Tuesday, August 4, 2009

John Tamny Zaps Matt Taibbi's Rolling Stone Piece On Goldman Sachs With Kryptonite

ALSO: SILENCE IS GOLDMAN
I'D BEEN WAITING FOR John to weigh in on this and when it arrived this morning in an email, it did not disappoint. Below is the full text of Tamny's complete undressing of Taibbi's Rolling Stone putting-it-all-in-perspective piece on Goldman Sachs. I agree with most everything he says, though I need more time to mull it over.

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THE ROLLING STONE'S Matt Taibbi has caused quite a stir with his hatchet job on Goldman Sachs, with some even saying he knocked $800 million off of its market cap. That's hard to imagine considering he contradicted his basic narrative halfway through the piece, not to mention that no company is as powerful as he suggests, and no clients dumb as he'd like to think. Written for RealClearMarkets.

At Goldman, Matt Taibbi Fires and Misses
By John Tamny

In a piece written to shed light on the allegedly evil doings of Goldman Sachs, Rolling Stone contributing editor Matt Taibbi unwittingly let readers in on why the majority of his strident protests against Wall Street's most prominent bank were near meaningless. For those who caught on, they likely quit reading halfway through. Sadly for this somewhat masochistic writer, pure curiosity took him to the bitter end.

But for those not privy to the article in question, about credit-default swaps Taibbi observed that they "were essentially a racetrack bet between AIG and Goldman: Goldman is betting the ex-cons will default, AIG is betting they won't." For a piece which included no less than 29 mentions of the word "bubble", and almost as many variations of the word "speculation", could Taibbi have really been so dim as to acknowledge that "speculation" is always and everywhere a two-way street?

The answer, apparently, is yes, which means that in an article the pretense of which was to say that Goldman Sachs is "The Great American Bubble Machine", Taibbi wrecked the very foundation of his argument with this simple acknowledgement. In order for anyone to speculate on anything, there has to be someone else who thinks they're dead wrong.
So while the word "bubble" has become the default word of choice for writers of all stripes seeking to explain rising prices, the basic truth is that the alleged creators of "bubbles" are by definition entering markets that others must be exiting. Importantly, Taibbi laid out quite a few more misreads, and to help readers avoid a half hour wasted, they'll be analyzed in short form right here.

To begin, Taibbi suggests that Goldman Sachs "positions itself in the middle of a speculative bubble" and from its place in the alleged middle it is supposedly able to "hoover up vast sums from the middle and lower floors of society" all the while "lending us back our own money at interest". Pretty scary stuff, but there's one minor problem. Not just anyone can become a Goldman client as evidenced by minimum individual account sizes there of $2 to $5 million. Last this writer checked, either amount would put any individual lucky or unlucky enough to deal with Goldman at society's top floor. Simply put, Goldman doesn't deal with the very people Taibbi thinks it does.

In order to make his broader case about Goldman having had a role in every major market meltdown, Taibbi first takes us back to the early part of the 20th century. It was then that Goldman had a financial interest in vehicles called "investment trusts" that supposedly were a "tool used to bilk investors", and which had their heyday during the Roaring '20s. Taibbi argues that these leveraged trusts were behind the 1929 stock-market crash.

Taibbi's source on the above? No less than the late John Kenneth Galbraith; Galbraith the economist who once observed that the Soviet system of communism was better than U.S. capitalism, and who also wrote glowingly in China Passage about the supposed accomplishments of Maoism. You know, the torture, the killings, and the starvation. It was also Galbraith who wailed in The Concept of Countervailing Power about GM's complete and unalterable control of the auto market; the very market that left it for dead last year. In short, to reference Galbraith on most anything economic is the equivalent of citing Detroit Lions owner William Clay Ford on how to win football games.

Apparently Goldman Sachs didn't play a role in the various recessions or market corrections after the 1930s, but according to Taibbi, it was the main force behind relaxed underwriting guidelines that fostered the Internet "bubble" of the '90s. Taibbi is of the view that Goldman foisted a lot of bad companies on investors then, and quotes an unnamed former bigwig at Goldman Sachs to tar Robert Rubin who, from the insider's point of view, "sure as hell knew what the underwriting standards were." Supposedly it was Rubin who turned Goldman's "long-term greedy" culture into one all about short-term profits, customers be damned.
The problem there is that Morgan Stanley floated the first IPO (Netscape) of the Internet era in 1995, and it should be noted that Rubin left Goldman in 1992 to work in the Clinton administration. Though Rubin wasn't around for Internet boom (he was when GS participated in the Dell and Microsoft IPOs), it seemingly didn't fit Taibbi's narrative to mention this somewhat relevant fact.

As Taibbi sees it, Wall Street ignored the long-held notion that three to five years of profits were necessary before a company went public, and threw it "in the trash"; Goldman the major miscreant given its massive Internet IPO market share. In truth, Taibbi gets it backwards. It is in fact institutional investors that set the tone for the IPO market, and as anyone who was on Wall Street back in the '90s knows, large investors had very little interest in the prosaically profitable MetLife's of the world, but greatly desired the shares of firms like Amazon.com. If Goldman is to be faulted here, it is for giving its customers what they wanted.

On the subject of "spinning" whereby Goldman offered up shares in soon-to-be-public firms to its rich clients ("rich" and "clients" at Goldman being a major redundancy), Taibbi would have us believe that billionaires like former eBay CEO Meg Whitman were somehow swayed by IPO profits a small fraction of their net worth such that they rewarded the firm with investment-banking business. On that, Taibbi can't have it both ways. If Goldman was the leading technology banking firm as his article suggests, wouldn't individuals like Whitman give the firm its banking business regardless of IPO windfalls?

Apparently they would have because according to Taibbi, Goldman's bankers used a technique called "laddering" to "manipulate the share price of new offerings." By laddering, Goldman's capital markets group allotted IPO shares to institutional investors who promised to buy more once trading in the new firm began. Why this would bother a company CEO Taibbi never quite explained, but to address his assertion that the shares of newly public companies were simply manipulated, one might ask why the party stopped? If the most sophisticated investors in the world were really as gullible as Taibbi would like us to believe (remember, his narrative is one suggesting Goldman tricked EVERYONE), it seems the "great vampire squid" would have saved itself from its staff-pruning decline which occurred with great speed in 2001 thanks to the disappearance of IPO profits.

Taibbi might reply that Goldman had an answer to profit declines in the form of mortgage securities. To believe him, its talented cast of salespeople gulled a new set of "unsuspecting insurance companies and pension funds" into buying collections of mortgages written "on the backs of napkins to cocktail waitresses and ex-cons carrying five bucks and a Snickers bar."
The problem there of course is that the kind of people Taibbi describes never darken the doors of a firm that only deals with the superrich. While it would be impossible to argue with the broad assertion that mortgage lenders acted horrifically when it came to lending to the worst kinds of credit risks, Goldman's biggest mistake there likely involved liquefying a market that enabled the polar opposites of its client base to get into houses they couldn't afford.

Taibbi is troubled that Goldman hedged the risk it faced with the kind of dodgy securities described above, but what he doesn't understand is that absent those strict risk controls, Goldman wouldn't exist at all. Contrary to Taibbi's suggestion that Goldman Sachs is some otherworldly entity, the reality is that without capital there are no businesses of any kind, and Goldman would have no capital unless it protected its downside in all manner of transactions.
And with the mortgage market no longer a profitable one for reasons alluded to earlier, Taibbi claims that Goldman's brilliant collection of con artists tricked "pension funds and other large institutional investors" into buying oil futures. Taibbi never explained how Goldman's salespeople could regularly steer its clients into bad investments without running out of clients, but since his account read like fiction to begin with, this likely did not trouble him.

In his defense on the subject of commodities and their run-up, it should be said that he did in fact insert one kernel of truth into an otherwise laugh-inducing account of what transpired. Twice he correctly noted the falling dollar's role in their rise, but then remarkably didn't mention the Bush Treasury's (former GS head Henry Paulson having served as George W. Bush's third Treasury secretary) weak-dollar policies that led to gold's (other commodities following gold upwards) 250 percent spike since 2001.

Instead he made the laughable suggestion that until Goldman's commodity arm (J.Aron) forced a liberalization of the commodities markets in 1991, "peace and harmony reigned" for "more than 50 years." Oh, I see, the commodities markets didn't go haywire in the '70s after Richard Nixon took us off the gold standard and the dollar collapsed. Apparently a 300 percent rise in the price oil, a 240 percent spike in the price of a bushel of wheat, and annualized meat price increases of 75 percent from '72-'73 apparently were "harmonious."

The purely symbolic Arab oil "embargo" is to this day fingered as the cause of oil's spike back in the early '70s, but since non-oil commodities had similar run-ups, it's more truthful to say that the dollar severely weakened post Bretton Woods, which meant commodities became expensive, and very volatile. Taibbi missed the disharmony that's been the rule in the commodities markets by twenty years.

Rather than correctly stick to the dollar story, Taibbi shockingly observed that "'long only' bettors" drove up the price of oil futures (no mention of oil futures sellers who sold so they could go long), and that while "this kind of behavior is good for a stock market, it's terrible for commodities, because it continually pushes prices upward (my emphasis)." Taibbi might win a Nobel for this thoughtful observation, because it seems we've found a cure for bear markets of any kind: just keep buying. As for the oil "speculators" who saw the price drop from $145 to $33, it's assumed they simply missed the memo telling them that if they'd just keep buying....

Taibbi somewhat concluded that after the run-up in commodities, investors, including Goldman Sachs simply ran out of "bubbles" to inflate. If only life were so easy. In truth, the falling dollar which he correctly cited fostered all manner of Austrian mal-investment, and the powerful investment banks of the past were on their backs for having deployed capital so poorly.
It is there that there's major agreement, although probably for different reasons. Taibbi's account shed a bad light on the bailouts, and for that he should be commended. But far from a Goldman Sachs conspiracy, it would be better to cite Randolph Bourne's observation that "war is the health of the state."

In this case, economic crises are the state's oxygen, and whether it was Paulson at the helm of Treasury or some other former investment bank head, governments always look to expand their economic reach in times of distress. Thanks to the bailouts that should never have been, capitalism received a black eye when in truth nothing about the past year was capitalistic.
Matt Taibbi would have done his readers a good turn had he explained why taxpayer bailouts of that which the markets have left for dead, retard rather than enhance economic growth. Instead, he engaged in falsehoods and contradictions in his failure to prove that an historically successful company could be that way for regularly duping monumentally stupid clients. Capitalism, even the false kind we in the United States practice today, doesn't work that way.

John Tamny is editor of RealClearMarkets, a senior economic advisor for H.C. Wainwright Economics, and a senior economic advisor to Toreador Research and Trading

2 comments:

Ellen said...

Not surprising you'd side with the Goldman thieves because some conservative wrote this article.

Google Tamny, you'll get loads of info on how dumb and incompetent this guy is. You might check out his bogus theories entitled: "say yes to price fixing" and "The food shortage myth".

http://economicsofcontempt.blogspot.com/2008/04/hackonomics-john-tamnys-return.html

Juan said...

I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


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