The $4 Billion Pen

Matt Taibbi’s “The People vs. Goldman Sachs” which appeared in Rolling Stone this week is a good and damning piece.  In his latest attack on Goldman (“the Vampire Squid”), Taibbi likens the scathing 650 page bipartisan Levin-Coburn report on the Financial Crisis to Upton Sinclair’s Jungle and calls for the Justice Department to bring criminal charges against Goldman, knocking 6% – more than $4 billion – off the firm’s market value.  Not a bad day’s work.

There are many notable revelations in the piece, but I was struck by the one “correction” Goldman lawyers made to the mortgage trader’s testimony. My read was that was the only case where they thought perjury could be proved. Goldman and the culture they represent are very good at “not lying” while they smugly deceive. Having said that, I’d love to see their daily VAR (“value at risk”) report through that period.  It should actually be quite easy to prove if Blankfein’s testimony under oath to Congress about not carrying a “big short” position was untruthful, or merely misleading.

What I find so troubling is that “we” can’t find the courage to say “no more”.

By “we”, I’m including the rest of Wall Street, the majority of Goldman partners and employees who are good, honorable, hard working professionals, retired Goldman partners whose “personal brand” and very sense of self has been so badly tarnished, Goldman “customers” and counterparties including some very “big boys” whose business suffers from bad market behavior and who have the ability to discipline, and of course society at large through our proxy the government who is supposed to serve the interests of “we the people”.  If ever there were defacto evidence that one firm wields too much power, the practical silence in this case is it.

One point of clarification on the $19 billion that went to Goldman via AIG.  Goldman consistently denies that it had significant exposure to AIG, because it had purchased credit insurance (who better to know the precarious position of AIG than Goldman who loaded it up with toxic credit default swaps – but that’s apparently not “insider trading”).  The key point is that if we assume Goldman is telling the truth, that it had hedged its AIG exposure with counterparties that were solvent, then by getting 100 cents on the dollar from AIG thanks to Uncle Sam, Goldman still reaped a windfall by collecting from AIG because that enabled them to sell off all the no longer needed insurance it had on AIG which was worth perhaps up to half of the $19 billion given AIG’s distress.  In other words, by not suffering a loss against which it had insurance, it was free to sell off the fully marketable insurance which was at that time deeply in the money!  Assuming Goldman tucked some meaningful fraction of this windfall away into its reserves, it is little wonder that its trading results were so outstanding the following year, out of which Blankfein and the rest of course paid themselves handsomely.

Why the mainstream financial press has not worked this out is a mystery to say the least.  So I guess we depend on Rolling Stone.  Go figure.