It’s the big Dealbook debate! In the red corner, there’s Andrew Ross Sorkin, defending Goldman Sachs from Senator Carl Levin’s accusations of egregious behavior during the financial crisis. Sorkin’s main point: that depending on how you measure it, Goldman might not have been quite as short mortgages as Levin suggests. And now, in the blue corner, we have Jesse Eisinger, saying that it really doesn’t matter how big or small Goldman’s short was: the real problem, as has been clear from the day the SEC filed charges against Goldman over a year ago, is that it lied to its clients.
There was the lie that Goldman peddled to potential buyers of Hudson Mezzanine, that “Goldman Sachs has aligned incentives with the Hudson program”. In fact, Goldman had a huge net short against Hudson. There was the lie that the Hudson assets had been “sourced from the Street,” when in fact they were sourced from the festering pile of nuclear waste that was stinking up Goldman’s own balance sheet. There was Lloyd Blankfein’s lie that Goldman was simply acting as a market-maker in these securities, when in fact it was aggressively trying to sell them and had no interest at all in buying them at any point. There was the lie seen by the Israeli bank which bought Timberwolf assets at 78.25 cents on the dollar, presumably on the understanding that Goldman was making markets in such assets and that their value was in that ballpark. (In fact, Goldman had marked those assets at just 55 cents.)
And then there was the way in which Goldman gratuitously maximized the total mortgage losses in the global financial system by creating new mortgage-backed assets out of thin air:
Goldman’s techniques harmed the capital markets. Goldman brought something into the world that didn’t exist before. Instead of selling something — thereby decreasing the price or supply of it — and giving the market a signal that it was less desirable, Goldman did the opposite. The firm created more mortgage investments and gave the world the signal that there was more demand, for C.D.O.’s and for the mortgages that backed them.
By shorting C.D.O.’s, Goldman also distorted the pricing of the underlying assets. The bank could have taken the securities it owned and sold them en masse in a fairly negotiated sale, though it likely would have gotten less for them than it was able to make by shorting the C.D.O.’s it created.
Because of Goldman’s actions, the financial system took greater losses than there otherwise would have been. Goldman’s form of shorting prolonged the boom and made the crisis that followed much worse.
Jesse concludes:
Goldman executives surely hope to change the subject from the firm’s specific actions to a more general discussion of how much and when it shorted. We shouldn’t let them.
One of the problems here is that it’s easy to get caught up in endless discussions about whether Goldman’s actions were illegal or not. Best to leave that to the prosecutors, I think. But Goldman’s actions were undoubtedly harmful: to its clients, to the financial markets generally, and to its reputation as an honest broker. Goldman’s trying to revisit those days and persuade us that it wasn’t that bad after all. Jesse’s right: if they’re raising the subject like this, it’s incumbent upon us all to remember exactly what they did, rather than letting them snow us with revisionism.
Felix Salmon is a financial writer, editor, and podcaster. A former finance blogger for Reuters and Condé Nast Portfolio, his work can be found at publications including Slate and Wired, as well as his own Substack newsletter.