Goldman-bashing at Bloomberg and Fortune

By Felix Salmon
January 29, 2010
mined in the past. His new column should be here, but isn't; Alphaville has excerpts.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

It’s Goldman-bashing time again (when isn’t it), with Michael Lewis returning to the same source of comedic gold that he’s mined in the past. His new column should be here, but isn’t; Alphaville has excerpts.

I have no problem with this kind of thing; I only wish it were a bit funnier. I’m all in favor of opinion columnists bashing Goldman every so often; I certainly do it often enough myself. On the other hand, they shouldn’t be allowed to get away with outright falsehood and extravagant stupidity. So why is Ben Stein writing for Fortune, and why are they letting him exude this kind of crap about Goldman Sachs?

Obviously, Goldman can put any disclaimer it wishes in the boilerplate of the offering documents. But as underwriters, it has a duty to deal fairly and honestly with its buyers, and to deal as a fiduciary, putting clients’ interests first if the buyer is a client of the firm. It holds itself out to the world that way, too. It holds itself as “adding value” when its works for a pension fund or any buyer by selling him securities. Read the annual report.

That is, it, Goldman, has a legal duty to not take advantage of the people to whom it acts as a fiduciary.

Does Stein think that if he uses the word “fiduciary” often enough, he’ll be able to change what it means? A broker-dealer, by its very nature, is an intermediary, a middleman. If you trade with Goldman, it’s either acting as a broker — finding someone else in the market who wants to buy what you’re selling, or sell what you’re buying — or else it’s acting as a dealer, and taking the opposite side of the trade itself. In neither case can it be a fiduciary.

A fiduciary is someone who invests someone else’s money on their behalf; Goldman Sachs Asset Management is one such institution which does indeed have a fiduciary duty to its clients. But Goldman’s traders are by definition the opposite: far from having their interests aligned with the people they’re trading with, they actually take the opposite side of the trade. Besides, when Goldman underwrites an offering of new securities, its client is the issuer, not the buyer of the paper. If Goldman had a fiduciary duty to its client in such matters, it can’t also have a fiduciary obligation to the investors in the deal.

But Stein hasn’t reached the heights of its idiocy quite yet. He continues:

Obviously, it’s different if Goldman is trading with a hedge fund or a canny wealthy trader who is not a client, who takes all kinds of risks. But when underwriting and selling to clients, such as pension funds, Goldman has a legal and moral duty…

The problem, of course, is for Goldman to be able to discern, for any given counterparty, whether Ben Stein would consider them to be “not a client” or a client. The bank is providing exactly the same service to the “canny wealthy” types as it is to “clients such as pension funds” — but Stein seems to think that every trader should have a red phone and a blue phone, with one used for “clients” and the other one used for “not a client”s. How to tell them apart? Maybe the traders should phone Stein first, every time, just to be on the safe side.

What kind of magazine prints this stuff? What kind of editor allows a columnist to get away with something like this?

Simple fact: if the banks’ proprietary trading had been consistently profitable, they would not have needed to be bailed out by the taxpayers in 2008.

Does Stein really think that the losses suffered by the banks in 2008 were the result of prop trading? That somehow the hundreds of billions of dollars in writedowns on toxic loans were so small that a consistently profitable prop-trading operation could have more than made up for them and obviated the need for a bailout?

Of course not: Stein doesn’t think. But as a result, his columns are neither interesting nor provocative: they’re just stupid. And I can’t for the life of me work out why Fortune is publishing them.

More From Felix Salmon
Post Felix
The Piketty pessimist
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
Comments
11 comments so far

“And I can’t for the life of me work out why Fortune is publishing them.”

The answer is: Like any magazine, they want to boost circulation. Idiot or not, Stein has a following.

Posted by MarkWolfinger | Report as abusive

Felix,

Regarding the relationship between proprietary trading and the banks’ massive write-downs, I suppose the real question is what we mean by “proprietary trading”. Was Merrill Lynch’s (among others) decision to hold onto billions of dollars of questionable securities (MBSs) a “proprietary trading” decision? Was Goldman’s decision to enter into credit default swaps with, say, AIG a “proprietary trading” decision?

It seems to me that these “investments” weren’t part of traditional commercial or investment banking activities (i.e., making loans and underwriting debt and equity offerings). So, should we consider anything that isn’t a part of traditional credit-channeling activities to be “proprietary trading”? If not, then how do we deal with those nebulous activities that aren’t strictly a part of the banks’ credit-channeling function and aren’t just naked trading? That seems to be the real issue here.

Keep up the great writing.

Posted by PhillyRunner | Report as abusive

Their is nothing funny about what Goldman pulled off in the AIG scam. Maybe that’s the point of this comedic critique of a critique of a comedy routine.

Posted by Woltmann | Report as abusive

I think PhillyRunner is right; Stein doesn’t mean prop trading in its commonly understood definition within investment banking circles.
He’s still a moron, it’s just that his readers are clearly morons too.
Hence, Fortune pay him.

Posted by TinyTim1 | Report as abusive

When the lead-in to an editorial commences with the term “Goldman-bashing” what follows is kind of like a carnival ride. Or Whack-A-Mole – which is what one suspects would automatically ensue were anyone to spill the magic beans making the sheer enormity of what Goldman’s been pulling off completely transparent to wider audiences.

There’s a philosophical angle to this as well. Like any astute designer of his or her own hermetic universe, GS has created a fiduciary thesis (GS can be trusted with people’s money), antithesis (GS is pure evil, never to be trusted except in looking out for itself) and synthesis such that, at any given time nobody – not even GS – should be able to tell which one has the upper hand. Right now, that’s what’s keeping them in business.

The specter of GS with its hand out is appalling, whether begging for taxpayer largesse or to seize another piece of its own customers’ raw booty, yet of such immensity and deliberate complexity that even seasoned commentators have a tough time discerning which Goldman needs how much bashing for what. And so the commentators duke it out among themselves.

Thus, Goldman has Ben Stein – and to some degree you, too – exactly where it wants them, never unanimous, generally too confused to bash where a righteous bashing is due.

Resolved: when identifying the culprit gets opaque to the GS-th degree, it’s time to shut the whole carney down.

Posted by HBC | Report as abusive

Felix: Not everything is automatically wrong just because it issues forth from your archnemesis.

Here’s the issue: Goldman put their own brand on the mortgage garbage that they bundled. That helped them sell the garbage. Then then shorted that garbage.

Stein wrote:

“Goldman Sachs underwrote substantial securities backed by mortgages, sold them to pension funds and others with the mighty GS imprimatur on the prospectus, and then sold them short massively –directly and through credit default swaps.”

That statement is true and it shows that Goldman’s behavior was morally reprehensible.

The 700 billion question is, is it illegal to short that which you are underwriting? It seems to be.

Another example: if an investment house was the underwriter for a company that was going public, and promptly busied itself shorting the shares of that same company, that would definitely constitute securities fraud.

These circumstances are the same.

Posted by DanHess | Report as abusive

I’m a little embarrassed to say this but I think I’m finally starting to understand this whole financial meltdown business Felix. Kudos as well to all the commentators thus far who’ve also helped me understand that up is really down and down is really up. Tricky bankers.

Who’s up for a hanging? A Bank hanging that is? Bring on The Regulators. Now watch the bank-boys leave so fast they won’t even empty their sock drawers on the way out of town… which is fine because they’ll be able to buy socks wherever they’re going; lots and lots of really expensive socks.

Posted by photis7 | Report as abusive

Felix,

Congratulations… not for competitor-bashing (who cares about a petty writer who would never be capable in analysing a balance sheet or to understand a competitive environment), but the quality of your reader feed-back. DanHess,HBC and in particular PhillyRunner should make your day.

I agree. The game plan is set and whatever you are writing or complaining about the new master in the White House would not spend time on you or, maybe worse, would not have the intellectual resources and a sound interst in getting the big picture. The pollsters are telling him.

His appointment of proven self-destructing minors in respect of the US society as Bernanke, Geithner and Summers is telling the story.

So, in a roll-out of your real message to Main Street, wire them to the tabloid between naked women and the story of John Edwards. This may trigger a change. Stein who?

I read a couple of lines this week that may convey your thinking in the direction suggested. Here they come…

“The danger to America is not Barack Obama but a citizenry capable of entrusting a man like him with the presidency.

It will be easier to limit and undo the follies of an Obama presidency than to restore the necessary common sense and good judgment to a depraved electorate willing to have such a man for their president.

The problem is much deeper and far more serious than Mr. Obama, who is a mere symptom of what ails us. Blaming the prince of the fools should not blind anyone to the vast confederacy of fools that made him their prince.

The republic can survive a Barack Obama, who is, after all, merely a fool. It is less likely to survive a multitude of fools such as those who made him their president.”

This considered view may be worth taking aboard. So, rewrite your message to Obamaville and surrounds.

Posted by HuckleberryFinn | Report as abusive

This is irony of Economic recession.Gloomy picture it created has left so many guessing as to the nature of business conglomerates ,intermediaries n above all ,the taxpayers.But not ready to buy Stein’s point especially the last one to Prop-trading.if i try to put some figures ,not more than 15 pc of Goldman revenue comes form this kind of tool.How,only if God had personified as Blankfein,one could manage to set off the write-downs on toxic instruments with prop-trading and stayed afloat.
Certainly ,Stein could have figured and burnt some more oil to bash GS(though it is backfiring) to a more hypnotic level.

Posted by AnmolRat | Report as abusive

You know that Investment Banks could hire twice as many workers, cut pay in half for all and have people work 9 hour work days instead of the 18 they pull today. I work for http://storyburn.com and I see the angst among Americans over getting kicked out of their homes and jobs. We have a kickin’ home foreclosure story at our site

Posted by hambo | Report as abusive

I think you are missing Stein’s point, Felix. He is not referring to broker-dealer status when he uses the term ‘fiduciary’. He is referring to Goldman’s status as an investment bank. An IB has a higher standard, because it is an advisor and advocate for investment management.

It makes me chuckle every time I read all the finger wagging responses and editorials. Obviously, most of this readership never earned a living as an intermediary. If they did they would understand how this financial crisis and aftermath is not the result of collusion and willful ignorance on the part of “big bankers”. Maybe the wage earners among you all should try to imagine themselves in a world where they desired to earn as much profit as possible, had a seemingly endless supply of capital(Institutions, governments, and the super-rich) that demanded the highest return with the highest safety available (Mortgage securities)on one end and hundreds of millions demanding to buy, invest, build, and create with on the other end. Imagine, if you can beyond your own narrow wage-earner world, what you would do if you were in the middle of those two forces. Imagine the frenzy of competition, imagine the frenzy of capital seekers, imagine the frenzy of capital providers…now imagine that frenzy sustaining itself for half a decade.

If you can get that far in your thinking, you will begin to understand that the common folk are not being consumed by big evil cigar chomping bankers, but rather the common folk just like everyone else were willing participants in everything that led to this financial crisis. Everyone was happy when the going was good. People got to buy homes without having to save decades for a the usually necessary down payment, people had jobs in growing companies fueled by consumer credit, folks who wanted to start a business without having to beg thiwr friends and family for start up capital could now go to banks where they could get sba guaranteed loans. Everyone liked it and everyone demanded it.

The government engineered this whole mess. They gave the IBs and CB’s the cheap capital, they asked intermediaries to make full use of leverage, they provided loan guarantees or suggested guarantees, they created huge mega-million project financing guarantees and gov’t backed bonding. They lowered interest rates and bought Treasuries on borrowed money. They did all this over and over again to the tune of trillions of dollars. And everyone thought it was a great idea.

You all are pointing your finger at the wrong culprit. Point your finger at the Fed Govt. …because they are still doing the same crap….shelling out dough for high speed rail, buying a trillion dollar health care boondoggle while cutting taxes and shelling out tax credits…how’s that going to balance the budget?

Quit looking for someone to blame, because the blame is you…and its me…and its everyone who demands justice. There is no justice, we are all ingredients in the stew. We need to better manage the cook who’s stirring the pot- the Fed Gov. Quit sniveling and bring some real thought and ideas to the discussion!

Posted by Dr.Savage | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/