Goldman Spins Away From Success
By ANDREW ROSS SORKIN “We didn’t have a massive short against the housing market,” Lloyd C. Blankfein, Goldman Sachs’s chief executive, insisted at a Congressional hearing last year.
Ever since, politicians, pundits and professors have been calling him a liar. Goldman Sachs, his critics contend, escaped relatively unscathed largely because the bank saw the apocalypse coming and moved to profit from it.
This narrative might feel like well-trodden territory. But the sometimes mind-numbing 650-page report on the financial crisis published last week by the Senate Permanent Subcommittee on Investigations offers a stark conclusion: Goldman Sachs executives didn’t tell the whole truth.
Senator Carl Levin, a Democrat from Michigan, is so convinced that Mr. Blankfein and his colleagues “misled” Congress that he wants to refer the matter to the Justice Department to figure out whether Goldman executives broke the law.
While prosecutors will have to determine the potential legal implications, the evidence amassed by the Congressional subcommittee increasingly shows that Goldman bet against the mortgage market — and did so successfully. It wasn’t just a “hedge.”
Why then has Goldman tried to spin it into a different story?
“I cannot figure out why they keep denying it,” said William D. Cohan, the author of the new book, “Money and Power: How Goldman Sachs Came to Rule the World,” and a columnist for NYTimes.com. His best explanation is that “given the political dynamics that we’re living in the moment, they’d rather be perceived as being as dumb as everybody else.”
Perhaps chest-beating about your genius at a time when the rest of Wall Street — and the nation — is doing so poorly might seem unbecoming. But it sure seems better than people publicly questioning your integrity.
The findings of the Congressional report are straightforward and damning.
The Senate subcommittee said it found the phrase “net short” some 3,400 times in documents from Goldman related to the mortgage market. For example, the company wrote in a letter to the Securities and Exchange Commission that “during most of 2007, we maintained a net short subprime position and therefore stood to benefit from declining prices in the mortgage market.” In September 2007, Goldman told employees that “we were overall net short the mortgage market and thus had very strong results.”
Now, compare that to a statement from the bank in 2010: “Goldman Sachs did not take a large directional ‘bet’ against the U.S. housing market.”
Reading those quotes back-to-back is the equivalent of hearing someone declaring it is raining when it is a sunny day with clear blue skies. It just doesn’t make sense.
The confusion continues today.
“The testimony we gave was truthful and accurate and this is confirmed by the subcommittee’s own report,” Goldman said in a recent statement. “We did not have a massive net short position because our short positions were largely offset by our long positions, and our financial results clearly demonstrate this point.”
To defend its stance, the bank notes that in 2007 it was short the mortgage market $3.8 billion and long $3.3 billion. In Goldman’s mind, those positions were simply hedges — and the outcome could have gone either way.
But whether through brilliant bets or dumb luck, Goldman Sachs made $500 million from that short. In this case, Goldman wasn’t just offsetting its risk. It was profiting from those bets, and quite a lot.
For Goldman to suggest otherwise — as it has — is almost silly.
Having studied Goldman’s statements closely, it appears the firm decided to take a Clintonian approach to parsing its words. Notice that Goldman and Mr. Blankfein always qualify their denials of the firm’s short bets by saying they weren’t “massive” or “large” or “consistent.”
Such descriptions may be accurate. What’s large, or even massive, may be in the eye of the beholder.
To Goldman, a $500 million net short position may seem tiny relative to the rest of the firm’s positions. But $500 million is still a lot of money; to the rest of the world it might even seem “large” and “massive.”
Goldman’s other qualifier — about its positions not being consistent — is also true. There were times that Goldman wasn’t net short and there times when the firm tried to reduce its short positions.
But semantics shouldn’t be the issue. Goldman should be proud of its prescient call about housing.
It was better for its shareholders, and frankly better for the taxpayers, that the firm was smart enough to short the mortgage market. After all, Goldman didn’t require a big bailout like Citigroup or American International Group.
As Josh Birnbaum, a former star trader at Goldman who pushed that short position, told Mr. Cohen, “The net result of the mortgage department in 2007 was a record year. Think about that statement: making a record amount in a year when everyone else was losing their shirts.”
So Goldman, take a bow. Don’t hide behind the curtain.
Ever since, politicians, pundits and professors have been calling him a liar. Goldman Sachs, his critics contend, escaped relatively unscathed largely because the bank saw the apocalypse coming and moved to profit from it.
This narrative might feel like well-trodden territory. But the sometimes mind-numbing 650-page report on the financial crisis published last week by the Senate Permanent Subcommittee on Investigations offers a stark conclusion: Goldman Sachs executives didn’t tell the whole truth.
Senator Carl Levin, a Democrat from Michigan, is so convinced that Mr. Blankfein and his colleagues “misled” Congress that he wants to refer the matter to the Justice Department to figure out whether Goldman executives broke the law.
While prosecutors will have to determine the potential legal implications, the evidence amassed by the Congressional subcommittee increasingly shows that Goldman bet against the mortgage market — and did so successfully. It wasn’t just a “hedge.”
Why then has Goldman tried to spin it into a different story?
“I cannot figure out why they keep denying it,” said William D. Cohan, the author of the new book, “Money and Power: How Goldman Sachs Came to Rule the World,” and a columnist for NYTimes.com. His best explanation is that “given the political dynamics that we’re living in the moment, they’d rather be perceived as being as dumb as everybody else.”
Perhaps chest-beating about your genius at a time when the rest of Wall Street — and the nation — is doing so poorly might seem unbecoming. But it sure seems better than people publicly questioning your integrity.
The findings of the Congressional report are straightforward and damning.
The Senate subcommittee said it found the phrase “net short” some 3,400 times in documents from Goldman related to the mortgage market. For example, the company wrote in a letter to the Securities and Exchange Commission that “during most of 2007, we maintained a net short subprime position and therefore stood to benefit from declining prices in the mortgage market.” In September 2007, Goldman told employees that “we were overall net short the mortgage market and thus had very strong results.”
Now, compare that to a statement from the bank in 2010: “Goldman Sachs did not take a large directional ‘bet’ against the U.S. housing market.”
Reading those quotes back-to-back is the equivalent of hearing someone declaring it is raining when it is a sunny day with clear blue skies. It just doesn’t make sense.
The confusion continues today.
“The testimony we gave was truthful and accurate and this is confirmed by the subcommittee’s own report,” Goldman said in a recent statement. “We did not have a massive net short position because our short positions were largely offset by our long positions, and our financial results clearly demonstrate this point.”
To defend its stance, the bank notes that in 2007 it was short the mortgage market $3.8 billion and long $3.3 billion. In Goldman’s mind, those positions were simply hedges — and the outcome could have gone either way.
But whether through brilliant bets or dumb luck, Goldman Sachs made $500 million from that short. In this case, Goldman wasn’t just offsetting its risk. It was profiting from those bets, and quite a lot.
For Goldman to suggest otherwise — as it has — is almost silly.
Having studied Goldman’s statements closely, it appears the firm decided to take a Clintonian approach to parsing its words. Notice that Goldman and Mr. Blankfein always qualify their denials of the firm’s short bets by saying they weren’t “massive” or “large” or “consistent.”
Such descriptions may be accurate. What’s large, or even massive, may be in the eye of the beholder.
To Goldman, a $500 million net short position may seem tiny relative to the rest of the firm’s positions. But $500 million is still a lot of money; to the rest of the world it might even seem “large” and “massive.”
Goldman’s other qualifier — about its positions not being consistent — is also true. There were times that Goldman wasn’t net short and there times when the firm tried to reduce its short positions.
But semantics shouldn’t be the issue. Goldman should be proud of its prescient call about housing.
It was better for its shareholders, and frankly better for the taxpayers, that the firm was smart enough to short the mortgage market. After all, Goldman didn’t require a big bailout like Citigroup or American International Group.
As Josh Birnbaum, a former star trader at Goldman who pushed that short position, told Mr. Cohen, “The net result of the mortgage department in 2007 was a record year. Think about that statement: making a record amount in a year when everyone else was losing their shirts.”
So Goldman, take a bow. Don’t hide behind the curtain.
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