Goldman Sachs: A Bank Without Pity

Below is an excerpt from an article written in April 2011 which reprises some of the antics of Goldman Sachs prior to the financial crisis in 2008.  As you can tell, Goldman is all about profit and certainly deserving of being described as a culprit in spite of the author's contention otherwise.  It's important to put a laser beam on Goldman's actions rather than looking past them to other institutions that played their part in bringing the financial system down.

The crisis was not about being unable to control yourself or about just going wild.

Goldman has not curbed excessive pay which probably also has implications for how much curbing of risk Goldman has undertaken.   Goldman exemplifies all that is wrong with global banking today.

Why Goldman Is Not a Simple Culprit in the Financial Crisis Report
By Steven M. Davidoff - DealBook

The Senate Permanent Investigation Subcommittee’s report on the financial crisis is an important document. It is an exhaustive look at certain main aspects of the financial crisis, a report which heavily criticizes Washington Mutual, the now-defunct Office of Thrift Supervision, the credit ratings agencies, Goldman Sachs and Deutsche Bank.

The focus in the media, as well as in Senator Carl Levin’s news conference on the report, has been the criticism shed on Goldman Sachs for betting against clients who bought collateralized debt obligations from it.

But the criticism of Goldman is overwrought. And the focus on Goldman obscures the other important points the report makes about the entire financial industry.

To understand why, you have to read up to page 392 of the report. It is here that you are rewarded with this gem:

Morgan Stanley’s representative reported to a colleague that when Goldman rejected the firm’s request to sell the poorly performing Hudson assets, “I broke my phone.” He also sent an e-mail to the head of Goldman’s C.D.O. desk saying: “One day I hope I get the real reason why you are doing this to me.”

The paragraph concerns the $2 billion synthetic C.D.O. Hudson Mezzanine-1. Goldman had created and began marketing the Hudson C.D.O. in October 2006. The firm took the entire $2 billion short position on this C.D.O., meaning that any losses on the residential mortgage-backed securities underlying the C.D.O. would mean a gain for Goldman.

Set against Goldman Sachs, Morgan Stanley took almost a $1 billion position on the long side, betting that housing prices would remain stable or go up.

The paragraph above details an exchange that occurred in 2008. By that time the Hudson C.D.O. had been downgraded and Morgan Stanley was trying to salvage its billion dollar bet.

Goldman, being Goldman, was serving multiple roles in the C.D.O. Goldman had a small $6 million long position and was also collateral agent. The Morgan Stanley banker here was begging Goldman to use its position as collateral agent to sell some of Hudson’s assets in order to stem Morgan’s losses, a request Goldman refused.

You can hear the pleading of the poor Morgan banker in this e-mail, and you almost feel sorry for him.

This sad tale exposes the real point of this report. Wall Street went wild in the years leading up to the financial crisis and in the aftermath, the penalties have been few. Morgan Stanley lost about $960 million on Hudson, a bet put on by Morgan Stanley’s proprietary trading desk.

As Michael Lewis detailed in “The Big Short,” the desk headed by Howard Hubler ended up losing roughly $9 billion. Morgan Stanley itself was almost brought down in the financial crisis in part because of these losses. Mr. Hubler, however, left Morgan Stanley with tens of millions of dollars in pay. He is yet another financial crisis executive who was rewarded for bad decisions.
The Permanent subcommittee uses Goldman’s negative bets on the Hudson C.D.O. as well as three others to complain again that Goldman was inherently conflicted, betting against its clients.
Goldman claims that it was not a fiduciary or investment adviser to these clients and instead a market maker, simply making a market where sophisticated clients could fend for themselves.

The fact that the most sophisticated of investors and brokers, Morgan Stanley, was on the other side supports Goldman’s view.

You can debate this point, and either way it appears that Goldman was too greedy and risked its reputation in making these trades.

But the Morgan Stanley episode shows that perhaps the Goldman tale is more complex while the story of the financial crisis is simpler.

Goldman was merely fulfilling what was expected by the market while happily profiting at the expense of the entire financial system. But Morgan Stanley was trying to do the same thing — and simply made a very, very bad trade. It is hard to think that Morgan Stanley here was “duped” by Goldman or could not have asked or demanded that Goldman disclose its positions if it wanted to.
The general conclusion, though, is that these banks could not control themselves.

This is not to say that bashing Goldman has not been useful. As William Cohan has written, this type of rhetoric and Goldman’s reputational missteps with the Abacus C.D.O. are likely what got us Dodd-Frank and financial reform.

And indeed this report is a validation that Dodd-Frank may have been worth the effort. This bipartisan Senate report contains 19 recommendations, many of them that are based on implementation of Dodd-Frank’s missives.

Read the whole article here