Matt Taibbi on "Wall Street's Big Win"

The New Financial Crisis, Same as the Old One?

Don't have time to read thousands of pages of (purposefully) arcane legislation, to figure out whether the financial reform bill Congress passed this Summer really reforms how Wall Street does business? (I guarantee you that few if any members of Congress read the bill in its entirety, either).

Here are the Cliff's notes, courtesy of Matt Taibbi (now infamous for calling Goldman Sachs “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells of money") :

What happened to our economy over the past three years, and is still happening to it now, was not an accident or an oversight, but a sweeping crime wave unleashed by a financial industry gone completely over to the dark side. The bill Congress just passed doesn't go after the criminals where they live, or even make what they're doing a crime; all it does is put a baseball bat under the door and add an extra lock or two on the doors. It's a hack job, a C-minus effort. See you at the next financial crisis.

--Matt Taibbi, "Wall Street's Big Win"; The Rolling Stone (8/19/2010)

In damning (and depressing) detail, Taibbi lays bare how senior members of both parties gutted the so-called "Volcker Rule" and the "Lincoln Rule" -- the bill's two provisions aimed at shutting down proprietary trading and derivatives trading, respectively.

As Taibbi, Michael Lewis, Barry Ritholtz and numerous others have now chronicled in great detail, it was precisely those two activities that lay at the foundation of the financial melt-down that started in 2008 and is still plaguing our economy.

Here is Taibbi's sum-up:

Over a long year of feverish lobbying and brutally intense backroom negotiations, a group of D.C. insiders fought over a single question: Just how much of the truth about the financial crisis should we share with the public? . . . Do people need to know the real version, in all its majestic whorebotchery, or can we get away with some bullshit cover story? In passing Dodd-Frank, they went with the cover story.

--Matt Taibbi

Besides the sheer skulduggery of what transpired on Wall Street, what I find most dismaying is that the most vocal and impassioned critics -- still -- are people like Jon Stewart, Matt Taibbi, and Ritholtz.

In other words, entertainers, journalists, and bloggers far removed from the actual levers of power.

It's as though we're living through a financial Watergate, but this time the Woodward's and Bernstein's are being muscled aside.

Taibbi on Wall Street, Addicts & Con Men

Guess Who the Addict Is?

No, Matt Taibbi hasn't mellowed since his infamous Rolling Stone article last summer ("Inside the Great American Bubble Machine").

Here's an excerpt from the sequel:

Instead of liquidating and prosecuting the insolvent institutions that took us all down with them in a giant Ponzi scheme, we have showered them with money and guarantees and all sorts of other enabling gestures.

Instituting a bailout policy that stressed recapitalizing bad banks was like the addict coming back to the con man to get his lost money back.

--Matt Taibbi, "Wall Street's Bailout Hustle"; Rolling Stone

Elsewhere in the piece, Taibbi poses a question that I've also addressed on this blog ("Dealing with the Devil: Why be a Goldman Sachs Client?"):

Why big institutional investors like pension funds continually come to Wall Street to get raped is the million-dollar question that many experienced observers puzzle over.

I think my explanation is still the most plausible:

Presumably, Goldman Sachs' clients have decided that it is better to be on the inside of whatever scam(s) Goldman is running -- presumably benefiting from them -- than being on the outside, victimized like everyone else.

--Ross Kaplan, "Dealing with the Devil"; City Lakes Blog (9/25/2009)

Key word from the above: 'presumably.'

Even if you don't like Taibbi, read his piece for his primer on street scams and hustles.

Deal(ing) with the Devil

Why Be a Goldman Sachs Client?

I'd rather have the SOB in the tent and pissing out, then the other way around.

--Lyndon Baines Johnson

He may be a son of a bitch, but he's our son of a bitch.

--FDR

It's a question that's been gnawing at me since at least last December, when Bernie Madoff was arrested, and has only grown stronger as various and sundry accounts of Goldman Sachs' machinations have come to light.

Namely, if you suspect (or worse) that someone you have business dealings with is "ethically challenged," why hang around? Why not simply run for the exit, like a rational person would?

Background

You'd have to have been in a cave the last six months not to be at least dimly aware of the charges and recriminations hurled at Goldman Sachs.

Namely, that Goldman Sachs wields undue influence over U.S. financial and monetary policy, and benefits mightily from same; that it has inside information that it uses to game the markets; and that the firm, in Matt Taibbi's infamous words, is a "great vampire squid wrapped around the face of humanity."

If you were a Goldman Sachs client, you'd think that all that might at least give you pause.

Unless.

Unless you actually believed the allegations, in which case you might rationally decide that it was better to be on the inside of whatever scam(s) Goldman was running -- presumably benefiting from them -- than being on the outside, victimized like everyone else.

Doing Business with the Devil

Interestingly, a similar theory emerged around the time Bernie Madoff was arrested.

According to some news accounts, at least a few Madoff clients suspected that his returns were too consistent to be legitimate. In fact, they believed Madoff was actually engaged in "front-running," i.e., illegally trading ahead of his (brokerage firm) clients to snag guaranteed profits.

Whether true or a canard, it would explain why at least some putatively sophisticated (but ethically deficient) Madoff clients stuck with him.

At least until it all blew up.

Then, they discovered another lesson: sometimes, even people supposedly "inside the tent" end up getting pissed on, too.

Defending Sodom & Gomorrah

Goldman Sachs: 'Bad, But Not the Worst'

Based on the drivel I've read the last six weeks, I'm convinced that if Matt Taibbi had chosen to rail against, say, the mayor of Sodom & Gomorrah -- instead of Wall Street and its undisputed kingpin, Goldman Sachs -- the same pack of apologists would have jumped to the mayor's defense.

Who are these people? Seriously.

Consider the latest non-defense defense:

What about Taibbi's charge that Goldman engaged in "laddering," or promising shares of hot IPOs to insiders or "friends and family" who would buy more later? And "spinning," or giving company executives super-cheap shares in exchange for the promise that they would buy more?

Yes, Goldman may have been involved in something like that. It helps, however, to point out that the class-action lawsuit on laddering included 55 underwriters as defendants. Including Goldman, yes, but also Morgan Stanley, Credit Suisse, Deutsche Bank, Salomon Brothers, Robertson Stephens, and literally every bank on Wall Street. The lawsuit -- launched in 2001 --was just settled this year, and it was all of $586 million for all of the banks as well as 300 of the failed companies they took public. That was an amount those banks and companies earned before afternoon tea on tech stocks during the boom year. The whole point of the lawsuits, however, is that the banks and companies were in it together-at least 355 entities in all. To single out one bank of 355 as particularly rapacious is ridiculous. What were the other 354 doing, then?

--Heidi Moore, "Matt Taibbi is Just Plain Wrong"; The Big Money (8/6/09)

Where to start . . .

How about with, "Yes, Goldman may have been involved in something like that"??

There's really no need to continue.

Just because Goldman wasn't the ringleader, just because it didn't invent the egregious practices described, isn't really a defense. It's an indictment of the entire Wall Street culture -- one which, if you don't recall, made billions off the Internet bubble before it blew up in investors' faces and tanked the economy.

Sound familiar?

Which raises point #2: they got away with it.

Moore is certainly right about one thing: $586 million is a small amount to pay for the aforementioned misdeeds.

Hmm . . . huge profits, nominal civil fine imposed almost a decade later -- "Let's do it again!" And they did.

The only real difference I see is that the resulting conflagration grew so big that it consumed practically all of Wall Street.

Except for . . . you guessed it: Goldman Sachs.

Why? Because it effectively built itself a bomb shelter. Namely, it bet against the same toxic mortgage-backed securities that it sold its customers.

To Moore, this isn't the height of deceit, or fraud, or breach of fiduciary duty, it's . . . prudence.

In fact, we should be grateful that Goldman's bets against their own customers paid off so prodigiously because if they hadn't, U.S. taxpayers would have had to have given the firm an even bigger bailout.

Sadly, amazingly, infuratingly -- she's probably right.

So, there you have it: Goldman Sachs, looking out for the best interests of the U.S. taxpayer.

"Where the Crisis Came From"

After Almost a Year, The Fog Lifts

Maybe it's just me, but it certainly seems as though, almost one year after the financial system's September, '08 "heart attack," some clarity and consensus are emerging about exactly what happened, and why.

If you've been on a desert island, read Robert Wilmer's excellent "Where the Crisis Came From" (Washington Post; 7/27/09). Consider this wonderful synopsis:

Wall Street created, originated and sold an alphabet soup of derivative securities, and it was such synthetic instruments -- not traditional mortgage loans, small-business loans or other standard lending originated by banks -- that unleashed a flood of credit, created a vast excess of housing, weakened the capital structure of the banking industry and undermined popular confidence in banks.

Like a slalom skier expertly hitting gate after gate, Wilmer gets every key fact about the financial crisis right -- until the end.

After detailing all the ways securitized debt and its underwriters have devoured the financial system --and co-opted regulators -- the last 20 years, Wilmer essentially appeals to Wall Street's sense of decency to correct things:

Corporate leaders have an obligation to set the right tone -- a moral tone -- lest public confidence in our private enterprise system erode.

Unnh-unh. Great analysis, wrong prescription.

People who have amassed the kind of power and wealth that Wall Street -- and specifically, Goldman Sachs -- has don't typically relinquish it voluntarily.

There's a saying, "power can't be given, it must be taken."

To that, I'd propose a corollary: ceded power isn't voluntarily returned, it must be taken back."

P.S.: it's not nearly as sensational, but Joe Hagan's cover story in this week's New York magazine, "Is Goldman Sachs Evil?," covers much the same ground -- and draws similar conclusions -- that Matt Taibbi does in his now infamous Rolling Stone piece.

"The Joy of Sachs"*

And Then There Were Two

Goldman and Morgan were assisted in a rather violent industry consolidation. They remain, more than ever, officially “too big to fail” (TBTF), so they know they can always request tax funds directly from the Treasury Department and elevate risks above competitors. With their enormous profits they can buy out any remaining politicians and expand their direct appropriation of taxes, pensions, and anything else they might want. They really should be congratulated. It isn’t easy toppling a large nation with barely a shot fired.

--post, Floyd Norris blog , "A Great Time to be a Banker"; (NY Times; 7/16/09)

No, the author of this post isn't Matt Taibbi (the "poster" is someone named Nelson Alexander).

And, yes, his analysis of what has transpired the last 18 months or so seems startlingly accurate (and depressing, and enraging).

Or, maybe it's just that I agree with it.

Here's my post on Mr. Norris' blog in response (yes, I occasionally contribute to other blogs):

Once upon a time, corporate charters were granted stingily, directly by the sovereign, on the condition that the recipient serve the interests of the commonweal. Can anyone argue that that’s what Goldman Sachs and JP Morgan Chase are doing today? Or have done the last 2 years — or twenty?

Forget the inevitable class actions suits to come, kicked off by CALPERS’ against the credit rating agencies. The judgments will be years in the coming, then appealed even longer (think, Exxon Vadez). Maybe it’s time to go for their jugular; they sure know how to go after ours!

--"A Great Time to Be a Banker", Floyd Norris blog (see, comment #28)

Want a more succinct take on all this? Try *Paul Krugman:

Goldman is very good at what it does. Unfortunately, what it does is bad for America.

--Paul Krugman, "The Joy of Sachs"; The NY Times (7/17/09)

Matt Taibbi v. Goldman Sachs, cont.

Rebutting Goldman Sachs' Rebuttal

If you're tired of the Goldman Sachs/Matt Taibbi-related string of posts on this blog ("Great 'Legs': Taibbi on Goldman Sachs"; "Goldman Sachs, Culprit", "Goldman Sachs' Nine-Plus Lives") . . . you'll want to skip this.

However, if you're not, here is Taibbi's reaction to the highly orchestrated, very sophisticated PR effort mounted to deflect the criticisms he made of Goldman Sachs in a now infamous Rolling Stone piece:

Even if it is true that "everyone else was doing it": so what? Who cares? To me this response is highly telling. We published a piece accusing Goldman Sachs of systematically ripping off pensioners and other retail investors by sticking them with rafts of toxic mortgages it knew were losers, of looting taxpayer reserves to cover its bad bets made with AIG, of manipulating gas prices to massive detrimental effect, of helping to explode an internet bubble that caused over $5 trillion in wealth to disappear, and numerous other crimes -- and the response isn't "You're wrong," or "We didn't do that shit, not us," but "Well, Morgan did the same stuff," and "Why aren't you writing about Morgan?" . . . .

The important thing is to pay attention to what they don't say. And what they didn't say about this piece is that it was wrong. They didn't deny any of it. They said others were just as bad, they said I was a bad guy, they said it was a conspiracy theory. But they didn't say it was mistaken, and that's the only thing that matters.

--Matt Taibbi, On "The Everyone Was Doing It" Excuse

If my stance on this wasn't already clear: Taibbi's right, Goldman Sachs is (very, very) wrong.

Great Legs: Taibbi on Goldman Sachs

Taibbi's Article: Great 'Legs'

If online articles were ranked the same way as newly-released (music) singles, Matt Taibbi's scathing attack on Goldman Sachs in the current issue of Rolling Stone (yup, Rolling Stone) would be number one -- with a bullet.

If it were a new movie, you'd say Taibbi's article has 'legs.'

If you haven't read it, Taibbi lays bare how the company has done something even worse than break the rules: it has tailored them -- rather skillfully -- to suit its (financial) interests.

In the two weeks since the article appeared, it has precipitated literally thousands of blog posts commenting on it (here's mine: "Goldman Sachs, Culprit").

The comments seem to split into two categories: the "retail" posts, from little guys like me, who are lavishing "atta-boy's" on Taibbi, and want him to run for something; and the "wholesale" posts from financial columnists, the so-called Main Stream media, and Goldman Sachs itself.

By sheer quantity, I'd put the split at 90-10. But of course, the two groups' power splits 10-90 (more like 1-99).

What I find most interesting is the most common adjectives emanating from the latter camp: 'hysterical' (Goldman Sachs' term), 'outrageous,' 'hyperbolic,' 'irresponsible,' 'simplistic and ill-informed,' etc.

The one term I haven't heard used in connection with Taibbi's piece?

"Factually wrong."

P.S.: Best blog post on the subject (besides mine)? The one suggesting that Goldman Sachs was going to put out a hit on Taibbi -- but only after buying a life insurance policy on him first.

Goldman Sachs, Culprit

Regulatory Capture -- Exhibit A

Goldman Sachs made out on the housing bubble twice: it f---ed the investors who bought their horsesh-t CDO's by betting against its own crappy products, then it turned around and f---ed the taxpayer by making him pay off those same bets.

--Matt Taibbi, "The Great American Bubble Machine"; Rolling Stone (July 9-23, 2009)

Too subtle for you? Try this one, from Taibbi's blog:

Imagine a meat company that bred ten billion rats, fattened them on trash and sewage, ground their bodies into chuck, and then sold it all as grade-A ground beef to McDonald’s and Burger King, right under the noses of the USDA. [Securitized subprime mortgages] are exactly the same thing, only with debt instead of food. We’re eating it, they’re counting the money.

Looking for a culprit for today's financial mess? (plus today's oil price roller coaster, plus the '90's Internet stock bubble, plus AIG's black hole for taxpayer dollars -- plus a lot more).

Taibbi makes a damning -- and compelling -- case that Wall Street's fingerprints -- and specifically, Goldman Sachs' --are everywhere.

The piece reads like the stuff of conspiracy novels, which even Taibbi acknowledges at the end.

However, much of what he alleges -- the players, their business practices, the regulations they lobbied for (and thwarted), who profited -- is a matter of public record.

The more I see and read, the more I'm convinced that slow, creeping regulatory capture is the meta-problem at the root of all our other financial problems. Taibbi's piece is Exhibit A.

Read it, and decide for yourself.

(Im)plausible Deniability

Wall Street Who-Dunnit: No One??

Victory has a thousand fathers, but defeat is an orphan.

--John F. Kennedy

Hurricane Katrina was an act of nature. The economy's Wall Street-triggered financial collapse is not. If and when anyone is actually held accountable for that, you can expect to hear variants (combinations?) of the following defenses.

(Im)plausible Deniability, or, "The Enron Defense"

Ken Lay, Enron Chairman, famously argued that he was out of the loop at the company he ran.

If you don't recall, Enron was a financially engineered house of cards -- complete with opaque, off-balance sheet entities -- that spectacularly imploded (sound familiar?). The resulting mess cost investors, creditors, and company employees about $100 billion -- a number that seems positively quaint by today's standards.

At trial, Lay argued that he was above it all, and didn't really understand all the complex transactions that led to the company's undoing.

Unfortunately, that stance was contradicted by multiple pieces of evidence, including the testimony of Lay's own lieutenants, incriminating email's, and Lay's conveniently-timed sale of millions in company stock (even as he was exhorting employees to buy).

Because Lay's claims of ignorance were so roundly refuted, the jury never really got to the far more legally relevant question: whether Lay should have known what was going on at his own company. After all, under corporate law, that's the board chairman's duty. And Lay certainly was paid -- munificently -- to know what was going on.

Knew . . . or Should Have

Fast forward to today.

In an instantly infamous letter run in last week's New York Times, Jake DeSantis, a senior executive at AIG Financial Products ("AIGFP"), argued -- amongst other things -- that he had nothing to do with the toxic credit instruments at the heart of the company's (and financial system's) melt-down.

If Lay's argument was that he was too high in the pecking order to have been in the loop, DeSantis' argument is that he was too low. DeSantis wanted the world to know that he refused to be a scapegoat and a fall guy. Plus, he had other (unspecified) job opportunities -- or did.

So, in a tone reminiscent of Richard Nixon's 1962 valedictory ("you won't have Nixon to kick around anymore"), DeSantis announced that he was resigning -- and donating his $750k after-tax bonus to charity.

Here is Matt Taibbi's take on DeSantis' claim of ignorance (or at least the printable part):

AIGFP only had 377 employees. Those 400-odd folks received almost $3.5 billion in compensation in the last seven years, a very large part of that money coming from the sale of credit default protection. Doing the math, that averages out to over $9 million of compensation per person. Ask yourself this question: If your company made that much money, and the boss of the unit made almost $280 million in just a few years, exactly how likely is it that you wouldn't know where that money was coming from?

Are we supposed to believe that Jake DeSantis knew nothing about Joe Cassano's CDS deals? If your boss and the top guys in your firm were all making a killing selling anything at all -- whether it was rubber kayaks, generic Levitra or credit default swaps -- you really wouldn't bother to find out what that thing they were selling was? You'd really just mind your own business, sit at your cubicle and put your faith in the guys up top to fill you in if there was something you needed to know?

--Matt Taibbi, The Smoking Chimp

Taibbi goes on to make the point that if, however inexplicably, DeSantis is actually clueless about credit default swaps . . . what expertise does he have that would justify taxpayers paying him millions to unwind them?

"I was just following orders" (or, The Eichmann Defense). If Wall Street firms were all headed by Ken Lay's, their subordinates are likely to claim that they were all Adolph Eichmann's.
Sometimes referred to as "the architect of the Holocaust" (and the subject of Hannah Arendt's chilling "The Banality of Evil"), Eichmann argued in his defense that he was merely a subordinate following Hitler's orders.

So, too, one might expect that all but the senior-most Wall Street executives will argue that they were merely implementing directives from higher-up's. To prevail, however, they will likely have to disavow thousands of incriminating email's, eyewitnesses' testimony, and their own extravagant compensation -- often in the hundreds of millions. Unlike Eichmann, who plausibly might have feared for his safety had he opted out, Wall Street's various accomplices -- er, underlings -- faced no such coercion.

Postscript: Eichmann's arguments were rejected, and he was hung.

"Everyone Did It." When you can't deny that you did something, or blame it on others, or otherwise excuse the conduct in question, then what? The predicament reminds me of one of my favorite lawyer jokes:

When a neighbor charges that the lawyer's dog bit him, the lawyer first denies it. When he's shown photos of the bite and the emergency room bill for the neighbor's stitches, the lawyer then argues that the dog attacked in self-defense. When numerous witnesses come forward to testify that the attack was unprovoked, the lawyer says . . . it's not his dog.

Unfortunately, millions in foreclosed homes, trillions in evaporated wealth, 10% unemployment, etc., are not a laughing matter.

A functioning legal system will manage to parse the foregoing defenses, lay blame, and hold somebody accountable. Recovery depends on it.

AIG Explained

Hollywood Couldn't Come Up With This Stuff

"The AIG bailout, in effect, was Goldman [Sachs] bailing out Goldman [Sachs]."

--Matt Taibbi, "The Big Takeover"; Rolling Stone (3/19/09)

"Here's the dirty little secret . . . most of the stuff that got us into trouble was perfectly legal. And that is a sign of how much we've got to change our laws."

--President Barack Obama

Taibbi's article is apparently the buzz of the blogosphere this weekend. Warning: it makes dark, corporate conspiracy movies like Michael Clayton seem like Snow White.

My advice: read it on an empty stomach. It would be a shame to waste a nice meal as you see how all the pieces fit together (at least according to Taibbi).

Quick summary: the dollars are bigger (much) than you think, the process worse and more opaque.