners signed off, so it was hardly a secret…

The CFTC published a report in August 2008, indicating that there were few instances when entities would have exceeded spec limits, had they applied to OTC positions.

Yesterday, as you probably know, the Senate Permanent Sub-Committee on Investigations issued a report on wheat futures in which they concluded that divergence between prices for actual wheat v. wheat futures is being caused solely by index investment. The Committee’s recommendation is that hedge exemptions which support indices should be phased out.

Not quite so recently, the elimination of Glass Steagall doesn’t exactly provide a robust argument for regulatory capture. And Taibbi’s bubble case doesn’t stand up to serious scrutiny either. To give just two examples, even with the worst will in the world, the blame for creating the internet bubble cannot credibly be laid at our door, and we could hardly be described as having been a major player in the mortgage market, unlike so many of our current and former competitors.

Taibbi’s article is a compilation of just about every conspiracy theory ever dreamed up about Goldman Sachs, but what real substance is there to support the theories?

We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance of being a force for good.

Van Praag is right that if the Senate is recommending that Goldman’s exemptions in the futures market be phased out, then the Senate, at least, has not been captured by Goldman. And he’s also right that Goldman can’t really be blamed for creating either the tech-stock bubble or the housing bubble — it was a relatively minor player in both.

But you don’t read a Taibbi rant for an evenhanded look at both sides of a complex story. It’s more a forcefully-put case for the prosecution: some of his charges might not stick, but he’ll throw a few chancers in as well for good measure. (Interestingly, though, even Taibbi didn’t try to include Ben Stein’s ridiculous conspiracy theory about Goldman’s chief economist trying to drive down the prices of mortgage bonds in order that Goldman could profit from its short positions.)

I disagree with van Praag that the CFTC exemption given to J Aron “was hardly a secret” — as far as I know, there was no contemporaneous reporting of it at all, either in the press or in Goldman’s own filings. And although there’s a strong case to be made that Goldman has failed to capture the legislative branch (see for instance Chris Dodd jumping on the Ben Stein bandwagon), I think there’s a pretty compelling case that both the executive branch (home to countless Goldman alumni) and the regulators, like the CFTC, have a pretty strong track record of doing whatever was in the best interests of Goldman Sachs.

Van Praag told me that in the wake of the events of the past year or two, Goldman’s partners have pretty much lost their appetite for going into public service. Maybe that’s for the best. They are generally smart and talented and knowledgeable people, and I daresay that many of them have done a lot of good after leaving the firm and joining government. At the same time, however, we’re supposed to have a government of the people, not a government of multimillionaire Goldman Sachs technocrats. And when you have the latter, you’re inevitably going to end up with a lot of mistrust and conspiracy theories sooner or later, whether they’re well-founded or not.


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My question ?

What part did Mike Milken play in the creation of derivatives or other exotica.
I know he does consultation or some other titled work.
A loophole somewhere to get back in the action.

Posted by Wayne | Report as abusive

“By the way, each of the then [1991 CFTC] Commissioners signed off, so it was hardly a secret…”

Hmmmm … so that would have included:

- Wendy L. Gramm (Chairman 02/22/88 – 01/22/93), wife of Sen. Phil, who went on to serve on the audit committee of Enron’s board of directors, which also “signed off” on Enron’s accounting methods;

- Sheila C. Bair, current chairman of the FDIC;

- William P. Albrecht, can’t easily find his current whereabouts, he came to the CFTC from academia (U. of Iowa);

- Fowler C. West, can’t easily find his current whereabouts, as of 1997, her was General Counsel for lobbyists The Washington Group;

- Kalo A. Hineman (died in 2003);

- Joseph B. Dial, can’t easily find his current whereabouts, he was later (1998) a fellow at Harvard’s Institute of Politics.

Maybe someone should ask them.

jck and Jawaralal Bernstein: “It’s routine for the CFTC to grant exemptions from position limits for bona fide hedging. This is Reuters, not Rolling Stone, YOU should know that.”

The claim in Mr. Taibbi’s article (and the claim to which Mr. Salmon is referring above) is that, sure, it’s routine *now*, but the 1991 private letter ruling of the CFTC, granting J. Aron a bona fide hedging exemption for a non-traditional (i.e., paper vs. actual commodities) hedging, was the first of its kind. Sullivan and Cromwell, hardly a wild eyed group of revolutionaries, agrees (“Since 1991, when the CFTC granted its first bona fide hedge exemption for a non-traditional hedging transaction”, as does the Commodity Futures Trading Commission itself in the Federal Register (“Beginning in 1991, the Commission staff granted bona fide hedge exemptions, in various agricultural futures markets … The first such hedge exemption involved a large commodity merchandising firm that engaged in commodity related swaps as a part of a commercial line of business”

1) What is it that you know that is “over the head” of Rolling Stone, Reuters, Sullivan & Cromwell, and the CFTC itself?

2) Why is it, in a “government of laws,” that something as important as the “first bona fide hedge exemption for a non-traditional hedging transaction” ought to be handled via a private letter ruling? Isn’t the type of thing that ought to be handled by something like, um, a *law* or, least, a *regulation*, so that other people (e.g., folks who don’t like the idea, or even folks who *do* like the idea and might want to compete with GS) know about it?

It seems to me that all the talk one hears about the pros and cons of “government intervention” are hopelessly 19th century. The name of the GS game in the 21st century seems to be:
1. We greatly favor government intervention (*our* kind of government intervention, anyway) over non-intervention
2. *Our* kind of government intervention is the kind that gives us a competitive advantage and that gives our competitors a competitive disadvantage; and
3. The *best* kind of all is the #2 that nobody else knows about.

I think that Mr. Taibbi has opened a real can of worms here, and there are lots of people, on all kinds of points of the political spectrum, who are going to be very interested in this story and where it goes. I think things could get quite uncomfortable for GS; and for Pres. Obama and Sec. Geitner too, if they don’t watch out.

How can Praag say they were not responsible (at least partly) for the housing and internet bubbles??? They lowered the lending standards drastically in each case, and everyone always does whatever Goldman does!!! Everyone who knows anything about Wall Street knows that!!! Not responsible??? Come on!!!

We all must do what we can to pressure our government to liquidate GS. They are not too big to fail. America is bigger, and either GS fails or America fails.

Posted by Dr. Sanford Aranoff | Report as abusive

It’s interesting that no one talks about the predictions for the next bubble referred to in the article: carbon credit trades. Nor that GS has investments in the largest carbon credit exchanges (as do almost all of the major investment banking houses, here and in Europe). Whether bubble blowers or not, GS is very good at spoting trends. It might be wise to take a tip from the best. By the way, Al Gore’s company, only a few days ago, tried to buy out a major carbon exchange company, that refused to sell out. Gore’s company raised its stake in the exchange from 14% to 19%.

Posted by Bob Berke | Report as abusive

Goldman Sachs should do the world a favor and die.

Posted by heavysole | Report as abusive

Bailout 2008, a poem by David Jeffrey:

Like a bloodied warrior,
laying broken and torn.

Like a dying soldier, hopeless and forlorn.

But the blood, it be green,
the color of money.

And the soldier is an economy,
and it is anything but funny.

Broken are it’s people and shattered are their dreams.

Thanks to the ultra rich and their full proof schemes.

It is a tragedy with more pain to come.

Finance will be Hell, and their wills will be done.

Posted by D.R. Sanchez | Report as abusive

Did anyone read the whole article, Where’s Eliott Ness when you need him? IRS, are they not feared? Would a one percent income tax get the economy going? It works for GS.

Posted by Nathan Hetzell | Report as abusive

The Hunt brothers’ attempt to corner the world silver market, during the late 1970′s, created a massive speculative bubble.

The episode would seem to disprove the claim of Matt Taibbi’s story byline, that Goldman Sachs has engineered “every major market manipulation since the Great Depression.”

Wage and price controls also arguably have constituted a major government-sponsored manipulation of the US economy.

What is so “ridiculous” about Ben Stein’s conspiracy theory? Didn’t Goldman profit handsomely by betting against mortgage-backed securities it had sold only a couple of years earlier? You bet they did. And what about the $13 billion Goldman got from teetering AIG? Another fact that won’t go away.

Posted by Gerontius | Report as abusive

Mr Salmon, Taibbi may have his own slanted point of view, but relying on testimony from the source of the mess is highly suspect at best. What did you think that they would say…that we’re guilty as charged, we’ve turned over a new leaf and we’ll pay restitution? In this regard, your own slanted point of view is no better.

The roads of economic ills that lead to GS are becoming so numerous and transparent that it is almost laughable to believe that any suggestion of impropriety on their part is unfounded. People have been convicted on less circumstantial evidence than what can be dug up on them.

Perhaps you should follow the compilation of “circumstantial evidence” in the “conspiracy theories”. And follow the money trail; the money NEVER lies.

Posted by Tom B | Report as abusive

Taibbi may have played fast & loose w/ some of facts but the big picture stands in respect to GS exploiting loopholes in regulation and making bets that allow it to profit whether the mkt is going up or down. Furthermore, many of the other I-banks are just as guilty of similar economic exploitation. The difference being that GS always seems to come out on top so you have to ask how does a company consistently come out on top w/o cheating or undue influence. In every other walk of life winners only sustain for awhile and eventually they return to average – just ask the NY Yankees or better yet watch the Tampa Bay Rays and see how long they sustain – they are owned by an-ex Goldman banker.

There are clearly too many GS alumni spread out across our economic institutions which if anything has to create a type of GS incestuous regulatory environment. What this article doesn’t point out is the concept of “buyer beware”. There are plenty of other smart investors in the world besides GS and clearly there are plenty of dumb ones. One has to ask why do sophisticated investors such as CALPERs or all the buyers of the CDO’s didn’t stop to ask a few pertinent questions about mortgage quality and risk. They didn’t, just as many didn’t ask why does an internet start-up a good investment. It all goes back to everyone thinking they are getting a free lunch – for CDO’s it was yields more than typical AAA bonds and for internet stocks it was astronomical price return in just a few weeks or months. GS clearly knows how to exploit that stupid greed.

Posted by Chris | Report as abusive

“Van Praag told me that in the wake of the events of the past year or two, Goldman’s partners have pretty much lost their appetite for going into public service.”

Does this mean they’ve stopped paying leaving employees bonuses for taking government jobs? 7

Posted by ska | Report as abusive

This is a classic response from a banker. It reads like the fine print of a credit card statement. What it fails to do is explain why a bank (a public one) should be able to bet on, or more importantly against, the price of oil. What value does that add to society? It is to “hedge” against their swaps? Are you kidding me? Swaps should be illegal as well, thats what got us into this mess. Another overly complicated, unregulated instrument meant to hide assets from the balance sheet.

GOLDMAN PARASITES! Thank you and all the other greedy scumbags on Main St. and Wall St. for wrecking the economy. Sadly your comeuppance hurts the whole world.

Thank you gutless politicians for refusing to enforce our legal codes via the SEC.

Thank you, America, for being so intellectually and morally lazy (and overweight).

An Eagle Scout, a professor with a doctorate, I am no longer proud to be an American.

From the Far East,

Posted by DDC | Report as abusive

p.s. Those of you who think that GS and JP Morgan are not on the inside track of ruining America and making everyone into wage slaves, PLEASE PLEASE PLEASE stop being sheep! Watch:

The Money Masters (free video)


Crash Course (by Chris Martenson, also free)

I know I’m mainly preaching to the converted here, but this will help folks to realize that it’s no surprise JP Morgan, Citi, and GS are still around (while Bear, Merrill and Lehman were always fated for destruction). These videos were made WELL before last year’s crisis.

Posted by DDC | Report as abusive

Personally, whenever a big corporation screams “CONSPIRACY THEORY!!” without providing irrefutable evidence to the contrary, on all points, you have to just laugh at them, and their big red hand.

The corporations and government would be in serious trouble if the masses had more keen critical thinking skills – a skill that should be mandatory curriculum all throughout grade school and college, IMHO.

Posted by de1 | Report as abusive

Van Praag’s arguments against Taibbi’s article are specious and full of finance speak. It’s no answer at all, just sputtering.

Sorry, Goldman, but the American public doesn’t have to read Taibbi’s article about you to know that you are “a vampire squid ramming its blood funnel down anything that smells like money”.

Posted by Diane Shirley | Report as abusive

Here is what I think of Goldman’s absurd bonuses, enjoy! kg

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