Opinion

Felix Salmon

The Goldman wars continue

By Felix Salmon
April 24, 2010

There is no scandal whatsoever associated with Goldman Sachs emails released by Senator Levin today. They show Goldman people going about their line of work, doing what Goldman people do, taking long positions, taking short positions, sometimes even taking big short positions. This is what broker-dealers should do if they have decent risk management.

The most interesting bit about them, for me, is the glimpse they give into the Goldman PR machine. Here’s Lucas van Praag, responding to an upcoming story by Jenny Anderson in the NYT:

GS Gives is not in the story. I have agreed to brief Jenny thoroughly on it tomorrow and expect the news to run either Tues or Wed. I think it would be good if you had a 5 min phone call with her on the subject and I’ll liaise with Russell on timing. We will issue the press release to coincide with the publication of her article…

Which is exactly what happened.

On the subject of simultaneous releases, Goldman has countered Levin’s damp-squib emails with its own 12-page document entitled “Goldman Sachs: Risk Management and the Residential Mortgage Market”. I agree with substantially all of the points it makes, and I’ve consistently defended Goldman against populist charges that simply shorting mortgages, or hedging long mortgage positions, is inherently evil. They write:

Goldman Sachs never created mortgage-related products that were designed to fail. It is critical to remember that the decline in value of mortgage-related securities occurred as a result of the broader collapse of the housing market. It was not because there were any deficiencies in the underlying instruments. The instruments performed as would have been expected in those unexpected circumstances.

I think this is true, narrowly. Pretty much all subprime CDOs imploded, and the Abacus deals would have imploded no matter what subprime securities were put into them. In that sense, the careful choice of securities by John Paulson in the Abacus-AC1 deal in particular didn’t make much if any difference to the final outcome. If Goldman was long subprime and then put on a big short-subprime bet in order to hedge its long position, then the dynamics of correlation trading would end up giving them an unexpected profit in the end, since no one expected correlations to go nearly as high as they did.

So I’m with Kevin Drum: let’s not demonize Goldman Sachs for shorting mortgages, or for making money doing so, especially since it isn’t true: while the Goldman mortgage desk did make $476 million in 2007, it lost $1.686 billion in 2008. That’s less than its competitors lost, but it’s still a lot of money.

Finally on Goldman I should mention that I have a piece in the Washington Post today explaining just how bad the SEC charges are for its reputation. The economic historian Brad DeLong has a learned response, saying that Goldman never really had the reputation that I’m claiming it had:

Felix Salmon thus, I think, mistakes the business of Goldman Sachs. The old House of Morgan was an investment bank interested in building long-term relationships. Goldman Sachs is instead about doing deals and having the knowledge, sophistication, and intelligence so that it can do the deals with greater ease than anybody else–but it won’t protect you from itself, and won’t protect you from yourself.

I didn’t really have the pre-war years in mind, of course, but Brad does have a good point, and there were other shops, like Lazard and Rothschilds, which probably had a better reputation in terms of long-term client service than Goldman had in the 1990s. Still, when it came to the big investment banks, Goldman was at the top of the heap: its clients trusted it more than they trusted, say, Bear Stearns or Merrill Lynch. And it’s lost a lot of that reputation now.

Comments
12 comments so far | RSS Comments RSS

GS is more like Salomon, they trade for their own account. Lazard and Rothschilds don’t and you can’t compete on big deals or big customer deals if you don’t trade, you can’t underwrite bonds or stocks if you don’t know where the market is.

Posted by alea | Report as abusive
 

This is rather scatterbrained stuff, coming from Felix.

At stake appears to be Goldman’s reputation. This hasn’t been tarnished by the SEC charge so much as it has been by Goldman’s own proximity to shady dealings and an overbearing sense of entitlement to continue as-was. They simply do not have sufficient arm’s length from rigged deals. Nor have they had the modesty to refrain from seeding Treasury with (ex?) employees of theirs. That’s the problem their reputation is now suffering, not “populist” sentiment nor the SEC’s capacity to regulate, which it may have done here with surprising diligence.

The flurry of arrogant denial from Goldman substantively fails to convince. Given what’s at stake they protest too savagely, like Wall Street’s very own Jerry Springer cast members, thereby even further from saving face.

With relentless transparency being now called for, self-indulgently obscurant side-bar condolences for Goldman’s plight now consume what little of that vaunted Goldman reputation remains to defend.

One doesn’t have to be a stochastic sleeveless wizard to figure out that the only way out for Goldman is down.

Posted by HBC | Report as abusive
 

So are you giving Goldman points for what may well be another case of creative accounting? Being huge bonuses were made on income never earned, didn’t they also defraud their shareholders?

That 90 million loss should be looked at a whole lot closer. Someone made money besides Paulson.

Financial industry’s political power is increasing and they have been waging war against reform …. The SEC, the Government and the people have to ensure Wall Street and banks are restricted in their ability and power to cause crises and manipulate government, Do it now or more will follow. Business as usual should not be an an option.

The rest of the world doesn’t really want to watch you crumble and take us down with you. We can’t understand why so many are standing idly by, when they are already being hit by the rubble.

Posted by hsvkitty | Report as abusive
 

I actually agree with this opinion. I can’t stand the lawmakers lambasting Goldman for having short positions? What are they thinking, people don’t short sale. If you are on the wrong end of the equation, too bad…you should learn and do a better job next time.
Not everyone will be a successful investor, investing is not like going to school,it is different, not everyone will get A’s. If there are A’s, there will be F’s with the curve around C.

Posted by freroht | Report as abusive
 

Wow a lot of news about the profit they made. If you look at the profit and loss for the group, they actually lost money overall.

110 – 294 + 553 + 107 – 1 219 + 170 – 507 – 130 = -1 210

Posted by savo | Report as abusive
 

This is getting long in the tooth and tardy, let’s change the topic, let’s attack the buyer now…

Posted by Ghandiolfini | Report as abusive
 

So no one on the mortgage related trading desk received any bonuses becuase of the ‘losses’?

Posted by longandshort | Report as abusive
 

J Bradford “Annoyingly Smug Mayflower Descendant” Delong’s response is less learned than spuriously pedantic (as usual). There can be no doubt that media coverage since 2007 and the recent SEC lawsuit depict GS in unflattering and reputationally damaging terms. This non-dispute (as Delong frames it) concerns how much reputation Goldman has to lose. With or without Delong’s quibble, Goldman will lose gobs of reputation.

Delong needs a lithium prescription.

Posted by xyz70 | Report as abusive
 

ABN AMRO didn’t know somebody was shorting the very transaction they were going long on? Uh huh….You can’t set up a CDO otherwise

Posted by STORYBURNcom_0 | Report as abusive
 

ABN AMRO was selling protection on the CDO (albeit via ACA). And the were selling the protection on a leveraged basis (over $1 billion in protectionon a $200 million CDO).

One doesn’t have to be a Wharton MBA or a U of C Financial Engineer or even a Devry Tech grad to figure out that someone wants to pay you chump change for a majorj bet against the mortgage market.

ABN obviously thought the “chump” was the protection buyer.

Posted by longandshort | Report as abusive
 

“They show Goldman people going about their line of work, doing what Goldman people do, taking long positions, taking short positions, sometimes even taking big short positions. This is what broker-dealers should do if they have decent risk management.”

So, in re: ABN AMRO, you can’t assert that their trade was stupid, or even bad, without reference to their entire trading book, complete with VaR analysis, durations, and so forth.

btw, @STORYB.., what you say is true of the synthetic CDO, but not for an real one; that is, an actual pool of actual loans, structured as a CDO. No short interest is needed in that situation.

Posted by mutant_dog | Report as abusive
 

Every business makes good and bad decisions, just a matter if they learn and eventually bounces back from it. But what’s important is they move on instead of dwelling and harping on the mistakes.

Posted by Anonymous | 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/
  •