This Eric Martin post reminds me that a number of you have asked me what I thought of Matt Taibbi's Rolling Stone piece on Goldman Sachs. What I think, sadly, is that Matt Taibbi is becoming the Sarah Palin of journalism. He seems to deliberately eschew understanding his subjects, because only corrupt, pointy-headed financial journalists who have been co-opted by the system do that. And Matt Taibbi is here to save you from those pointy headed elites.
Taibbi is a gifted narrative journalist, whose verbal talents I greatly admire. But financial meltdowns don't offer villains, for the simple reason that no one person or even one group is powerful enough to take down a whole system. Confronted with this, Taibbi doesn't back away from the narrative form, or apply it to smaller questions where it is more appropriate, as William Cohan did in House of Cards. Instead, he grabs whoever's nearest to hand and builds them up into a gigantic straw villian, which he proceeds to bash with a handful of recently acquired technical terms that he clearly doesn't quite understand. It'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.
To give you a flavor of what I mean, Taibbi rants about how we knew derivatives were bad bad BAD! because they'd gone so badly wrong before:
There was only one problem with the deals: All of the wheeling and dealing represented exactly the kind of dangerous speculation that federal regulators are supposed to rein in. Derivatives like CDOs and credit swaps had already caused a series of serious financial calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange County, California, was forced to default in 1994. A report that year by the Government Accountability Office recommended that such financial instruments be tightly regulated - and in 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, agreed. That May, she circulated a letter to business leaders and the Clinton administration suggesting that banks be required to provide greater disclosure in derivatives trades, and maintain reserves to cushion against losses.
But it's not clear how much derivatives regulation would have helped any of these three companies. Gibson was defrauded by its bankers. P&G wasn't; they spent a great deal of money unwinding their positions when the Treasurer realized they had a lot of exposure on a bad bet on falling interest rates. Orange County, too, was making a massive, levered bet on a steep yield curve (roughly, a large difference between short and long term interest rates) that came undone when the yield curve flattened and interest rates rose. Moderately complex derivatives allowed its idiot financial manager to take somewhat larger bets, but you can take massive, money losing bets without them. At any rate, none of these derivatives have much to do with CDOs or CDSs; you might as well conflate stocks and bonds because they're both "securities". No one, as far as I know, is now proposing that we need to curtail the use of interest rate swaps.
Or take Taibbi's complaints about Goldman and its nefarious role in the Great Depression:
Beginning a pattern that would repeat itself over and over again, Goldman got into the investment-trust game late, then jumped in with both feet and went hog-wild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund - which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah - which, of course, was in large part owned by Goldman Trading.
The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line; The basic idea isn't hard to follow. You take a dollar and borrow nine against it; then you take that $10 fund and borrow $90; then you take your $100 fund and, so long as the public is still lending, borrow and invest $900. If the last fund in the line starts to lose value, you no longer have the money to pay back your investors, and everyone gets massacred.
In a chapter from The Great Crash, 1929 titled "In Goldman Sachs We Trust," the famed economist John Kenneth Galbraith held up the Blue Ridge and Shenandoah trusts as classic examples of the insanity of leverage-based investment. The trusts, he wrote, were a major cause of the market's historic crash; in today's dollars, the losses the bank suffered totaled $475 billion. "It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity," Galbraith observed, sounding like Keith Olbermann in an ascot. "If there must be madness, something may be said for having it on a heroic scale."
This is all technically true, and collectively nonsense. Investment trusts--aka mutual funds, now heavily regulated--were not the cause of the Great Depression. They were not even the cause of the stock market crash. They were an interesting sideshow that Galbraith included in his book because they were a vivid example of the froth. And Goldman was not the center of investment trust activity. They were one player among many whom Galbraith picked as an example, presumably because they happened to be still around and had a recognizeable name. In other words, because their activity had been less extreme, and hadn't taken the bank down with it. Yet Taibbi turns this into a central example in the exhibit against them. Then there's a 65-year gap in the indictment, presumably because no one has written an engaging popular book about the stock market convulsions of the 1970s.
Then the reserve of popular investment post-mortems fattens, and suddenly there's a lengthy litany of new complaints about Goldman: pumping, laddering, spinning. Eric Martin defends Taibbi on the grounds that it's all true. I myself firmly believe that these things are true (she said, looking demurely over her shoulder at the nice man from Legal). But it's all old, old news. It's not even a particularly well-written or thoughfully analyzed summary of the exhaustive treatments of the subject by the fuzzy headed moderate business journalists Taibbi disdains. Investment banks treated their clients disgracefully during the internet bubble, and a lot of the clients were managers who did the same to their shareholders. But what does this have to do with the current financial crisis? Perhaps more to the point, how is it a special indictment of Goldman, the ostensible topic of his piece? Other banks did more and worse.
Even as an indictment of the system this thing is lacking, and showcases Taibbi's lack of fundamental conceptual understanding. He complains about CDO's on the grounds that Goldman hid the atrocious risks inside a fancy dan derivative package that no one could understand. But in fact, everyone was aware that CDO's were repackaging crap mortgages--that was the point. The idea was pure portfolio theory, broadly agreed upon by everyone involved. Everyone knew a lot of the mortgages might go bad, either by defaulting or prepaying. (This is a risk for bankers, who don't like the idea that if interest rates drop, their 7% mortgage might suddenly turn into a pile of non-interest-bearing cash which can only be invested at 5%.) But if you pool the risk, only some of the bonds will go bad, while others pay off. The result is a less risky, less volatile investment than any individual junk mortgage bond. And it would have worked, too, if it hadn't been for
those crazy kids a collapse in the housing market of a scale not seen since the Great Depression.
Did individual portfolio managers take on too much risk? Yes. Did some morons get sold these bonds without understanding what was going on? Undoubtedly. But Goldman's customers for CDOs are not little grannies who think a bond coupon is what you use to buy denture glue. They're institutions who could reasonably be expected to understand the risks. Which is why it is not, as Taibbi absurdly claims, "securities fraud" for Goldman to sell people mortgage-backed CDOs when they themselves were moderately short the overall housing market.
"That's how audacious these assholes are," says one hedge-fund manager. "At least with other banks, you could say that they were just dumb - they believed what they were selling, and it blew them up. Goldman knew what it was doing." I ask the manager how it could be that selling something to customers that you're actually betting against - particularly when you know more about the weaknesses of those products than the customer - doesn't amount to securities fraud.
"It's exactly securities fraud," he says. "It's the heart of securities fraud."
First of all, of course banks sell people positions they aren't themselves taking. Sometimes the bank is right, and sometimes the customers are; differences of opinion are what make marriages and horse races. Second of all, the banks that went down, the ones that arguably caused the financial crisis, were long their own toxic waste (and that of others). Third of all, Goldman itself might argue that its mortgages were not as toxic as others, and for all I or Matt Taibbi know, they might be telling the truth. Fourth of all, the disconnect between the underwriting and the customer side of the investment houses was not only legal, but in some cases, mandatory. Excessive entanglement between the two is why Henry Blodget, whom Taibbi references elsewhere, has been banned from the securities industry for life. That Taibbi could even ask how this was not securities fraud is really troubling.
This would not be complete, of course, without a detour into the dastardly CDSs, in which Taibbi illustrates that he either does not understand the concept of "hedging", or doesn't care. Memo to Taibbi: we want banks to lay off some of their risk exposure. That's what makes them more stable. Now, maybe Goldman Sachs was doing something wrong. But the fact that they insured some part of their portfolio against default is not proof of it. To know that, we'd need some sense of the size of the portfolio, the size of the insurance, the structure of the deals. Those are details Taibbi either doesn't have, or doesn't provide us.
I won't even go into Taibbi's silly and naive discussion of Goldman's alleged oil market speculation, except to note:
- He again does not succeed in pinning it all on Goldman
- He fails to explain how a 1991 rule change caused a 2008 price spike and decline
- He fails to note that price spikes and declines in the oil market were common pre-1991
Does this matter? Aren't I, as people love to claim when you get into details, "missing the big picture?" After all, okay, maybe Goldman wasn't really all at fault but the important thing is that it shows how we were all duped over the last 25 years by insiders.
No, for several reasons.
First of all, Taibbi doesn't say that Goldman Sachs is just a sort of Everyman; he claims they helped engineer crises so that they could profit from them. Second of all, ignorance leads Taibbi to ask the wrong questions, and provide no useful answers. The problem isn't that pointy-headed bankers were rooking us--that may have been an individual problem for individual investors, but a crisis this big cannot be explained by any sort of fraud. To make these charges stick, Taibbi needs to posit a ludicrous level of naivite among institutional investors. Being satisfied with sloppy answers, he doesn't talk about, say, Goldman's role in the AIG collapse, or how you build a banking system without putting bankers in charge of it. He doesn't prove anything except that Matt Taibbi knows little about how the financial system works.
A lot of laymen, and not a few financial writers, like Taibbi because he's willing to take the piss out of self-important bankers. But you can learn about how the banking system works without being coopted by the bankers--look at Michael Lewis, whose Liar's Poker remains a classic twenty years on. What you can't do is build cartoon villains. Felix Salmon isn't overly friendly to Wall Street. But he doesn't write rubbish.
The more dangerous thing is that Taibbi makes a lot of people feel like they finally understand how they were conned. Taibbi's facile use of technical terms, his lengthy explanation of little-known secrets that have been endlessly rehashed on every financial page for going on a decade, gives people the illusion that they have acquired valuable information about the financial crisis. They haven't. They've acquired a bunch of disconnected vignettes.
Which is not to say that I disagree with Taibbi's project. Wall Street is an arrogant beast that more than held up its half of the devil's bargain which drove us into our current ugly straits. Bankers who thought they were geniuses were deceived by models that assumed away the possibility of a second great depression. They made a terrifying amount of money doing it. And now that the taxpayers have bailed them out at considerable expense, we don't even get a goddamn fruit basket. Instead they merrily go along paying themselves gigantic bonuses for the singular feat of not driving our economy entirely back to the stone age. I think some populist rage is more than warranted.
But just because Taibbi, or Sarah Palin, has a legitimate grievance, it does not follow that everything they say is thereby legitimate. How you press that grievance matters. And the right way to do it is carefully, honestly, and with a deep respect for the value of knowledge, even if you disagree with those who are purveying it.