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Goldman Sachs’s Toxic Asses

April 20, 2010

Now that we’ve all had a few days to recover from the shuddering orgasm of schadenfreude we all enjoyed when we heard the SEC’s announcement that they’d found something to pin on Goldman Sachs, it’s time to start the less delicious, but certainly more important, process of understanding how Goldman and it’s ilk came to indulge themselves in the behavior which caused The Great Recession.

This is a somewhat complicated topic, so I’m going to tackle in a few posts. In this first one, I think it’s important to explode the myth that what the Goldmans of the world did may have been regrettable, but that it was perfectly innocent.

I’m going to begin with a small prediction: Goldman’s executives will almost certainly defend themselves with the argument that they did nothing that other banks didn’t do – that however it may appear, they engaged in nothing more sinister than straight up advisory and financial engineering services, always in service of their clients, and with nothing approaching the kind of guile of which they’re accused. And in one respect they’ll be right; Goldman wasn’t the first bank to work both sides of a bet, or, to put it less kindly, to double deal its clients. There’s always been some of that on Wall Street – part and parcel of making a market is selling to both sides of a transaction. Goldman Sachs is, however, the most successful, the most powerful, and one of those rare institutions (like Microsoft and Intel) which is a world unto itself. And, as we’ll see, the firm’s success was derived much less from the traditional activities that we think of when we hear the words ‘investment bank’, and much more from the kinds of activities we more typically associate with banana republics and organized crime. But let’s not get ahead of the story.

In erecting what could be reasonably characterized as the ‘collective guilt defense’, Goldman and it’s banking brethren (as long as we’re naming things, let’s call the whole cabal ‘The Golden Boys’ – TGB for short) will do everything they can to fill the air with subtle – and perhaps not so subtle, once the right-wing echo chamber picks it up – message that any effort to rein in their behavior will bring down the financial system, and the rest of us with it. Again. Diving into that in this post would be a distraction, but we’ll get to it (I’ll try to remember to come back and add a link to that once I do. If I forget, I hope that one of you kind readers will remind me.)

As important as it is to prepare ourselves for the inevitable pissing match over financial reform – a topic on which I’m sure I’ll also write a thing or two in upcoming weeks & months – it’s equally important to one of the critical myths which allowed TGB to become supremely influential with regards to the wealth of much of the world. And, eventually (though not today) important, how equally ill-suited they were to the task.

The primary thing to understand about TGB – and you can bet that this will be a central theme employed in their defense – is how much they resemble many of the other horizontally integrated corporations* from which we buy products every day – companies like Proctor & Gamble, Johnson & Johnson, General Motors & General Mills. The TGB business model, as with the others, is to lump as many similar operations under one roof as they can. The logic is simple and unassailable; there are meaningful efficiencies and strategic advantages to being in a bunch of related businesses, and they’d be doing a disservice to their shareholders if they didn’t pursue as many of those opportunities as we could. This is the American way, what has produced the highest standard of living in the history of the world, yadayadayada. In fact, although I’m spelling it out here to illustrate my point, they won’t even need to make that particular argument – as demonstrated by the examples given above, it’s become integral to our understanding of economics that big firms gang together as many activities as possible in order to provide us with greater variety at lower cost. And, to be sure, it works – many of the things that make our lives better would never have existed without this highly-efficient production & distribution model.

TGB will put this environmental reality to its service by arguing that since they’re in so many different businesses, each one with a different measure of success, it’s inevitable that that the different groups will do things which look to unwashed and ignorant parties – such as the SEC, the “lame stream media”, and the morons on Main St.—to be unethical and dishonest. The subtext of that argument will be, as it has always been, that masters of the universe are members of an elite priesthood, the ways of which are mysterious and sacred. That what might look to the uninitiated like an abuse of position is nothing more than the magic of the sacrament. And, more importantly, that to fuck with them would be to court the wrath of the gods. Or some such similar bullshit.

To put it in slightly more concrete terms, TGB will try to make anybody who suggests that they’re subject to the same conflict-of-interest hazards as mere mortals to be an enemy of free enterprise, a dangerous virus attacking the body economic…a…a…a…socialist!

In mounting their defense, TG B will try their damnedest to divert our attention from is the same thing they tried so hard to divert their clients’ attention from: that they’re not selling cars, or food, or clothes, but rather complex, easily manipulated, and highly subjective bets. And just as we wouldn’t look terribly kindly on P&G simultaneously selling foods that make us sick and owning the patent on the only known antidote, or GM selling cars with defective brakes while taking out life insurance on their customers, the notion that The Goldie Boys were creating defective bonds in one room (and making a fee), selling it to an investor as an AAA investment in another room (and taking another fee), and taking bets that it would fail in yet a third (for yet another fee), seems pretty toxic.

And, it makes the guys who did it seem very much like a bunch of asses.

Next up: The real business of The Golden Boys


* If you’re unfamiliar with that term, don’t let it intimidate you – a horizontally integrated company is simply one that owns a number of different related businesses. The Gap is a great example – in addition to The Gap, they also own Banana Republic, Old Navy, & Athleta. Other examples with which we’re all familiar are Proctor & Gamble, General Mills, and General Motors. The logic behind a horizontally integrated firm is that since so many businesses require similar capabilities, there’s logic in putting them together so that they can share resources, use information they gather from their operations to help one another, and generally play off one another’s strengths. The other thing they can do is cover one another’s weaknesses: in the car business you’re much safer from the risk of changing consumer preferences if you sell both sedans & SUVs. For clothing retailers you’re better off selling to young and old people, urban and suburban ones, northerners and southerners, etc. This mostly works, although it can also resulting in one successful business being dragged down by the others.

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3 Comments leave one →
  1. Puck permalink
    April 23, 2010 8:42 am

    TGB will do whatever it takes to make a buck- anyone who does business with them needs to have one hand on their wallet at all times. When they’re performing their stated purpose in life (capital intermediation), they providing a necessary service to our economy. However, when they create “securities” for the sole purpose of profiting from investment destruction, then they’re nothing but casino operators.

    I’m all for Fin Reg reform, but consumer protection? It galls me that our gov’t needs to proctect us from our own stupidity.

Trackbacks

  1. Tim Geithner’s Gilded Blinders « conscience of a progressive
  2. Goldman Sach’s Toxic Asses – Part Deux « conscience of a progressive

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