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Goldman Sachs Vanity Fair Profile: Bank Can 'Practically Mint Money' And 'Never Loses'

03/18/2010 05:12 am ET | Updated May 25, 2011

In what constitutes a compendium of anti-Goldman Sachs charges, Vanity Fair's Bethany McLean has delivered some of the best reporting on the bank since the financial crisis.

McLean, a former Goldman trader, investigates the bank's evolution from a plucky investment bank known for its unique and powerful culture into what some critics have likened a a giant hedge fund.

The entire battery of charges against Goldman is, of course, lengthy. There is the assertion that the bank received a de facto bailout through its investments in AIG, which McLean says clearly helped Goldman and the entire financial system. Goldman, for its part, has always asserted that it would not have gone under had AIG collapsed. And McLean also addressed the benefits Goldman Sachs continues to receive by virtue of its transition to a bank-holding company, and its $21.6 billion in funds still guaranteed by the FDIC.

But McLean's piece also uncovers some of the overlooked claims against Goldman Sachs. McLean writes that with its competitors crippled -- especially Merrill Lynch and Lehman Brothers -- Goldman was one of the only firms able to profitably effectuate the sale of a huge amount of Wall Street assets. As the financial system imploded last fall, Goldman emerged as something of a centralized trading nexus for the industry's less-favored securities.

She writes that the bank was enabled by "spreads -- the difference between the price at which you sell and buy a variety of securities -- were wider than they had been in years, meaning that Goldman could practically mint money."

McLean spoke to two financial insiders who had a far more colorful way of putting it:

"People worry that they're in my business, and they're better than I am," says one money manager. Asks another hedge-fund trader, "Are they the Yankees? No, the Yankees actually lose! Goldman never loses. And people say they are a hedge fund! This ain't no hedge fund. Hedge funds lose money." When I ask him if he does business with Goldman, however, he replies, "Of course we do business with them. We have to. It's like the Mob who picks up the garbage. You pay their fees, because you need your garbage picked up."

Goldman's transition from a traditional investment bank, McLean writes, into a firm that earns the vast majority of its profits through trading may have also changed the way it treats its clients. Actually, that's putting it nicely. A recent series of articles by McLatchy accuses the bank of divesting its own positions from the mortgage market, while selling $40 billion in shoddy mortgage securities to its own customers.

In short, Goldman may have sold a bill of goods to its clients. McLatchy spoke to one banking expert who argues that this could constitute a criminal act:

"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

McLean's sources point to the trauma that securities sold by Goldman have inflicted on the market: "Goldman's management team was almost flawless in its execution. But how many people needed government help because of the things Goldman sold them?"

Despite all this, Goldman COO Gary Cohn argues that Goldman's unloading of these investments was "a hedge," a claim that draws the ire of Felix Salmon:

"..."hedge" can just as easily be seen as a way of structuring a set of opaque and complex derivatives trades so that Goldman ended up making money and its counterparties ended up losing. That's good for Goldman; it's not good for America. And indeed if any of Goldman's trades fall into the category that Blankfein has labeled "clearly wrong", these would surely be near the top of the list."

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