Is Goldman Sachs evil -- or just wickedly smart?
In "Tenacious G," New York Magazine writer Joe Hagan has come up with one of the most levelheaded looks at the much-maligned investment bank. You'll recall that Matt Taibbi's recent Rolling Stone piece "The Great Bubble Machine" called Goldman "a great vampire squid wrapped around the face of humanity." Not exactly subtle stuff.
Hagan's a bit more circumspect in his reporting on Goldman, but the evidence is still rather damning. Sitting down with John Rogers, Goldman's chief of staff, Hagan walks us through some of the claims about the bank's behavior during the financial crisis.
Take last year's AIG bailout, for example. Goldman critics - and rival investment banks - argue that the bank received much better deals in the government's rescue of AIG. Goldman was effectively paid 100 cents on the dollar for the credit default swaps it had arranged with AIG, while other banks got only a fraction of their money back, according to Hagan. Hagan quotes one former Lehman managing director as saying: "The consensus is that we were deliberately fucked."
More from Hagan:
"Of the $52 billion paid to AIG's counterparties, Goldman Sachs was the biggest recipient: $13 billion, the entire balance of its claim. The amount was surprising: Banks like Merrill Lynch that had bought credit-default swaps from failed insurers other than AIG were paid 13 cents on the dollar in deals moderated by New York's insurance regulator. Eric Dinallo, the former New York State insurance commissioner, who was at the AIG meetings, characterizes the decision this way: AIG's counterparties, Goldman being the most prominent, 'got to collect on an insurance policy without having the loss.'"
Goldman's position, Hagan reports, was that they were forced to participate in the enormous government rescue of AIG. Thanks to expert hedging, they argue, they had no material exposure to AIG -- and may have even profited from its collapse.
At True Slant, Matt Taibbi took a shot at this assertion. For one, he writes, Goldman would not have been able to collect on its hedged bets if other banks failed:
"Goldman has been making that argument ever since the AIG bailout, but it has never come out and identified that magical counterparty or counterparties who'd have been able to come up with $20 billion after a system-wide financial collapse."
As Hagan put it, "Not a single Wall Street executive I spoke with, including several Goldman Sachs alumni, believe those hedges would have survived an overall collapse of the financial system."
Hagan also notes that after the AIG bailout, Goldman took advantage of a FDIC-backed bond program, which allowed them to raise a huge amount of cheap capital. Hagan points out that the FDIC program was intended to spur consumer lending. But, unlike other large banks, Goldman had no "street-level" banking operations. Instead, the Goldman used the FDIC's cash to execute well-timed trades and record record profits.
Hagan's final conclusion is that none of Goldman's sky-high profits would possible have been "without government intervention--without the AIG bailout, the TARP money, the FDIC bonds, the fact that without Lehman Brothers it had one less competitor in the field."
Read the entire story at New York Magazine.