Goldman’s reputational issues are more than skin deep

March 2nd, 2010

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 questioning whether it has a long term future.

Matt Taibbi’s polemic about Goldman Sachs, published last summer in Rolling Stone magazine, started to crystallise 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 January 1st, 2001.  Goldmans also later helped to undermine the Mediterranean country’s financial position by betting against it once its sovereign debt crisis started to unfold.

Taibbi’s thesis is 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 July 9th, 2009, opened with a powerful analogy. Matt Taibbi — a former Moscow-based report for the eXile, who has become something of a bete noire inside Goldman’s 85 Broad Street headquarters in New York City (pictured above) — 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’s Inside The Great American Bubble Machine went 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.

Taibbi 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 in order 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. To put it impolitely, it might be construed as criminally selfish.

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, whose article was a “watershed moment” for US journalism 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 established financial journalists who often suck up to 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 simply don’t apply in the world of finance.

Increasingly Goldman is coming to be recognized as a virtual “rogue state”. Even some traditional worshippers at the temple of Goldman are privately beginning to question their faith. Yes, the game may finally be unravelling for Goldman.

With the shift towards self-interested self-enrichment post ‘Big Bang’, their preference for proprietary trading over looking after clients’ interests, their arrogance, their astonishing tolerance of internal conflicts of interest, their widespread abuse of leverage, and the fact they somehow persuaded regulators and government into giving them free rein, it was always a risk that investment banks would become a kleptocratic, self-serving and socially-destructive oligopoly. Unfortunately, it has come to pass.

As a result of recent revelations, Goldman Sachs is rapidly losing its “aura”, with applications for jobs at the bank said to be down some 20% in 2009 alone. It has been cold-shouldered by the Obama administration.

And even the “bandits of Broad Street” themselves recently acknowledged, in a 10-K financial statement, that negative publicity might harm the bank, saying: “adverse publicity … can also have a negative impact on our reputation and on the morale and performance of our employees, which could adversely affect our businesses and results of operations.”

You can say that again.

Further reading:

1. Goldman’s influence in Washington from FT Alphaville
2. An article from Columbia Journalism Review which defends Taibbi,
3. Is Goldman Sachs evil? by Reuters columnist Matthew Goldstein
4. Joe Hagan‘s Tenacious G from New York Magazine
5. N.B. this is a revised and updated version of a blog post first published in September 2009 under the headline “Is the game up for Goldman?.

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Posted by Ian Fraser on Mar 2 2010. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry