Matt Taibbi Is just plain wrong about Goldman Sachs

August 7, 2009

— Heidi N. Moore is a business writer in New York City. This article originally appeared in The Big Money. The views expressed are her own. —

bigmoneyCan one firm create a bubble? Can one firm create four bubbles?

Maybe, but it’s damn hard to prove. That’s why it’s so unimpressive that a fervent 10,000-word rant by Matt Taibbi in Rolling Stone’s July 9 issue-devoted purely to “Goldman’s big scam”-spent 12 pages on the subject of Goldman Sachs’ “Great American Bubble Machine” but never delivered any plausible proof. The mammoth article disappointingly failed to provide the smoking gun that so many people on Wall Street-who have envied and admired and hated Goldman for much of this decade-would have been delighted to see.

Context and good facts were in short supply in favor of a lively, if incoherent, narrative. As a fellow financial journalist put it: “If you read the article without knowing anything about finance, by the end you would still not know anything about finance-but you would hate Goldman Sachs.”

True. Goldman’s reputation is its own business-I’ve never owned any of its stock and don’t have any friends who work there-but as someone who’s written about Wall Street for a decade, it annoys me to see the public that wasn’t fully educated about the financial crisis before it happened get snookered again by misleading reporting afterwards.

Megan McArdle of the Atlantic apparently feels the same way, having dubbed Taibbi “the Sarah Palin of journalism” and pointing out intelligently that “[i]t’s not that everything he says is wrong, but the bits that are true aren’t interesting, and the bits that are interesting aren’t true. The whole thing dissolves into the kind of conspiracy theory he so ably lampooned in The Great Derangement. The result is something that’s not even wrong. It’s just incoherent.”

In his rebuttal, Charlie Gasparino of CNBC said the article made him “ill” in his “Stop Blaming Goldman Sachs” rebuttal to Taibbi. (Allegedly, Gasparino and Taibbi will settle their differences with the modern-day version of pistols at dawn, which is a dual appearance on Imus.)

Here’s why I’m on record as siding with the skeptics: Taibbi set himself an impossible task in trying to prove that one firm is that evil and that smart. The thing about bubbles is that they take a village-everyone has to become disinhibited, and greedy, on a mass scale to buy into a really bad idea.

The whole history of Wall Street is guys with homes in Greenwich complaining about guys with ranches in Telluride, billionaires bashing millionaires, and in the end, the whole Street is in on it together because they all get paid the same way. The idea that one person or firm could be behind any of it is at most a distant delusion. It is not a conspiracy launched in one place and foisted on others-it is people responding to the incentives we give them. (And, by the way, there are some good people in there, too, although that often gets forgotten.)

All Wall Street firms and their hedge fund friends played a part in fueling the tech bubble, got involved in unsavory amounts of trading in mortgage-backed securities, and toyed with credit-default swaps, because that’s how they could make money at the time. Wall Street almost always moves in lockstep. That’s why the bailouts that helped Goldman actually helped other firms even more: They’re too interconnected to fail.

Not too many people, however, have addressed the bulk of the actual factual and contextual inconsistencies in Taibbi’s Rolling Stone article. The facts won’t change the debate-as Barry Ritholtz points out, the Goldman article is more about having someone to blame for the credit crisis, one target, fair or not, for all of society’s frustrations-but it’s still useful to get them out there. So here’s a little factual perspective about Wall Street and its bubbles that I wish more readers had had with them as they were reading the Rolling Stone article.

Let’s start with the AIG (AIG) thing. Everyone has read about how Goldman received $12.9 billion from AIG to cover money AIG owed Goldman on credit-default swaps. That $12.9 billion, in turn, came from the government via the first bailout of AIG. The conspiracy theory says that the government paid out all of AIG’s debts because Goldman alone would have failed without that $12.9 billion in hand. That’s hard to believe: AIG’s bailout went to pay several firms, not just Goldman: Bank of America (BAC) Merrill Lynch received $12 billion, as did France’s Societe Generale and Germany’s Deutsche Bank. England’s Barclays Plc received about $6 billion, and Switzerland’s UBS received about $5 billion, all of your taxpayer dollars. Goldman says it would have been fine regardless (which is admittedly hard to believe, since $12.9 billion is, after all, real money). But whether Goldman would be fine is beside the point. The point is that when AIG collapsed-in fact, because AIG collapsed-it owed money to several banks, and when the government took over AIG, it owed that money to the banks, too.

Taibbi is equally misguided in his account of the technology bubble. Taibbi’s argument is that Goldman created and fueled the technology bubble. “Goldman quickly became the IPO king of the Internet era,” Taibbi writes darkly, calling the firm “a leading underwriter of stocks during the boom.”

This is giving Goldman way too much credit. Anyone who actually lived through the tech boom had to be flummoxed by this. Goldman? The IPO king? In tech circles, Goldman was often considered an also-ran in tech IPOs. What about Frank Quattrone at Credit Suisse First Boston, or Mary Meeker, “the queen of the Internet,” at Morgan Stanley (MS)? Quattrone himself may have earned as much as $100 million in a single year from his technology IPO exploits and is now making a comeback.

Taibbi argues that Goldman’s tech IPOs lacked “quality,” but, given the barnyard trough that was the tech bubble, that’s a ridiculous claim. Nearly all the tech IPOs, by all underwriters, became essentially worthless; in addition, IPOs work through syndicates of five to 20 banks that sell shares, and many IPOs are “led” by two or more banks that do the heavy lifting. The quality of each tech IPO reflects equally badly on all the banks involved, who all put their names behind the companies and sold the shares to people in the markets.

In any case, the “IPO king” label seemed definitely false. I requested data from Thomson Reuters to double-check how much Goldman dominated tech IPOs. I asked Thomson for the “league tables” of bank rankings based on the dollar value of the IPOs they backed. Just as I thought: Goldman was, for much of the tech boom, a laggard, generating significant (significantly? Or cut?) billions of dollars of business less than its rivals. If Goldman was profiting from a bubble, it wasn’t doing as well as others.

In 1997, Goldman Sachs was No. 4, behind No. 1 Deutsche Bank-then the home of Quattrone-and No. 2 Morgan Stanley-the home of Meeker. The next year, in 1998, Goldman Sachs was No. 5 in tech IPOs, with Morgan Stanley taking the crown as No. 1 and Credit Suisse hiring Quattrone to jump to No. 3 from its previous No. 8 rank. Where Morgan Stanley underwrote $51 billion of tech IPOs in 1998 and Credit Suisse underwrote $28 billion, Goldman underwrote just $19.9 billion.

In 1999-as Taibbi points out-Goldman finally started to compete, rising to No. 2 behind Morgan Stanley and just ahead of Credit Suisse. But that year, Morgan Stanley underwrote $62 billion of IPOs, while Goldman underwrote only $50 billion. In 2000-the last full year of the tech bubble-Goldman Sachs was No. 3, behind both Credit Suisse and Morgan Stanley. The tally that year: Credit Suisse, $136 billion; Morgan Stanley, $108 billion; Goldman Sachs, $97 billion. At the height of the tech boom, Goldman Sachs underwrote 29 percent less in dollar value than its most successful competitor, Credit Suisse.

Considering that banks make money on the percentage of the total IPO value they underwrite-around 7 percent-missing out on $39 billion of IPOs was nothing for Goldman to brag about. That would have been approximately $2.6 billion of fees that Goldman failed to put in its own pocket. Taibbi never explains why Goldman, the IPO king, would choose to do such a thing. The tech IPO boom clearly belonged to Morgan Stanley and Quattrone at Deutsche, then Credit Suisse.

What about Taibbi’s other charge that Goldman engaged in “laddering,” or promising shares of hot IPOs to insiders or “friends and family” who would buy more later? And “spinning,” or giving company executives super-cheap shares in exchange for the promise that they would buy more?

Yes, Goldman may have been involved in something like that. It helps, however, to point out that the class-action lawsuit on laddering included 55 underwriters as defendants. Including Goldman, yes, but also Morgan Stanley, Credit Suisse, Deutsche Bank, Salomon Brothers, Robertson Stephens, and literally every bank on Wall Street. The lawsuit-launched in 2001-was just settled this year, and it was all of $586 million for all of the banks as well as 300 of the failed companies they took public. That was an amount those banks and companies earned before afternoon tea on tech stocks during the boom year. The whole point of the lawsuits, however, is that the banks and companies were in it together-at least 355 entities in all. To single out one bank of 355 as particularly rapacious is ridiculous. What were the other 354 doing, then?

As for spinning, the best example is far from Goldman. It’s actually the “Friends of Frank” program presided over by Quattrone, who watched over technology investment banking, research and even the part of the brokerage business that sold shares to individuals. Quattrone was in good company, however; so many banks offered similar deals on IPO stocks that executives told The IPO Decision author Jason Draho that they could not have played favorites, since they got sweet deals from everyone.

Taibbi points out that the Internet bubble was “one of the greatest financial disasters in world history,” which is true. But there’s no way that Goldman alone created it-every investment bank was involved, because Wall Street offers crazy incentives to create bubbles.

So, what about Taibbi’s attack on Goldman for its alleged part in the $4-a-gallon gas disaster of 2008? Taibbi points out Goldman asked for-and received-an exemption to speculate in the oil markets 17 years ago when such speculation was limited to actual holders of oil. Taibbi mentions in passing that 14 other firms received the same exemption. That means that 15 banks over 17 years were speculating in the oil markets due to a regulatory exemption. When you have 15 firms doing the same thing for nearly two decades, how is the government playing favorites?

In addition, Rolling Stone bolsters its point by quoting Goldman’s research analysts on the price of oil. Research analysts are forbidden from communicating with much of the rest of the firm, according to a 2003 settlement; at many firms, you need special identification just to enter the floors where research analysts sit, just to make sure they stay independent. If Goldman’s analysts believe oil would rise to $100 a barrel, it’s a good bet that they actually, really believed it-unless there’s proof that they didn’t or that they were influenced by the firm’s management or traders. When that proof comes up, maybe there’s a conversation. It’s too bad, because Taibbi makes a good point about oil supply not tracking oil demand-a paradox of the oil bubble that would have been a great story in itself. Still, you can’t have a supply-demand curve for a major commodity like oil based on a single firm’s actions; the whole market has to skew those numbers.

Next, let’s look at the context of the housing crisis, where Taibbi alleges that Goldman underwrote collateralized debt obligations-little bundles of mortgages that are packaged with some good ones and some bad ones to spread the risk around. McArdle has already pointed out many of the flaws with his argument. Taibbi argues that Goldman both underwrote terrible-quality CDOs and “shorted” them, or bet that they would go down in value. That’s legal, but that’s beside the point.

The point is more that Goldman was in the middle of the pack when it came to much of the CDO market. Taibbi points out, for instance, that Goldman paid a $60 million settlement to Massachusetts, which accused the firm of promoting unsavory home loans. But, as the New York Times pointed out, Goldman barely cracked the top 10 and more often just barely (word repetition) made the top 20 financiers of subprime mortgages.

However, what most people in finance know is that most of Wall Street underwrote terrible-quality CDOs and did so far more egregiously and with far worse consequences for taxpayers than Goldman. Merrill Lynch and Citigroup (C) underwrote more CDOs-and suffered more deeply-than any other firms. Merrill and Goldman ranked No. 1 and No. 2 in CDOs, while Goldman just jangled around somewhere in the top 5. In fact, CDOs are a major reason that the government lavished hundreds of billions of dollars on Merrill and Citigroup. Bank of America later claimed $138 billion in government guarantees and direct aid, allegedly because of Merrill Lynch. Citigroup, the No. 2 underwriter of CDOs during the boom, later required a whopping $326 billion in taxpayer dollars and federal guarantees. Goldman, as Forbes recently pointed out, was different only because it “hedged” its mortgage investments, or designed them so that it didn’t lose more than it could afford.

And those firms, unlike Goldman, actually made an active effort to gobble up more and more risky CDOs, even knowing that they would never be able to make enough money to offset the loss later. And while Merrill and Citigroup were taking all this risk at the top, they were also holding on to a lot of Main Street, mom-and-pop money-Merrill Lynch has its famous 12,000-strong brokerage force, and Citigroup was the top holder of consumer bank deposits in the United States. Goldman is proud that it deals only with institutions-other, savvy high-level investors, like banks and companies and hedge funds.

Merrill Lynch is a great case in point and the closest thing to a poster child there is on the subject. In 2006, Merrill actually fired a top executive, Jeff Kronthal, for not taking enough risk on CDOs. One Merrill trader was known for racking up $5 billion to $6 billion of bad-quality CDOs every quarter to hold on Merrill’s own balance sheet.

The firm ended up taking over $25 billion in writedowns on CDOs before selling a bunch valued at $30.6 billion for less than 22 cents on the dollar.

Nor was Goldman’s bet against CDOs unusual. Hedge fund manager John Paulson (no relation to the former treasury secretary) bet against the mortgage market for years; it finally paid off in 2007, when he made so much money that his paycheck alone was $3 billion (or nearly the equivalent of Goldman’s most recent quarterly profit).

Goldman’s combination of underwriting CDOs and shorting the mortgage market is partly a result of Goldman’s isolated “proprietary trading” group, which makes investments for the firm’s own account. Yes, the right hand can act against the left hand. That’s standard on Wall Street, where information between units is tightly policed.

Does all of this context mean that Goldman is totally innocent? Of course not. You can never know what happens inside a firm. What it does mean is that if you’re going to label one big firm as a bubble machine, first make sure that the others aren’t.

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How about this, probably be just as hard to “Prove” but there is such a thing as “A Preponderance of evidence”.

That 4.7 trillion that disappeared and the 500 billion that went to Europe, think that would be enough “money” to keep the world’s markets funded, and climbing? Especially if Goldman, Fed, IMF, World Bank, and all the Nations, Banks, Businesses, Funds, Trusts, Non-Profits, For Profits, and shell companies run and influenced by Ex-Goldman employees across the world are using those funds and their high frequency computerized trading schemes that do trades in the millisecond?

Seriously, no one i know has any money to put into a crazy market in the middle of a Depression/Recession.
How can the market have one of the best months in 20 years in the middle of the worst financial downturn in the history of the world’s economy?

How many points has the DOW gone up? Really? 200 in a day? 150 just the other day? From where? Honestly where?

Posted by C.D. Walker | Report as abusive

Wow, there are so many problems with this article its hard to know where to begin, though I will by saying its disappointing that someone that touts 10 years experience in financial journalism is such a painfully bad writer. Your definition of CDOs is also ridiculous, perhaps if these “little” (several billion per deal is little?) bundles of debt diversified with some “good” mortgages as you claim they wouldn’t have caused so much damage, a large number of them were full of subprime, that’s why they are known as being “toxic.”

This is your second attempt to defend Goldman after the pitiful story that seemed to be based on the notion that, hey they were dowdy clothes and have stirring debates, what’s wrong with that? In this overly long, painful article your argument rests on the notion that Goldman isn’t evil because everyone was doing it, and that’s a weak argument as Taibbi has pointed out many times. You are also playing very loose with information, perhaps the size of Goldman’s commodity trading is worth noting? The size of their equity trading operations???? League tables don’t say much, especially as Taibbi never based his argument on the firm being the biggest underwriter in each bubble.

Its also interesting that you haven’t addressed the government ties, to defend Goldman you must defend Hank Paulson, a hard thing to do.

I think Heidi Moore represents the core problem with financial journalism, and that is that there are a lot of bad reporters who are so tied into the bank culture they can’t get real perspective. Shame on Reuters for running this drivel, and Ms Moore, if your second attempt is as bad as your first it might be time to find a new job.

Posted by Sally | Report as abusive

I guess this means that Ben Stein is wrong about GS as well. He called it back in 2007.

Posted by SNS | Report as abusive

I can’t decide whether Heidi is offering clarification or defense or both.

Nonetheless, it’s a rambling rundown of the gaming industry on Wall Street. Sufficient to raise the hairs on the back of every retail investor’s neck.

No wonder Vegas can’t get the big players anymore. By law, the casinos must run a straight game.

Posted by rayman in CA | Report as abusive

I’m gob smacked! .Heidi N.Moore seems to think that chastising us for our ignorance of the massive scale of corporate swindling on Wall Street pre-Meltdown somehow exonerates the sharpest and most unscrupulous and politically connected player involved in it of any real wrong doing.

Even if Matt Tiabbi is wrong about the Meltdown being largely Goldman Sach’s doing – and this morally challenged piece certainly doesn’t get them out of the frame – we still have more reason to question the professional standards and ethics of Financial Journalism on Wall Street if the extent of abuse Moore alludes to as the norm only gets published in a spirited defence of one of the chief swindlers behind and major beneficiaries of the Meltdown after the taxpayers have been forced to bail them out.

Posted by desik | Report as abusive

Maybe this is oversimplifying, but shouldn’t – by definition – the biggest losers from this bubble, i.e., Citi, Lehman, AIG, Countrywide, Fannie/Freddie… shouldn’t they be eating the cow-pie instead of Goldman. While Lehman blew up the market to the tune XX trillion dollars in lost equity, the other 4 corps I listed account for about $500bil in gov’t loans and gurantees. Goldman’s number = $10bil and it’s already paid back with warrants repurchased as well. While I agree, Goldman takes the cake in the impropriety department, their balance sheet shows that they’re not to blame – unless one believes the shadow conspiracy and that they create bubbles, get out just before the bursting and then watch the fireworks and pick up the pieces afterwards. Let’s face it finally: Goldman is not that big or important, they are just another player in the game who is slighty (only slighty) more cautious then the rest. They are not even one of the top 50 biggest corps in the world.

Posted by the Shah | Report as abusive

citizens created the bubble. if people weren’t so stupid they wouldn’t have gotten themselves into the mess. i know of people whomade 35k/year and lived in 300k homes. the problem was the obsession with appearing affluent.

stop blaming the bankers. they just the dealers, people choose whether to shoot up.

Posted by chris | Report as abusive

Wow- what a mind numbingly bad article this is! What you have done here is only firmed up what a bunch of lecherous hacks Goldman was/is (the is because we know they’re there again creating and riding the next taxpayer funded bubble). All you’ve managed to do Heidi is put up a comparison of all the top nearer do wells in each category, and say GS was in the top 3 of each! Hey, that makes me feel better! But then again your numbers are cherry picked from WHAT YOU SEE, not from the backroom balance sheets! So here is the real conclusion- either Mr. Taibbi was right altogether, or at the very least your buddies over at GS can say we suck less. Great job- makes me feel better!
What wasn’t addressed altogether is the fact that GS grads have held, and continue to hold far too many key Treasury/Fed/Policy making positions to not have it their way. Unfortunately this makes us (taxpayers) doomed to repeat the past.
Reuters- shame on you! I came to this publication as one of the last bastions that don’t let nonsensical and unproven “journalism” get published, and now this drivel!

Posted by mynamehear | Report as abusive

This article screams PR for Big Finance.

The only retort I keep seeing is that the others did it too and they may or may not have been worse….but as one pointed out earlier you can’t defended the cronyism across the private/public sector line. That to me is the “smoking gun”.

Posted by iSelektor | Report as abusive

Just don’t understand why someone need to blame Goldman Sachs from the first place, even more confused when someone who claimed to have no indirect or direct connections with Goldman needed to defend Goldman with tonnes of arguments.
So what is the purpose of your defense then? For truth (no one can verify the truth from different points of perspectives), clarification (there is far too many explanations else way), or for advancement of your hidden agenda (whether you have some indirect investments with GS or financial companies, some relatives (not friends) working there, or just save your soul as you might have worked somewhere in GS / financial communities some time ago?)

Posted by Rose Eli | Report as abusive

Moore wrote- “Here’s why I’m on record as siding with the skeptics: Taibbi set himself an impossible task in trying to prove that one firm is that evil and that smart. The thing about bubbles is that they take a village-everyone has to become disinhibited, and greedy, on a mass scale to buy into a really bad idea.”

Yes, it takes a bunch of village idiots to ride the wave of unregulated greed over a cliff, but leading the village idiots (to their doom) there is always the one Bernie Madoff (Goldman).

Posted by mynamehear | Report as abusive

What the heck does a quote from Megan McArdle at the irrelevant Atlantic magazine, saying — the Sarah Palin of journalism — have to do with anything?? The Sarah Palin…. ?? Wow, the political and business prejudice sure shines through on that article leading comment. Whatever happened to objective, truthful reporting of FACT instead of editorializing…. editorializing is precisely what Heidi does, but claims this is the weakness in Taibbis article. Read it again Heidi. The point of Taibbis article is that Goldman has both lead and been complicit in many questionable transactions, and unlike other firms, has had the people in place internationally to pull off these shady looking transactions. That in itself makes Taibbis article very plausible.

Posted by Ima Beelever | Report as abusive

To Sally,
You gave a very thoughtful and rational response. I enjoyed your retort more than this article.

Posted by TheObserver | Report as abusive

Not only are his theories correct, in my opinion, but I am surprised that someone so young would come to such stark conclusions about our government and our corporate financial system. What you are witnessing is the systematic stripping of US assets and US capital and treasure in favor of corporate globalism, emerging markets and “one world” political philosophy.

“One World” means that the entire world economy is going to be controlled by a very small group of opec like corporate oligarchists.Like the G-8 on steroids. People do not want this. People want the right to live in freedom with the peeps of their choice. You think the economy is tough now? I think we are only a few years from outright seizure of personal assets.

For the greater good, of course.

The US and its people are screwed. We will be lucky if this country remains in one piece.

We are the fiscal underlings to Germany and France. They are doing better than the US is. They are probably going to become energy independent before we do. Their people live better.

And they have a great standard of living, rich in history.
What does the US have left? A great military that has been so abused in the last ten years it is teetering on ruin. A financial system that has been exposed as a worlwide fraud. A foreign policy that endangers every person on earth. WOW what an accomplishment. Super power.
Super Power? Not any more. The greatest thing about america has always been her forward looking optimistic people. Her spirit. Her faith. Those people: the backbone, the salt of the earth, the middle class, has been destroyed by greed and criminality.

Only in america could these people have ever been as successful. Only in america could a kid from the streets of Brooklyn grow up to head the worlds largest bank.

And how do they show their gratitude for the riches heaped upon them?

The people of the US need to stand up and fight for their country because we only have about 5 years left before it is gone.
Don’t believe me? Google tent cities and take a good long look at California, the worlds sixth largest economy.

America. We are fuc*ed.

Posted by phoenix1 | Report as abusive

It is impossible to censor the truth in the modern age.

Posted by phoenix1 | Report as abusive