A Partial Defense of Goldman

Goldman Sachs has apparently become Public Enemy #1.



Regarding Matt Taibbi's article on Goldman, I don't have much to add to Megan McArdle's pitch-perfect critique, which concludes that "Matt Taibbi is becoming the Sarah Palin of journalism." I read Taibbi's piece, and it was exactly as stupid as I expected. It's not even remotely serious, and can barely even claim to be based in reality. It was difficult to finish reading it, because it was one of those articles that's so bad it actually makes you embarrassed for the author.



I'm honestly surprised by how much "Goldman hatred" has spread to the general public (even before Taibbi's creative writing piece). I think it's completely unfounded. Of course, in the financial industry, "Goldman envy" (which often turns into "Goldman resentment") is a long-standing tradition—a sort of favorite pastime, if you will. But a lot of the conspiracy theories about Goldman that circulate through the Wall Street rumor mill are tongue-in-cheek. The current Goldman hatred is, I think, mostly sincere.



I've worked with Goldman frequently over the course of my career. I'm sure some people will take as proof that I'm some sort of Goldman shill, or that I've been "captured," but they're wrong, and there's probably nothing I can do about those people anyway. So take this for what it is.



I know this isn't a popular thing to say, but the truth of the matter is that Goldman is simply better than everyone else right now—more talented, more diligent, and much more thoughtful in its approach. (Matt Taibbi is so far out of his league it's not even funny.) I'm reminded of Rick Bookstaber's description of Salomon Brothers in A Demon of Our Own Design:

Going to Salomon [from Morgan Stanley] was like moving from a lumbering cargo plane to a fighter jet. Salomon Brothers was not like other firms on Wall Street. ... The atmosphere was reasoned and intellectual. Where discussions at Morgan Stanley seemed to be a concatenation of sound bites, at Salomon things were thought out. While at Morgan Stanley there was a hierarchy that demanded wending down the right path to bring out ideas, at Salomon a vice president who disagreed with the head of a trading desk would just walk up and discuss things. If what he said made sense, that was how it was done. Turf and status were trumped by the primacy of ideas.



Perhaps that sounds Pollyanna-ish, but I saw it happen regularly. (pp. 52-53)

This is a nice description of Goldman in the past decade. (Citigroup quickly gutted Salomon after their 1998 merger, famously disbanding Salomon's powerhouse fixed-income arb unit. Sandy Weill: worst CEO ever.) Goldman has a fundamentally different culture than other major banks—much like the culture Bookstaber described at Salomon—and it's immediately obvious when you work with them. There's a reason why Warren Buffett's Berkshire Hathaway is the largest investor in Goldman, and why Buffett injected $5bn into Goldman at the height of the crisis. They're very good at what they do. They make mistakes, of course, but not many, and they're generally not unforced errors.



I simply don't buy the argument that the bailout, or the financial crisis in general, proves that Goldman is guilty of wrongdoing. What happened last September was a bank run, pure and simple, and we've always known that what makes a bank run so dangerous is that it creates a classic coordination problem, which is indiscriminate in its destruction. If the market believes there will be a panic, then each individual firm has an incentive to liquidate assets and horde cash (because of anticipated margin calls and higher liquidity risk). But the more that firms dump assets into illiquid markets, the further asset prices fall, and the more cash they need to meet margin calls. Asset prices in a bank run are based on investors' idiosyncratic liquidity needs rather than fundamental value, so whether a bank fails or survives depends on the random liquidity needs of other, possibly unrelated investors, rather than the underlying strength of the bank's assets.



The point is that bank runs are irrationally destructive. The fact that Goldman was swept up by last September's financial crisis isn't proof of wrongdoing.



Yes, Goldman was bailed out by the taxpayers, but taxpayers also made money on the deal. Goldman paid back its TARP money. The argument that the $13bn it received from AIG should be regarded as bailout money is naïve. Goldman has repeatedly explained that it had collateralized and hedged its counterparty exposure to AIG—and if you want proof that they had hedged themselves, just look at AIG's own internal memos. Goldman was either going to collect that $13bn from AIG or its hedge counterparties. If AIG had been allowed to fail, Goldman would have collected the money from its hedge counterparties. That's what it means to be "hedged." Also, what if Goldman took $5bn of the $13bn it received from AIG and used it to pay someone like Fidelity? Would the AIG bailout then be a backdoor bailout of Fidelity? The argument has no logical end.



AIG paid out 100 cents on the dollar on its CDO CDS because Goldman wasn't in a position where an AIG failure would have been worse than accepting a haircut. If AIG failed, Goldman would have seized the posted collateral and collected the rest of the money from its hedge counterparties—so if AIG had offered 80 cents, Goldman would essentially have been choosing between 80 cents and 100 cents. Do you see why AIG paid out 100 cents on the dollar? As for the FDIC-backed debt that Goldman issued, they were just taking advantage of a program that was made available to them. That's what profit-maximizing firms do. There are no call provisions in the debt instruments, so there's nothing Goldman can do about it now. If you want to blame someone for not including a call provision, blame Sheila Bair.



Finally, the "Government Sachs" arguments are based on nothing more than rumor and innuendo, and are frankly insulting to the former Goldmanites working in the government. Why is it that anyone who has ever worked for Goldman is assumed to remain loyal to the firm long after they've left, and even after they've held jobs at other firms?



So there, that's my defense of Goldman. Take it for what it's worth.