Goldman’s reputational issues are more than skin deep

Goldman Sachs likes to think of itself as being so smart it is invincible but the truth is somewhat different. The New York-based investment bank would probably not be around today had it not been for the US government’s decision to bail out AIG in the panicked few days following Lehman Brothers’ collapse in September 2008 and some are even questioning whether it has a long term future.

Matt Taibbi’s polemic about Goldman Sachs, The Great American Bubble Machine, published last summer in Rolling Stone magazine, played a part in crystallising people’s thinking about the bank. Suspicions that its bankers put their own desire for self-enrichment above the interests of their clients or any ethical/moral concerns have intensified as a result of the bank’s involvement in the Greek crisis.

Not only did Goldman lead the swaps trades that enabled Greece to disguise its indebtedness, enabling the country to fraudulently join the single European currency on 1 January 2001.  Goldmans also later helped undermine the Mediterranean country’s financial position by betting against it once its sovereign debt crisis started to unfold.

Taibbi argued that the New York-based institution has been perpetuating a major scam against the public, both in the US and elsewhere, for many years, ripping them off right, left and centre as its executives pursue their over-arching goal of enriching themselves.

His 10,000-word polemic, published on 9 July 2009, opened with a powerful analogy. Taibbi wrote: “The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

Taibbi’swent on to accuse Goldman Sachs of a multitude of sins, including stoking up most of the economic bubbles in history, including the crash of 1929, in order to enrich itself at the expense of the rest of the world. He also accused the bank of deliberately driving up the oil price to $147 per barrel last year through orchestrated speculation on the futures and options markets, and of concocting the “cap-and-trade” system for trading carbon emissions permits to line its own pockets.

He reminded readers Goldman was heavily pushing CDOs that bundled sub-prime loans to other banks, while simultaneously short-selling the same parcels of debt from about December 2006. If true this was hardly very civil or ‘socially-useful’ behaviour.

Here’s a brief excerpt from Bubble Machine in which Taibbi explained how Goldman pulled this off: “The formula is simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased.”

Taibbi is by no means alone in putting the boot into Goldman Sachs. Soon after the article was published, the New York Times pointed out that Goldman’s traders and dealers are known in New York as the “Bandits of Broad Street”. And Nobel Prize-winning economist Paul Krugman said that what the bank does is “bad for America”.

Yet Taibbi has also come in for a fair amount of flak, especially from Wall Street-ers and certain financial journalists whose modus operandi is to soft soap Goldman in the hope of getting access to privileged information. Their main gripes are that Goldman “did not act alone” — it was one of several investment banks that behaved in similar ways — and that Taibbi is being “simplistic”. Some established financial journalists have accused of producing insufficient evidence to support his claims (see Matt Taibbi is just plain wrong, by Heidi N. Moore).

However some of these critics don’t appear to have read Taibbi’s piece. Having just re-read it, I acknowledge that he succumbs to polemicism (and perhaps also presents Goldman as a trifle more powerful than it really is). He also probably weakens his case by harping back to 1929. But the broad thrust of Taibbi’s claims are true.

Everyone I know in the City of London who has had dealings with Goldman Sachs says the investment bank invariably puts its own interests ahead of those of its clients.

Some friends of mine who were setting up a hedge fund about eight years ago were advised against using Goldman as their prime broker (stock lender) by a former Goldman Sachs prop trader. The executive told them: “Do not use Goldman Sachs as your prime broker; they’ll pass your position book on to their prop traders so they can make money off you.”

Goldman Sachs is a past master at putting “lipstick on a pig”,  to sell what it well knows to be piles of crap to unsuspecting suckers. If this sort of thing happened anywhere else (in the food and drink sector, say), it would have been stopped by the regulators and by governments decades ago.  However it seems that the normal ethical and commercial rules don’t apply in the world of investment banking.

Further reading:

1. Goldman Sachs’s influence in Washington from FT Alphaville
2. Columbia Journalism Review defends Taibbi
3. Joe Hagan‘s Tenacious G from New York Magazine

This blog post was published on 2 March 2010. It is a revised and updated version of my earlier post, “Is the game up for Goldman?” published September 2009