Tuesday, July 07, 2009

The Blame Game

By Taesik Yoon - One of the things that has bothered me most in the aftermath of the financial mess that we are still digging ourselves out of is the blame game that so many seem to be playing. Sure, there is plenty of blame to go around and plenty of participants to share in that blame. However, to wholly place blame on any single one of these players is both narrow minded and a sorry attempt to absolve others of their share of responsibility.

The latest ire of these finger pointers comes in the form of a recent, now widely-circulated, article written in the latest issue of Rolling Stone magazine by contributing editor Matt Taibbi.

Here’s a link to the article: The Great American Bubble Machine

In it the author trashes Goldman Sachs. He blames the financial institution and the reach of its not-so-invisible hand (through company alums that have managed to infiltrate key positions in our government) for engineering “every major market manipulation since the Great Depression.”

In reality, the article focuses more on the present decade—specifically on how Goldman’s “unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam” beginning with the tech/dotcom bubble, moving on to the housing bubble, then the bubble in commodity prices. It even highlights how Goldman rigged the federal bailout.

My problem with the article has little to do with the facts presented. Generally, I found it to be well-researched. The specific examples of how Goldman profited from these bubbles both legally and illegally were compelling and enlightening.

But Mr. Taibbi was not above distorting the truth to make a stronger argument for his thesis. For example, he notes that Goldman converted from an investment bank to a bank holding company specifically so it could participate in the taxpayer-backed TARP funding. The author is right that Goldman received $10 billion in TARP funds. However, what he conveniently omits is the fact that Goldman never wanted (or likely even needed) these funds. It has also been among the most vocal at wanting to pay the funds back as soon as possible. In mid-June, it did just that, repurchasing $10 billion in preferred shares from the government, as well as paying an additional $425 million in dividends, which is expected to reduce second quarter earnings by 77 cents.

In other words, Goldman not only gave back the taxpayer money it borrowed less than three quarters after borrowing it, it also paid an additional $425 million to taxpayers. If the company was as brazen as the article suggests or if the money provided was, as he states, “…10 billion free dollars in a paper bag to buy lunch,” then why pay it back so soon or at all?

What makes this particular omission so egregious is the fact that a key reason why Goldman wanted to payback TARP funds so quickly was because of all the restrictions on compensation set forth in it. This, in fact, is completely consistent with Mr. Taibbi’s argument that Goldman is all about greed and paying fat bonuses. The only reason I can see for leaving this out is because it would invalidate his more important argument that the funds were provided to Goldman by its chummy government buddies without impunity. This sort of data mining is dangerous. It serves the exact same purpose he claims Goldman is guilty of: duping the uninformed.

And speaking of the general public, Taibbi does not note their participation in this mess. I, on the other hand, am not as kind. In the end, it all comes down to supply and demand. For example, with regard to the housing bubble, he notes how Goldman’s influence helped lead to a regulatory environment which allowed the CDO market to explode. But that only represents the supply side. You still need mortgage demand to drive the CDO market. This demand is driven by consumers. If we would have been more disciplined there would have been no pool of sub-prime loans to package together as CDOs. Whether or not financial institutions or government agencies helped perpetuate an environment of easy credit and mortgage lending practices, it was ultimately up to the consumer to decide to take that credit or leave it.

This is not to shift the blame entirely on individuals, but rather to highlight just how easy it would be to do so. Nor am I trying to absolve Goldman of wrong doing. There is no denying the company profited immensely from each one of the bubbles Mr. Taibbi lists at the expense of the American public. Additionally, there is no way to defend some of the unscrupulous tactics Goldman used to generate profits during these bubbles.

But Goldman certainty was not the only one to employ such tactics. Indeed, investment banks are like drug dealers. Only instead of selling crack or heroin, they sell a much more potent intoxicant—the promise of wealth and quick riches—all while doing their best to mask the risk inherent. And I would agree that Goldman was probably the biggest dealer on the street. But there is no doubt in my mind that if you could not buy from it, there would plenty of others more than willing to take your money. In other words, these bubbles would have occurred with or without Goldman’s involvement. The problem for Goldman was that it was among the last dealers standing after the raid and that makes it an easy target.

Mr. Taibbi ends by stating, “This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework until the end of time… It’s gangster state, running on gangster economics… And maybe we can’t stop it, but we should at least know where it’s going.”

This to me is the ultimate cop-out. It essentially boils down to saying here’s the problem. Unfortunately, I can provide no solutions—not even one; the reality of the situation is that there is not much we can do about it.

Well, I’ve got one solution for him and anyone else who shares his view: buy Goldman Sachs’ stock. After all, if Mr. Taibbi is correct in his assessment, then Goldman’s stock is what we in the industry refer to as an arbitrage (risk-free) opportunity. By his account, Goldman already owns all the air it needs to inflate the cap-n-trade bubble he is so certain will be the next to take place. Therefore, Goldman should be the biggest beneficiary. As an owner of Goldman shares, so should you.