The Goldman Sachs story is just getting bigger, and I get the sense it may be AIG time for Goldie.
I don’t mean AIG in the sense of a stupid company gobbling up all the risk on Wall Street for pennies and then nearly taking down the economy. I mean AIG in the sense of poster boy for What’s Wrong with the System.
Matt Taibbi did yeoman’s work in putting Goldman front and center with a fascinating-if-hyperbolic polemic whose first paragraph in less than three weeks has already entered the pantheon of Greatest Ledes of All Time:
The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.
Bet you can’t get that imagery out of your head. And know that, by way of disclosure, Goldman’s “blood funnel” has in part funded The Audit.
Taibbi’s piece is finally fully online, which ought to amplify its reach even more (Hey, Wenner: I understand wanting to give subscribers reason to stay and others reason to buy on the newsstand, but it would have been nice to have an option to buy the article online for a couple of bucks. I only got to read Taibbi’s piece a couple of days ago, since it wasn’t online except in stolen form).
But “The Great American Bubble Machine” may turn out to have been well-timed fuel for the fire on the Goldman Sachs story. Two weeks after RS published it, Reuters broke a fascinating story that a Goldman computer programmer had left the firm, absconding with a huge piece of the code for its super-secret automated-trading platform.
The programmer was arrested in seemingly record time, but not before he uploaded it to a German server, leading the prosecutor to say this in arguing for a high bail:
The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.
Which we and others have noted is a pretty astonishing statement. If “somebody” can use the program to “manipulate markets in unfair ways,” then Goldman can, too. And how would we know if it was? That stuff is a black box and I doubt regulators have ever been under the hood—or would know what to look for if they have.
It’s unclear how the financial press can get in there, but you can bet they’re certainly exploring the so-called high-frequency trading world.
Now come the boffo profits reported by Goldman in the second quarter. It’s on all the major front pages this morning, with The New York Times and Financial Times zeroing in on the massive paydays Goldman’s profits mean for its bankers. Goldman’s $3.4 billion second quarter means its bankers are on track to get an average $770,000 each this year—a record.
The Wall Street Journal doesn’t go with the pay lede, but its business angle—how’d they do that?—could be just as problematic for Goldman, reporting as it does that the bank bulked up on business from weakened or dead rivals while ramping up its risk-taking.
The latter is something I expect we’ll read more about in the coming days. How exactly did Goldman up its risk-taking and what are the implications for it and for the financial system as a whole if its bets go bad (Jim Bianco had a fascinating post in this direction today at The Big Picture showing how huge Goldman’s credit exposure is compared to its peers)?
Some sort of one-two punch lede melding the increased risk and the increased pay would have been great, but none of these papers do that. The WSJ doesn’t really get to the pay implications until the twenty-first paragraph. Meanwhile, the NYT doesn’t ever adequately explain Goldman’s increased risk-taking.
Here’s the Journal:
Goldman ramped up its risk-taking during the quarter. By the end of the quarter, its VAR, or “value at risk,” had risen by 33% from the year-ago level, to $245 million, up from $240 million in the previous quarter. VAR represents an estimate of how much the firm could lose in a single day.
At the same, Goldman reduced its leverage ratio, a measure of how much it is using borrowed money to magnify bets. That ratio fell to 14.2 at the end of the quarter, from 27.9 at the beginning of 2008.
So Goldman ramped up its risk-taking while lowering risk at the same time. I’d like to see that explained better.
The Journal also doesn’t explain that Goldman did this with the help of the taxpayers, something the paper should have pointed out even if it seems obvious to many of us. The NYT did well on this:
As well as receiving federal assistance last fall under the government’s Troubled Asset Relief Program, Goldman, along with other banks, has benefited from a government program that allows it to issue debt cheaply with the backing of the Federal Deposit Insurance Corporation. In addition, it received money from the government’s bailout of the American International Group, being paid 100 cents on the dollar for its $13 billion counterparty exposure to the insurer.
And the Journal doesn’t put the impending egregious pay at Goldman in context, leaving it at the $770,000 a head number. The NYT and FT do better, with the latter noting that “top executives stand to make tens of millions in bonuses, as was the case in 2006 and 2007.”
Which brings me back to my point about AIG. It seems like a long time ago, in a different market and a different time, but it was less than four months ago that tour buses were pulling up to the gated Greenwich mansions of AIG execs.
The massive backlash against the hundreds of millions of dollars in bonuses slated to be paid out to the AIG unit that “crashed the world,” as Michael Lewis puts it in his problematic Vanity Fair profile
of Joseph Cassano (Lewis unfortunately bought the spin that it was all Cassano’s fault), sent financial workers into panic, some supposedly fearing for their lives.
Now that we’ve stepped back from the financial cliff and with the Dow up a third, Goldman will be rolling the dice that individual bonuses in the tens of millions of dollars will fly with a public whose benevolence prevented Goldman and just about every other bank from tumbling into the abyss last September.
Taxpayers are stuck with a multi-trillion dollar bill caused by Wall Street while Wall Street continues to pay itself Gilded Age riches. Something’s gonna give here.
But “Wall Street” is a faceless villain, something Taibbi understands and why he took the journalistic license to zero in on Goldman to the exclusion of other banks who have done similar things. With the news today, Goldman stands out even more—like a gold thumb.
For its efforts (and those of folks like Taibbi), Goldman may get to be our AIG now. It better hope the pitchforks of March have been put away for good.
UPDATE: For more on this, see the FT’s Alphaville blog for a good roundup that includes media reaction across the pond.Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at email@example.com. Follow him on Twitter at @ryanchittum.