Look back at the prepared testimony that Lloyd Blankfein, Goldman’s CEO offered to the US Senate two days ago. In it he clearly defines what Goldman Sachs public purpose is – what its societal function is. Are they fulfilling that role and if not what do we do about it? To me this is the debate now being waged in Washington over financial regulation as brought home in the Goldman Sachs fraud allegations made by the SEC.
Here’s what Blankfein said:
The 35,000 people who work at Goldman Sachs, the majority of whom work in the United States, are hard-working, diligent and thoughtful. Through them, we help governments raise capital to fund schools and roads. We advise companies and provide them funds to invest in their growth. We work with pension funds, labor unions and university endowments to help build and secure their assets for generations to come. And, we connect buyers and sellers in the securities markets, contributing to the liquidity and vitality of our financial system.
These functions are important to economic growth and job creation. I recognize, however, that many Americans are skeptical about the contribution of investment banking to our economy and understandably angry about how Wall Street contributed to the financial crisis. As a firm, we are trying to deal with the implications of the crisis for ourselves and for the system.
What we and other banks, rating agencies and regulators failed to do was sound the alarm that there was too much lending and too much leverage in the system — that credit had become too cheap.
No, what you stand accused of in the court of public opinion is duplicity.
Remember the film Duplicity with Clive Owen and Julia Roberts where they act like good corporate citizens but secretly collude to con their respective bosses for their own private gain? That’s what’s many believe Goldman was up to: making clients believe one thing but then doing something different.
–noun,plural-ties for 1.
1. deceitfulness in speech or conduct; speaking or acting in two different ways concerning the same matter with intent to deceive; double-dealing.
1. deception, dissimulation. See deceit.
Here are a few examples from the case at hand via the emails unearthed by the SEC as reported by the Financial Times:
Goldman Sachs officials privately disparaged a complex $1bn mortgage security that the Wall Street bank sold to investors, according to e-mails released by Senate investigators on the eve of hearings on Tuesday on the bank’s role in the financial crisis….
The Goldman communications released on Monday involve Timberwolf, another so-called “collateralised debt obligation”, or CDO, which was structured by the bank to give investors a chance to bet on subprime mortgages.
Tom Montag, then a senior Goldman executive and now head of corporate and investment banking at Bank of America, was quoted as describing the deal in an e-mail as follows: “Boy that timeberwof (sic) was one shi**y (sic) deal,” according to the Senate subcommittee.
The subcommittee said that Matthew Bieber, the Goldman trader responsible for managing the deal, later described the day that the Timberwolf security was issued as “a day that will live in infamy”, recalling the language President Franklin Roosevelt used for the Japanese attack against Pearl Harbour.
This sounds very duplicitous indeed.
There was one exchange during the hearings that certainly left me with the impression that Goldman was in fact being duplicitous. Andrew Leonard of Salon sums it well, when he writes:
Levin’s first question, directed at Sparks, concerned Goldman’s efforts to sell to clients a security that referenced mortgage loans originated by New Century Finance — one of the most notoriously reckless subprime lenders. The loans were terrible, and Goldman knew that they were terrible — Goldman was hedging its own risk by betting that the security would decline in value.
One of Goldman’s clients asked via e-mail, "How do you get comfortable with the collateral behind those securities?" Meaning, basically: Those loans are crap, how in the world can you possibly be comfortable pushing this deal?
Levin wanted to know whether Sparks thought Goldman had a responsibility to tell its client that it was "getting comfortable" by selling the security short, by betting against it. In other words, did Goldman have a responsibility to tell its client that Goldman’s own opinion was that the security was likely a bad investment?
And Daniel Sparks simply would not answer the question. He tried delaying tactics. He tried to pretend that he did not understand the question. He tried to wiggle by citing Goldman’s favorite defense: that any investor Goldman made a deal for was "sophisticated" and fully understood what it was getting into. But a relentless Levin kept pressing the point, which boiled down to something very simple: Did Goldman have a responsibility to its client to indicate its own evaluation of the securities it was pushing?
The Goldman men from the mortgage department refused to answer this question. So Senator Levin put the question to Lloyd Blankfein. And he answered it. The Telegraph quotes:
Senator Carl Levin told the veteran banker that he "wouldn’t trust" Goldman as he repeatedly asked whether the bank would disclose its position "when they’re buying something you solicit them to buy, and then you’re taking a position against them?"
"I don’t believe there is any obligation" to tell investors, Mr Blankfein responded. "I don’t think we’d have to tell them, I don’t think we’d even know ourselves."
Parse this however you want but Blankfein and everyone at Goldman is saying we trade with qualified institutional buyers ONLY – the big boys. They know what they’re doing because they swim in the deep end of the pool for a living, folks. They do their own research. they have their own risk management teams. They take their own market views. We don’t have to tell them squat.
And there’s a lot of truth to that. But here’s the narrative I think is more substantial:
Goldman Sachs – like every other large international institution – was knee deep in the selling of the ‘garbage barges’ of mortgage backed-securities, CDOs and synthetic CDOs which were at the heart of the subprime crisis. This was a profitable business and they wanted a piece of the action. When the mood was buoyant in 2005, all was well and Goldman was happy to ‘participate’ as well as buy this toxic stuff – drinking the Kool-Aid and all of that.
But, at some point, Goldman realized – well before the hapless Merrills and UBSs and Citis of the world did – that this sh%t stinks. The firm didn’t realize it all at once; some people like Fabulous Fab Tourre smelled the odour well before others. But eventually, the foul smell reached the top managers of the firm and they clued in that the firm had a pile of toxic sh#t on its hands. That’s when they told the traders to sell, sell, sell. REDUCE RISK IN THE MORTGAGE BUSINESS NOW.
The question for you is what do you do now that you have decided to go the other way. After all, your bonus does depend in part on your P&L. Well, in Goldman’s mortgage department’s case, you dump the toxic assets on anyone who will take it, especially the hopeless schmucks from Germany and Holland who don’t have a clue about actual risk in US subprime. If they actually did their homework… And you help those who are ideologically aligned on the short side like John Paulson make a killing ripping the face off those Dutch and German qualified institutional buyers. Oh, and make sure you buy protection via those idiots at AIG too.
So, is Goldman fulfilling its public purpose? Given the drubbing they are taking in the court of public opinion, it doesn’t look like they are. Below I give my opinion on what’s happening.