Is Goldman Evil?

Some weeks ago, I read a mediocre rant about the alleged “evils” of Goldman Sachs. I rolled my eyes at yet another knee-jerk-populist, unproductive reaction to the recession. The next day at the gym, Chris Matthews had the author, Matt Taibbi, on, and began drooling all over him as some kind of investigative tour de force. The meme caught on. Not only has Taibbi been on TV nonstop, but friends who usually scrunch their noses in confusion at my business-journo world have been chatting me up constantly about the Goldman conspiracy and crediting Taibbi with discovering it. Allow me to correct the record.

According to Taibbi, Goldman Sachs deliberately inflates speculative bubbles by finding or manufacturing securities out of worthless assets and selling them to the public as secure; then they  get themselves out before it crashes; or, they rely on high-placed alumni to to save them. Moreover, they’ve done so in “every major market manipulation” of the last century. His case studies: The Great Depression, the DotCom Boom, the Housing Boom, the Commodities Boom (ie high gas prices), The Bailout, and (coming soon to a theater near you), Cap and Trade. This argument, which I’ve summarized in one paragraph, takes Taibbi  (get this!) 10,000 words. I’m going to explain why he’s a hack in 1/10 the space. Still a long post, for which I apologize.

Taibbi oversimplifies to the point of inaccuracy. He offers pithy definitions of basic financial terms that allow him to gloss over details and make tenuous claims that practices were unlawful, not just unsavory. An example: Taibbi says Goldman was successful as a firm because they used “laddering, which is just a fancy way of saying they manipulated the share price of new offerings.” Then he goes on to describe the standard, legal IPO practices at all firms, things that have been happening in broad daylight for decades. Many readers may see these practices as “manipulative,” but in finance, “manipulation,” has a very specific meaning that involves explicit violations of securities law. Taibbi is deliberately trying to blur the facts across that line. That’s intellectually dishonest, and unjournalistic.

Taibbi puts the blame for this “manipulation” all on Goldman, when all the other banks were engaged with similar if not identical behavior. Taibbi also fails to blame the regulators who let them get away with it, or who made the practices mis-labeled “manipulation” above legal. This makes it possible for him to throw around terms like “fraud” and assume readers WON’T know that these things don’t amount to securities fraud at all. As a hedge, Taibbi casually suggests that Goldman made up the laws anyway, because Goldmanites were running the regulatory agencies. Also, Taibbi’s history sucks. In an article that claims to tackle every major “manipulation” he skips from the Depression to the 1990s leaving out ACTUAL legal violations from the Den of Thieves to Enron. The selective amnesia is also engineered to support his theory—other banks, not Goldman, were the leading guilty parties in each of those crises.

This  hatchet job is getting traction, because it plays into people’s existing sentiments regarding banks these days. Instead of understanding that market manipulation is a very specific legal term referring to people who violate the system’s rules, Taibbi keeps using it to refer to Goldman because he thinks the system itself (ie capitalism) is inherently manipulative and evil. Some evidence: he refers to “profit for individuals” as “the least useful, most wasteful and insoluble substance on Earth.” That’s the message that most of his readers, or Chris Matthews’ viewers, took home—one commenter says “This is Class Warfare.” What’s wrong with class warfare? For one thing, banks and bankers do a lot of good when they play by the rules, and the rules involve many of the things—like the motive for profit—that Taibbi keeps painting as rule-breaking. Back during the Great Depression, to borrow a case study, it was JP Morgan that bailed out the American economy.

For another thing, the class warfare tends to dissuade people from actually learning about and understanding finance, which only increases their chances of being manipulated for real. Another example: a commenter on Taibbi’s story says as a constitutional right, the power “to create credit…must belong to each individual.” This is oxymoronic—credit, by definition, exists BETWEEN individuals, it’s based on loans one person owes another. No one can create or control their own credit by themselves; if you want to control your own money, you don’t use credit at all.

How could something so slipshod be so convincing to so many? Taibbi is a wordsmith who memorably labels Goldman “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

He uses his literary talent to obscure his factual elisions. To support his claim that Goldman controls everything, he reminds us that John Thain, CEO of Merrill during the crash, used to work at Goldman. Never mind that Thain wasn’t running Merrill during the bubble when all the ugly stuff happened; Taibbi distracts from that glitch by launching a richly colored rant about Thain’s luxurious office decorations. To support his claim that Goldman controls government, he refers to laws that benefitted “Goldman and 14 other companies.” Indeed, the convenient phrase “companies like Goldman” is something of a refrain throughout the piece.

The piece frustrates me not only because it is good writing without reporting, but because whatever grains of truth are in it (that investment banks have many practices and perverse incentives that are long-run bad for the macro-economy and that regulators have failed to address at multiple historical junctures) have been previously uncovered and explained, without expletives or descriptions of vampires, by much more responsible journalists.

Four pieces actually worth reading: Michael Lewis’s take on AIG (which addresses both Taibbi’s rage against private profit and the specific securitization policies involved in the last bubble), Simon Johnson on the influence Wall Street—not just Goldman—has in our society and government, Matthew Malone on why other banks WANT you to think Goldman is rigging the game, and New York Magazine on why government and we the people are as much as the banks for our current mess.