27 Jul Goldman Sachs Done Wrong in Long Form
It is not exactly newsworthy that some people blame Goldman Sachs for some pretty silly things. The initial hit-piece on Goldman Sachs came in a trendy rock n’ roll magazine, of all places. I have defended Goldman Sachs before, and believe this reply to the aforementioned nonsense in Rolling Stone covers a lot of the same ground I would cover now (though my own conviction level in the defense of Goldman is even higher now than it was then).
So when a very talented financial journalist who previously defended Goldman Sachs decides to join the cause of ignorant Goldman-demonizing, it is disheartening to say the least. Cohan is a gifted writer, and I have favorably reviewed his work in times past, particularly as it pertains to his authoritative book on Bear Stearns. And while much of this 620+page book was utterly fascinating, Cohan did himself and his no readers no favors by jumping on the consensus view that labels Goldman Sachs as the evil masters of the universe.
I will not say the entire book was a disappointment. It was not. I do not know how many other people would feel the way I do, but the 100+ year history of a Wall Street legend would be hard to bore someone who (a) Is fascinated by history, and (b) Is fascinated by Wall Street. A couple other masterful books chronicling the history of Goldman Sachs exist, but the sheer detail of this work provide captivating insights. If the book had been a 450-page history of Goldman Sachs, I would be writing a very positive review right now.
But alas, Cohan joined the long list of ignorant Goldman Sachs-bashers who feel no need to prove or substaniate anything they say about this storied Wall Street company. After 450 pages dealing with the history of Goldman Sachs, 450 pages that I mostly enjoyed despite some shoddy writing and ample bouts of incoherent investigative reporting, Cohan took a turn in the last 150 pages that I still would not believe if I had not read it myself. Cohan’s agenda was to get to some sort of book pinnacle where finally Goldman’s repeated years of blurring the lines between client obligation and firm ambition came to a head. The narrative was pre-set (and I might add, it had been pre-set by many others long before Cohan wrote this book). Any build-up in the story that was not along the pre-set script (Goldman spent years upsetting their clients and treating them poorly but always got away with it because they were Goldman Sachs) was not going to fit in the book. So essentially, when around p. 450 came and Cohan decided to claim ad nauseum that Goldman was notorious at mistreating their clients, but it was just “widely known” that the clients had to put up with it, I should not have been surprised that he provided no anecdotal evidence whatsoever. There are no citations, no examples, no stories, no illustrations – nothing. And in normal circumstances I might accept that the prima facie evidence is so strong, that some details need not be substantiated. But in this case, the prima facie evidene goes exactly the other way. What we see on the surface with the clients of Goldman Sachs are people and entities that did business with them over and over and over again. For all its notorious “client-screwing”, Goldman was the most respected and prestigious investment bank and risk manager in the world. It is all well and good to say, “Goldman was just deep into a place where it lost its ability to focus on clients”, but to merely assert that a systemic condition of this magnitude existed is both unbecoming a writer of Cohan’s ability, and brutally unfair.
Cohan deals extensively with the famous SEC complaint brought against Goldman Sachs right as the House was preparing to vote on the Financial Regulation bill (Dodd-Frank, which has passed, and is addressed here). Goldman settled for $550 million. Cohan deals with this story over about 50 pages or so, and doesn’t neglect to share with readers all the fascinating stories of Goldman employee Fabrice Tourre’s love letters to his two love interests (I am so glad he got that stuff in there). “It [the prospectus of GSAMP Trust 2006-S2] was designed to befuddle all but the most sophisticated investor”. Well, that shouldn’t be a problem then, since the product he talks to was absolutely sold to no one but the most sophisticated of investors. And this is where I believe the true story of Goldman and its selling of mortgage-backed securities in 2007 needs to be focused: This entire saga is a classic case – and frankly, perverse case – of one party (or several parties) attempting to rid themselves of all grown-up responsibility for decisions they freely and intelligently made, all because their decision did not work out. Very wealthy and sophisticated global institutional investors bought mortgage-backed securities in 2007. They did this because they were reaching for yield in a time that it was hard to come by. Had those trades worked out, there is not one single person on the planet who would be thanking Goldman Sachs for making this product available. The credit for the profitable decision would [rightly] belong to the institutional investors who took the risk and made the profitable investment. However, in a twist that is as audacious as it is wrong-headed, the entire focus on these foolish investments has been transferred to Goldman Sachs. It is the obese person blaming McDonalds for their eating decisions. It is the smoker blaming Marlboro for their cough. It is no surprise whatsoever in this society, and it is the only reason why we are having these conversations about Goldman Sachs.
To read Cohan’s book is to learn a lot about the DNA of this unbelievable company. Many people reading my review right now are aware, or should be aware, that I do not work for Goldman Sachs – in fact, I work for their biggest competitor. But I learned some time ago that one can not love capitalism if they do not love the capital markets, and one can not love the capital markets if they do not appreciate Goldman Sachs’s contribution to them over the years. I am not naive enough to claim that Goldman is employed from top to bottom by angels. They are not. No one says otherwise. But the idea that because Goldman is traditionally filled with very smart and accomplished people provides no basis whatsover for disliking them, other than very ignorant resentment. Goldman no more created the housing market bust than a Gallup poll creates election results. Goldman did not profit from the bust, they lost a ton of money from it. But they lost less than their competitors who we do not demonize because they had the wisdom to begin hedging what had become a dangerous exposure on their books. If everyone else had done what they did there would not have been a financial crisis – so how do you like them apples? It is a fact. Cohan takes the easiest of innuendos and insinuations and draws sweeping conclusions that lack foundation in reality. This is a total symbol of covetousness, resentment, and populist rage. It is silly.
I do not know what the future is for Goldman Sachs. As Cohan documents rather well, they have been through hard times before and come out rosy. This is a bad one. Rolling Stone and our own President have helped to paint a cartoonish image of them. Sadly, one of my favorite financial authors has assisted that cause. But if history really is written by the victors, I am not so sure that Goldman themselves will not end up getting to write the last chapter here. At least if history is any guide …