The following commentary is from the May issue of the Forbes Growth Investor.
Albert Camus was an Algerian French writer linked with a philosophy known as absurdism. His spirit must have been in Washington last week where Congress and Goldman Sachs performed in the Theater of the Absurd.
I have no particular desire to defend Goldman Sachs, a firm full of arrogant, overpaid bankers. In fact, about 15 years ago, Goldman turned down a friend of mine for a job. She was told, "You are very smart, but you are not a guru. We only hire gurus." We got a great laugh out of that comment. Today, I have to wonder, "Where have all the gurus gone?"
The SEC is suing Goldman Sachs for fraud, so you would think Goldman’s attorneys would have advised those called to testify in Congress to keep mum. There can be no doubt that the SEC will use their words against them. Instead, current and former Goldman executives answered questions politicians posed. I use the word "answered" loosely. More often than not, these executives came across as being obviously evasive. Now the Justice Department has jumped into the fray by filing criminal charges against Goldman.
The case against Goldman boils down to three issues: 1) Did the firm have an obligation to disclose who the parties were on both sides of a trade, 2) did it have an obligation to advise one of those parties not to make what appears to be a stupid trade, and 3) did it represent to one of the parties that the securities in question were something other than what they really were? In my opinion, the answer to the first two questions is no. As for the third, we will have to wait and see what the evidence shows.
Whether we are talking stocks, bonds, or houses, by definition, the buyer has a more bullish outlook than the seller does. Only time will tell who guessed right. If you go back to when these infamous trades were made, you will see that it was not obvious to everyone that housing prices were going to collapse. Back in 2004, I was not yet convinced we had a housing bubble. Still, I wrote an article called, Why I Hate Homebuilders arguing that housing prices could fall. A year later, I told NBC Nightly News that homeowners with interest-only subprime mortgages will be shocked by how much their monthly payments will increase. This was a full year before housing prices peaked. At the time, most housing experts still thought prices would never fall.
John Paulson figured out a way to bet against subprime mortgages. I wish I had been smart enough to do that. Goldman Sachs helped Paulson put the instrument together. Those on the other side of the trade were simply wrong.
Furthermore, Goldman’s actions did not cause the housing market to collapse. Housing prices fell simply because irresponsible lenders gave mortgages to unqualified borrowers. Both the lenders and the borrowers knew (or should have known) that these mortgages were designed to blow up if housing prices simply stopped rising. The government bears more responsibility for the mortgage mess than Goldman does. The government thought it was good public policy to encourage home ownership. For years, it urged lenders to make money available to unqualified borrowers. The government used Fannie Mae and Freddie Mac to prop up the mortgage market. Will the government take its share of the blame? Of course not. Instead, it will go after Goldman Sachs (and probably several other banks). After all, that is where the money is.
Showing posts with label Goldman Sachs. Show all posts
Showing posts with label Goldman Sachs. Show all posts
Sunday, May 02, 2010
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.
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.
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