In the past several months there has been a brewing populist anger against Wall Street firms. I think the anger started to increase dramatically after the passage of TARP which was supposed to provide $700 billion to the nation’s largest financial firms. Many ordinary Americans were frustrated that many firms that caused the financial crisis were being helped by the Government, while feeling that the Government was ignoring them. The anger reached a peak with the AIG bonus scandal in early March of this year, where AIG employees were intimidated and some received death threats.
A new trend has been in the past several months which I cannot truly figure out why. Much of the anger that was formerly directed at Wall Street is being solely directed at one firm: Goldman Sachs. Goldman Sachs has become public enemy number one with individuals ranging from government officials, the media, bloggers and ordinary Americans furious at the firm.
Rolling Stones a magazine that has no right discussing complex financial issues described Goldman Sachs “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.” The magazine accused Goldman of helping engineer “every major market manipulation since the Depression.” Needless to say the article was not particularly kind to the firm or it’s CEO Llyod Blankfein. Vanity Fair ran an article recently that was also very critical of the firm. This time the article was more credible as the writer is a former Goldman trader.
I was shocked to learn this past week that NY Times the has joined the chorus against Goldman Sachs. The New York Times ran a story accusing Goldman of selling CDOs to investors while betting against them simultaneously. The firm accomplished this by buying synthetic CDOs while selling CDOs to their clients. While the writer acknowledged in a small paragraph that Goldman claims it was merely hedging, the rest of the article claims Goldman was tricking its clients.
A colleague of mine who worked dozens of years at one of Wall Streets largest investment banks (not at Goldman) did a through investigation into the roles investment banks played in the financial crisis. From his extensive research he was inform me that he believed Goldman was merely hedging. Even though Goldman sold many CDOs it still had many CDOS on its books tied to mortgages that it wanted to protect itself from default. In fact Goldman probably did not hedge enough because they declared their first quarterly loss since going public in Q4 2008 of $2.12 billion. This loss included a $700 million loss on commercial real estate. If Goldman really thought all the CDOs were junk as the article claims they would not have kept them on their balance sheet.
Goldman further claimed that the clients were sophisticated investors and should have done their own due diligence. If I called up my brokerage firm and asked to invest $1,000 in a CDO they would laugh at me before hanging up the phone. These CDOs were not sold to widows to invest in their IRAs. They were sold to hedge funds, banks, and other institutional investors who have extensive research terms who clearly did not perform their proper duties.
Regardless, of what Goldman’s true intentions were there are two very important points that the article failed to mention.
The article fails to mention is Goldman like other firms was changing its stance on the economy and mortgage market as time passed. Goldman did not start hedging when it first started selling CDOs, it only started to do so when it saw the markets were going sour by the end of 2006. Gllian Tett writes in her book Fool’s Gold, that Goldman turned so bearish on the mortgage market that it started to sell its mortgage positions even at a loss. She quotes a senior Goldman executive as saying quote “We could tell the markets were getting overheated, so we took a position in the ABX [to bet against the mortgage market] and other ways”. Goldman was not the only bank to take this action. Deutsche bank started betting against the mortgage market as far back as October 2005.
Second, Even if Goldman was trying to trick clients, the unfortunately reality we live in is that business is riffle with conflicts of interest. Many investment banks also have research departments which provide investors with buy or sell recommendations. When Goldman underwrites equity IPO, and their research department is rating the stock there is obviously pressure to give a strong buy recommendation. Is that ethical? Stock brokerages encourage clients to do excessive trading even if it is not in their best interest, only to earn a commission is that ethical? This conflict of interest is not limited to Wall Street; it applies to every day situations. Doctors often perform treatments unnecessary procedures such as X-rays or ultrasounds to make money. The unfortunate reality of the world we live in is that there are conflicts of interest everywhere. Regulation should exist in certain cases; however most of the time it is up to the investor to do their own diligence. But why no public fury in these circumstances?
I am not entirely sure why Goldman has become public enemy number one among the populists, but I suspect one reason. Both Main Street and other Wall Street of firms is insanely jealous Goldman Sachs; the financial Times reported that Goldman Sachs reported only one daily trading loss in Q3 2009. That feat is simply mind boggling
While I am not a fan of the practices many investment banks use including Goldman Sachs nor do I think they employee ethical practices, I personally am glad Goldman is being so successful. I do not understand why anyone would want Goldman to need to be a steward of the Government like AIG, FNM, FRE etc. People should be applauding the fact that Goldman is successful. My main criticism of the firm is that instead of giving the profits to their employees, they should be paying higher dividends to their rightful owners, the shareholders. While I expect this type of yellow journalism from the likes of Rolling Stones, and Vanity Fair it is shameful to come from a supposedly worthy News agency such as the New York Time.