Page 2 of 3 Goldman good but not that bad
By Julian Delasantellis
Taibbi then fast forwards to the late 1990s for Goldman's next wickedness. Hold
on to your hat - it's dot-com madness time!
The basic scam in the
Internet Age is pretty easy even for the financially illiterate to grasp.
Companies that weren't much more than pot-fueled ideas scrawled on napkins by
up-too-Iate bong smokers were taken public via IPOs [initial public offerings -
that is, selling shares to the public], hyped in the media and sold to the
public for megamillions. It was as if banks like Goldman were wrapping ribbons
around watermelons, tossing them out 50-story windows and opening the phones
for bids. In this, game you were a winner only if you took your money out
before the melon hit the pavement.
It is certainly true that
the dot-com years covered Goldman Sachs
in particular, and Wall Street in general, in substances very difficult to be
classified as glory. However, to meet the level of pure venality which Taibbi
charges the firm, of first devising the schemes and then being their prime
perpetrator, is not true in either case.
In the dot-com age, it was Merrill Lynch and their talkative Internet stock
analyst Henry Blodgett who deserve that prize. He was the one who, while the
brokerage was pitching to the nation that it was "bullish on America" and its
tech stocks, was telling the firm's principals a very different tale. While the
company was recommending now long-gone Internet stocks such as Excite@Home,
Infoseek and Lifeminders, Blodgett sang a different song, calling them,
respectively, "a piece of crap", "a dog" and a "p.o.s." and, no, that does not
mean a piece of sassafras.
Count three of Taibbi's Goldman Sachs indictment is, in reality, just the first
half of count five, so I will deal with those in a minute. Count four has all
those Goldman New York sophisticates getting down and dirty with misdeeds in
the oil patch.
Remember $4 a gallon gasoline, and $147 per barrel crude oil? Who do you think
caused such an outrage? Chinese demand - not even close; the word China is
nowhere in Taibbi's 13-page six-point rant. It was, as usual, Goldman Sachs.
By
beginning of 2008, the financial world was in turmoil. Wall Street had spent
the past two-and-a-half decades producing one scandal after another, which
didn't leave much to sell that wasn't tainted. The terms junk bond, lPO,
subprime mortgage and other once-hot financial fare were now firmly associated
in the public's mind with scams; the terms credit swaps and CDO's were about to
join them. The credit markets were in crisis, and the mantra that had sustained
the fantasy economy throughout the Bush years - the notion that housing prices
never go down - was now a fully exploded myth, leaving the Street clamoring for
a new bullsh** paradigm to sling,
Where to go? With the public reluctant to put money in anything that felt like
a paper investment, the Street quietly moved the casino to the
physical-commodities market - stuff you could touch: corn, coffee, cocoa, wheat
and, above all, energy commodities, especially oil. In conjunction with a
decline in the dollar, the credit crunch and the housing crash caused a "flight
to commodities". Oil futures in particular skyrocketed, as the price of a
single barrel went from around $60 in the middle of 2007 to a high of $147 in
the summer of 2008.
If Taibbi is here saying that the rise in
oil and other commodities came as sort of a flight to quality from crooked
world financial and equity markets, he is demonstrably false. Oil and other
commodities bottomed out with world equities in the late 2001; after that, they
rocketed up together - for the exact same reason - the excess liquidity created
and directed by what came to be known as the shadow banking system. The best
proof of this was the 80% decline in the price of oil that followed upon the
disappearance of the shadow banking system last autumn.
The philosophical construct called Occam's Razor postulates that the simplest
explanations for things are usually the best, but instead of applying Occam's
Razor to oil, Taibbi uses it to cut his own wrists. Taibbi tells us that
Goldman, in effect, has used the past 15 years to become the world's Pied Piper
of Petroleum.
So what caused the huge spike in oil prices? Take a wild
guess. Obviously Goldman had help - there were other players in the
physical-commodities market - but the root cause had almost everything to do
with the behavior of a few powerful actors destined to turn the once-solid
market into a speculative casino. Goldman did it by persuading pension funds
and other large institutional investors to invest in oil futures - agreeing to
buy oil at a certain price on a fixed date. The push transformed oil from a
physical commodity, rigidly subject to supply and demand, into something to bet
on, like a stock. Between 2003 and 2008, the amount of speculative money in
commodities grew from $13 billion to $317 billion, an increase of 2,300%. By
2008, a barrel of oil was traded 27 times, on average, before it was actually
delivered and consumed.
Taibbi seems to be convinced that,
before the early 1990s or so, the world's commodity futures markets were all
just sort of happy medieval town squares where commodity sellers, like wheat
producers, met to do business with those who needed their product, like bakers.
Then the speculators violate the hallowed virgin soil, and it's been a tale of
woe and misery ever since.
Central to the effort to turn commodities into financial system playthings was
Goldman's 1981 purchase of the J Aron commodity brokerage house, essentially
putting Goldman right down there in the pits. In 1991, Aron petitioned the US
Commodity Futures Trading Commission for the ability to hold larger commodity
contract positions; that, according to Taibbi, set the match alongside the
powder keg that blew apart the commodity markets last year.
That 1991
letter from Goldman more or less directly led to the oil bubble in 2008, when
the number of speculators in the market - driven there by fear of the falling
dollar and the housing crash.
Of course, in Taibbi's story of a
long, straight upward climb for oil and other commodities since the arrival of
Goldman there is no room to talk about the crashes in oil prices in 1986, 1988,
and 2001, which saw oil drop to $6, $8, and $17 per barrel respectively.
What Taibbi really seems to be referencing here is the "commodities as asset
class" investment movement that in the 1980s sprang up in the academic journals
devoted to investing along the lines of the newly established discipline of
portfolio management. This was an attempt to put the newly developed "efficient
markets hypothesis" of Eugene Fama into practical application in the markets.
I remember reading many of these, and I do not in any way believe that the
author's inspiration in any of them was having Goldman zap the idea into their
brains from long distance. A key part of the Goldman plan, according to Taibbi,
was the establishment of the benchmark Goldman Sachs Commodity Index, but if it
was so easy to get rich just putting your name on a commodity index Jimmy
Rogers would be a lot more wealthy than he is already.
Count six in the Goldman indictment is evocative of the "pre-cogs" in Steven
Spielberg's 2002 science fiction drama Minority Report in that Goldman
is being charged with manipulating a market that does not exist - the market in
"carbon credits" that will be established once cap and trade is passed by the
United States Congress and implemented. Now that is what I call an evildoer
with lots of attitude - one that goes out of its way to scheme against a target
that won't exist for years.
But in counts three and five, Goldman may very well have some more explaining
to do. These are the ones that deal with Goldman's actions during the current
financial crisis.
All during the early days of the crisis in 2007, many commentators noted how
other Wall Street firms such as Bear Stearns, Lehman Brothers, and Fannie Mae
and Freddie Mac, had stock prices that made the companies look like they were
shoveling coal at their specialist stations all day, while Goldman invariably
finished the day clean pressed and sparkling white. Goldman's stock finished
2007 basically unchanged from 2006, while most of the rest of the financial
sector was by then well underway with the catastrophic declines that would lead
much of them to extinction by the middle of 2008.
A story began to be told in the markets, a story that raised Goldman's
reputation from being a mere legend to one of the gods on Olympus. Goldman had
shorted the subprime mortgage market.
With the gallows that was then rolling across Orange County California
dispatching subprime financiers such as New Century Financial, Countrywide and
Ameriquest with each stop, the news that Goldman was actually making money with
subprime was awe-inspiring. But just how were they doing it?
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