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.

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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.

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