Goldman Sachs and Duelling Perspectives

There are different points of view around the culpability of Goldman Sachs in helping to create the financial crisis. On the one hand, Andrew Ross Sorkin discusses the accusation that Goldman Sachs had a "massive short against the housing market." Sorkin looked at other Goldman Sachs documents and concludes that there were errors, omissions and sloppiness in the Levin/Coburn report that mitigates the big short theory. He concludes that in the end everything about the short may depend on the definition of "massive."

On the other hand, Yves Smith of Naked Capitalism states what Sorkin may be doing; that is, hinting at Goldman's defense and leaking it to the public. She goes on to point out the weaknesses in Sorkin's arguments. See below:

Goldman Uses Wall Street's Favorite Reporter to Make Unpersuasive Defense Against Levin Report
By Yves Smith - Naked Capitalism

Last night, the Wall Street Journal reported that Goldman was going on the offensive against the Levin report:

Goldman Sachs Group Inc., trying to counter a Senate subcommittee report that is fueling investigations and suspicion of the firm, plans to accuse the subcommittee of drastically overstating Goldman’s bets against the housing market in 2007….

The subcommittee’s 639-page report in April denounced Goldman as an unusually strong example of wrongdoing by financial firms during the crisis. According to the report, Goldman systematically sought to profit from a “big short” against the housing market and betrayed clients by putting the firm’s own interests ahead of theirs.

Goldman initially said it disagreed “with many of the conclusions of the report,” though the company added that it takes “seriously the issues explored by the subcommittee.”

Tonight, Andrew Ross Sorkin of the New York Times offers what appears to be a preview of the Goldman defense. If this is the sort of thing Goldman plans to provide, it is not terribly convincing.

It’s telling that the first salvo is being leaked through Wall Street’s favorite reporter. Now it’s possible the firm was using Sorkin as a one-man focus group to test and refine their messaging and have him all prepped to go. Sorkin says he’s been in communication with Goldman officials “for the past several weeks”. But this may also indicate that the firm intends to make its case to the press and then let the press persuade the public.

I see that as a sign of serious weakness. The Levin committee provides a great deal of documentation to the public as well as a detailed summary of its findings. By contrast, Wall Street firms make an art form of cherry picking numbers and presenting them in isolation. And journalists don’t have enough knowledge of tradecraft to push back in a serious way.

If the firm is not willing to make data available in a way that people who have market knowledge can assess its claims, I’m going to have trouble taking a Goldman rebuttal all that seriously. Yes, Sorkin does point out some real errors the report made, for instance reporting two figures in the same sentence, one which was net revenues, the other net earnings, and labeling them both as net revenues (the Senate’s mistake has the effect of making Goldman’s conduct look worse).

But as the committee points out in response to the Goldman corrections, why didn’t Goldman make these months ago? The firm adopted an intransigent stance, dumping an overwhelming amount of documents in a deliberate “Fuck you”, assuming they’d never be able to navigate their way through them.

The WSJ story yesterday said Goldman “was considering” releasing material on its site; there’s no indication of that in the Sorkin piece. If they instead go the “spin reporters” route, it simply confirms the impression that Goldman does indeed have something to hide. Matt Taibbi provided his own colorful reading of the Levin report, and the rebuttal via Sorkin leaves most of his charges intact. And we still have the patently false Lloyd Blankfein “market marker” defense from the hearings. Sorry, Goldman in selling CDOs was a placement agent, and that is not at all the same as being a market maker. Blankfein lied and he and the firm cannot pretend otherwise.

And this is where Goldman’s misdirection pays off. Remember, Levin forwarded his entire report to various prosecutors, including the Department of Justice. Sorkin focuses on the statement that got Blankfein into the most hot water: “We didn’t have a massive short against the housing market” and concludes that Blankfein was not lying. But he cannot know that based on the information he presents in his article. It’s not sufficient to reach that conclusion. You’d need to see pretty extensive trading data to reach that conclusion, and reading between the lines, that was not provided to Sorkin. Goldman referred him to various P&L figures.

That tells you nothing. Anyone who has ever done any trading know that positions move in value over time. Your profit is the result of how well you entered and exited a position. The firm could well have had a large short position and closed it out too early. so the realized profits would not be an accurate reflection of the size of the wager. It would be particularly instructive to look at February and March 2008. Both e-mails and pre-bonus self evaluations by members of the mortgage group indicate the firm went short in time to catch the downdraft in February and early March, closed out the short, and then got long and caught the rebound. Looking at the size of the gross and net positions on this round trip would tell us who is closer to the truth on this one.

Having Sorkin stand up for Blankfein on the charge made most loudly against him creates the impression that the Goldman CEO was probably truthful on other topics, when as we indicated earlier, his market maker defense was dishonest.

Given the firm’s having first taken the stance that it would ignore the extensive Levin disclosures and never tried to correct the record at the time, its sudden adoption of a belligerent posture looks highly sus. If the report was really that wrong, why did the firm not issue a lengthy correction at the time?

If the firm does make detailed disclosures as it said it might, it could prove the Levin committee to be wrong. But chats with favored reporters who need to maintain access is no substitute for transparency.

Read the article here