Portfolio’s Trivial Pursuit

Instead of investigating Goldman, it mocks the idea

I am still not understanding a certain strain of business-press culture that seems inclined to run interference for investment banks rather than investigate them.

This would not be my reflex in the aftermath of a multi-trillion-dollar meltdown, but then I may not be as sophisticated as some.

Conde Nast Portfolio this issue uncorks a puzzling two-part feature, “Conspiracy Theory, Exposed,” and “The Usual Suspects,” that purports, in an ironic tone, to debunk unfavorable rumors supposedly floating around Wall Street about Goldman Sachs Group, the fabled investment bank/welfare case.

The subheadline is:

Blankfein. Steel. Thain. Paulson. Kashkari. See a pattern? The Goldman Sachs “conspiracy” to take over the U.S. financial system.

Pretty funny, so far.

This passage gives you the flavor of where this is going:

Now, with Goldman emerging from the financial crisis battered but still on top, the Street is seeing something more insidiously silly: a bona fide Goldman conspiracy. “A lot of people think that they must have gotten where they are because of some unfair advantage,” hedge fund manager Bill Fleckenstein says. “Nobody likes to think that someone flat out beat ’em.”

Beat ‘em to what? The U.S. Treasury? And who is Fleckenstein, and why is quoted saying the same thing in both pieces?

“A lot of people think that they must have gotten where they are because of some unfair advantage,” hedge fund manager Bill Fleckenstein says.

Fleckenstein! We meet again!

The second piece lists eight rumors about Goldman, each more outlandish than the last. One rumor, for instance, is that Goldman engineered the collapse of Bear Stearns because it had held a “grudge” since Bear’s refusal to participate in the bailout of Long Term Capital in 1998. Another is that it saved Merrill Lynch out of concern for the reputation of Goldman alumnus and Merrill CEO John Thain. See if you can untangle this business-press sudoku:

The news: On the weekend that the government allowed Lehman to fail, Merrill Lynch, led by C.E.O. John Thain, sold itself to Bank of America for a tidy premium. Days later, the Britain-based bank Barclays agreed to buy Lehman’s core assets for pennies, wiping out Lehman’s shareholders.
The facts: Thain was a frequent adviser to Tim Geithner, who was then president of the New York Fed. Thain also worked as Goldman’s co-president under Paulson.
The conspiracy theory: To protect Thain’s sterling reputation (and Goldman’s too), Geithner and Paulson urged him to find a buyer immediately. If he hadn’t, Merrill would have followed Lehman Brothers into oblivion.

What is this, one wonders?

Here’s the alleged rumor about why New York Fed President Tim Geithner and Paulson bailed out Citigroup.

The conspiracy theory: Geithner and Paulson came to the rescue of their friend. The bailout preserved Rubin’s big gig—he made more than $62 million from 2004 to 2007—despite claims he championed some of Citi’s riskiest strategies.

These rumors are pure straw men, allegations so ridiculous they have the net effect of marginalizing any suspicion of Goldman and its influence. And yet, of course, there are legitimate questions to ask about Goldman, its officers, and its ex-officers now in government. A better use of resources would be to explore these, in my view. But no.

In this way, this piece resembles another recent cover story by Fortune, which implied that anyone who saw the possibility of criminal prosecutions resulting from the credit crisis was part of an “angry mob.”

Now, remember, in the case of Goldman, this is a firm whose employees, from CEO to janitor to pastry chef, averaged $500,000 a year, or better, each, for years, until compensation was tragically cut last year to barely above the poverty line, then ended up as the eighth-leading recipient of government aid, underwritten, one should hastened to point out, by a strapped middle class that hasn’t seen its incomes rise for eight years.

And in order to “earn” those paydays, as we’ve learned from serious reporting from Bloomberg, Goldman was a leading manufacturer of the same defective assets now collapsing the world economy. Not just any defective assets, but ones worse than most.

…Goldman still has on the market some $13 billion of almost $37 billion in bonds backed by subprime loans or second mortgages that it created while he was chief executive officer. Those bonds have an average delinquency rate of almost 22 percent, higher than the average of other subprime bonds from the period, according to data compiled by Bloomberg.

Yet Portfolio chooses to spend its resources defending Goldman against charges that no responsible person is making. Strange.

And it gets worse. Here’s Portfolio’s treatment of the AIG. bailout, a real side-splitter:

The news: Officials agreed to extend A.I.G. an $85 billion loan—later upped to $123 billion—to prevent its collapse. Goldman C.E.O. Lloyd Blankfein was (albeit briefly) the only investment-banking chief at a key meeting to discuss the deal.
The facts: Paulson installed Goldman vice chairman Ed Liddy as A.I.G.’s new C.E.O.
The conspiracy theory: Had the insurance giant failed, Goldman would have lost big. It’s said to have $20 billion in A.I.G. exposure. (Goldman says any exposure is offset by collateral and hedges.) Liddy was put in to protect Goldman’s interests. When asked why A.I.G. was bailed out but not Lehman, Dick Fuld, Leh­man’s C.E.O., told Congress, “Until the day they put me in the ground, I will wonder.”

Good one, right? But wait a minute. That’s no rumor. It’s a mangling of a live controversy over Goldman’s interest in AIG at the time of the takeover, whether the bank was exposed to a loss poised for a gain.

What’s more, Portfolio and the rest of us know that Goldman had any position in AIG only because of reporting by other business-news outlets that took the time, effort, and risk to pry loose critical facts about the secretive and unjust use of public funds to bail out AIG’s counterparties, Goldman Sachs almost certainly among them.

The New York Times’s Gretchen Morgenson wrote the groundbreaking story on September 27 that smoked out Goldman’s interest in AIG, as well as Lloyd Blankfein’s long weekend at the New York Federal Reserve, during which he was indeed the sole Wall Street CEO present at a September 15 meeting on AIG’s fate. Two days later, Bloomberg’s Mark Pittman nailed down the fact that as much as $37 billion in AIG bailout funds “has gone” to Goldman and other Wall Street firms, who would have become one of the insurer’s “biggest creditors” in the event of an AIG failure.

Goldman insists its exposure to AIG was “not material” and says its positions were fully hedged. While Goldman’s statement may seem to be at odds with the news accounts, this is not necessarily so.

Point is: the fact that Goldman had a significant interest in a government bailout of AIG is far more than a rumor, as Portfolio would have it.

And, by the way, is it so ludicrous to wonder whether Blankfein would seek to protect his firm’s interests during a meeting on that very subject with government officials? It would be strange if he didn’t.

In fact, other fact patterns that Portfolio sees as an object of mirth can in fact be seen as a legitimate area of inquiry.

How about the September 19 ban on short selling?

The conspiracy theory: When Goldman’s competitors felt pressure from the shorts, regulators acted timidly. Once the short-sellers turned their attention to Goldman, the company used its influence to push through a ban.

I’m not saying it’s true. I’m saying, it’s a good question for journalists, even a business monthly.

If that makes me a conspiracy theorist, I guess I’ve been called worse.

Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.