Matt Taibbi Hyperbole vs. Goldman Sachs Reality

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Matt Taibbi's latest Rolling Stone article “The People vs. Goldman Sachs
claims, in clever and entertaining prose, that Goldman execs should go
to jail because they: 1) participated in “the most destructive crime
spree in our history…”, 2) sold crappy CDOs to unwary clients, and 3)
lied to congress.  I'd like to take this opportunity to add a little bit of what I like to call "reason" to the disucssion.

Lying to Congress 

Let’s
start with simplest charge: Of course Goldman execs lied to Congress.
Everyone lies to Congress. Congress lies to Congress. Who outside of
Charlie Sheen wants to air dirty laundry in front of the whole world?
Yes I believe Goldman lied but not in they way RS thinks they did. Yes,
GS knew these bonds were crappy. Yes, they could have done a better job
disclosing all the risks. But as a former CDO manager and investor, I
know to review, research, and analyze CDOs independently of Rating
Agencies.

 

Selling Crappy CDOs to Unwary clients

Goldman
sold CDOs they knew to be crappy to investors who took the opposite
side of the bet. Rating Agencies blessed these structures with AAAs. And
why is this a crime? Isn’t the motto on the street “Buyer Beware”? The
deals would perform or underperform based on the underlying bonds making
up the CDOs. Is anyone claiming GS hid which bonds were included? No.
Despite RS’s assertion GS knew these bonds were crap, this does not
constitute a crime or a failure of disclosure. These bonds were not sold
with a guarantee nor did Goldman ever say these bonds had no risk.
Heck, even the rating agencies blessed these structures by allowing 75%
of the cash flow to be rated AAA.

To further the car analogy
favored by RS, imagine you want to buy a fleet of 100 cars from GS
Rental Company. You also have at your disposal the repair (i.e
performance) history of each and every car from a variety of third party
vendors named Intex, Core Logic and Lewtan. However, you rely on
Moody's Auto Rating service to tell you that only 15 cars are likely to
go bad in the worst case scenario. You decided to buy 75 cars with GS
Rental company keeping the first two cars that go bad. Crime or
out-and-out stupidity?

Further, doesn’t anyone remember all the
other products investment banks have sold which blew up shortly after
origination? I do. Ask me someday about 125% Mortgages, Manufactured
Housing, Airplane Lease ABS, Tech Stocks, and so on. Investment banks
only sell what investors are willing to buy. Same with the CDOs. Good
salesmen know how to sell. GS has very, very good salesmen. Frankly, any
investor who trusts a Wall Street salesman and doesn’t ask the tough
questions should go work for a feel-good non-profit. Buying investment
products you don’t understand should be a crime.

 

Crime Spree and Key Stone Cop Regulators

Lastly,
cutting through RS’s massive hyperbole, I’m trying to figure out what
constituted the biggest crime spree of all time. Fraudulent subprime
mortgage backed securities issuers? CDO managers? Fraudulent mortgage
originators? Fraudulent borrowers? Fraudulent Rating Agencies?
Incompetent and toothless regulators? Lazy investors?

Every part
of the business created the housing meltdown. Borrowers who over levered
or lied to get access to housing  they couldn't afford. Real estate
agents over sold housing to drive up commissions. Home appraisers
inflated valuations at the behest of mortgage brokers. Mortgage
brokers, paid on commission, forged or instructed borrowers to lie to
get access to as much money as possible. Loan officers, paid based on
production, ignored problems in loan origination files. MBS issuers
ignored prudent underwriting standards and due diligence with no
regulatory oversight. Regulators didn't have the authority to stop this
train wreck nor the poltical backbone to do so. Rating Agencies relied
on outdated models and Wall Street pressure. Investors didn't do the
work necessary to understand the risks.

This "crime spree" wasn't a drive by a Moriarty-esque criminal mastermind but a Confederacy of Dunces.

RS
says the "banks were closely monitored by a host of federal regulators,
including the Office of the Comptroller of the Currency, the FDIC, and
the Office of Thrift Supervision." I call bullshit. The OTS actively
sought more regulatees by stating to them "we are the kinder gentler
regulator". The biggest blow-ups were OTS governed (Washington Mutual,
Bear Stearns, Lehman Brothers, Indy Mac, and Countrywide). The OCC
wasn't much better and the FDIC was busy laying off personnel because
the world was going well. The Fed's chief drug lord (Greenspan) was
pushing housing as the great engine of the US economy.

 

Lastly....

I'm
sick of Rolling Stone's hyperbole. If GS had a $6B bet on the housing
market then they were a little more than 1/2 a percent of the total
investors in the market. They were small potatoes, and because they were
small they survived the meltdown like cockroaches in a nuclear winter.


Naked Bond Bear

Stone Street Advisors