Goldman Sachs Replies to Taibbi

I just got off the phone with Lucas van Praag, the top flack at Goldman Sachs (GS), who called Matt Taibbi’s piece on the bank “hysterical”. He also sent me an email, which makes some specific responses to Taibbi’s points:

Having read your piece about Matt Taibbi’s article in Rolling Stone, I wanted to set the record straight, particularly about “regulatory capture”.

Background: Under the Commodity Exchange Act, the CFTC (for agricultural futures) or exchanges (for energy/metals futures) established speculative position limits. As much as anything else, the limits are intended to prevent market imbalances that would result in failures of the ultimate settlement of the futures contracts.

The CFTC rules exempt “bona fide hedging” transactions from these spec limits. A bona fide hedging transaction was originally understood to be an actual producer/consumer who was selling or buying the underlying commodity and wanted to hedge risk of the price moving up or down. In 1991, J. Aron wanted to enter into one of its first commodity index swap transactions with a pension fund. In order to hedge our exposure on the swap, we wanted to buy futures on the commodities in the index. We applied to the CFTC for exemption from position limits on the theory that even if we weren’t buying the commodity, we had offsetting exposure (in our swap) that put us in a balanced/price neutral position. The CFTC agreed with our argument and granted exemption. By the way, each of the then Commissioners signed off, so it was hardly a secret…

The CFTC published a report in August 2008, indicating that there were few instances when entities would have exceeded spec limits, had they applied to OTC positions.

Yesterday, as you probably know, the Senate Permanent Sub-Committee on Investigations issued a report on wheat futures in which they concluded that divergence between prices for actual wheat v. wheat futures is being caused solely by index investment. The Committee’s recommendation is that hedge exemptions which support indices should be phased out.

Not quite so recently, the elimination of Glass Steagall doesn’t exactly provide a robust argument for regulatory capture. And Taibbi’s bubble case doesn’t stand up to serious scrutiny either. To give just two examples, even with the worst will in the world, the blame for creating the internet bubble cannot credibly be laid at our door, and we could hardly be described as having been a major player in the mortgage market, unlike so many of our current and former competitors.

Taibbi’s article is a compilation of just about every conspiracy theory ever dreamed up about Goldman Sachs, but what real substance is there to support the theories?

We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance of being a force for good.

Van Praag is right that if the Senate is recommending that Goldman’s exemptions in the futures market be phased out, then the Senate, at least, has not been captured by Goldman. And he’s also right that Goldman can’t really be blamed for creating either the tech-stock bubble or the housing bubble — it was a relatively minor player in both.

But you don’t read a Taibbi rant for an evenhanded look at both sides of a complex story. It’s more a forcefully-put case for the prosecution: some of his charges might not stick, but he’ll throw a few chancers in as well for good measure. (Interestingly, though, even Taibbi didn’t try to include Ben Stein’s ridiculous conspiracy theory about Goldman’s chief economist trying to drive down the prices of mortgage bonds in order that Goldman could profit from its short positions.)

I disagree with van Praag that the CFTC exemption given to J Aron “was hardly a secret” — as far as I know, there was no contemporaneous reporting of it at all, either in the press or in Goldman’s own filings. And although there’s a strong case to be made that Goldman has failed to capture the legislative branch (see for instance Chris Dodd jumping on the Ben Stein bandwagon), I think there’s a pretty compelling case that both the executive branch (home to countless Goldman alumni) and the regulators, like the CFTC, have a pretty strong track record of doing whatever was in the best interests of Goldman Sachs.

Van Praag told me that in the wake of the events of the past year or two, Goldman’s partners have pretty much lost their appetite for going into public service. Maybe that’s for the best. They are generally smart and talented and knowledgeable people, and I daresay that many of them have done a lot of good after leaving the firm and joining government. At the same time, however, we’re supposed to have a government of the people, not a government of multimillionaire Goldman Sachs technocrats. And when you have the latter, you’re inevitably going to end up with a lot of mistrust and conspiracy theories sooner or later, whether they’re well-founded or not.

Comments

[Clive Corcoran:]

Good question for your next call with Mr van Praag or better yet Mr. Blankfein:

How do you respond to the suggestion that -- "there’s a pretty compelling case that both the executive branch (home to countless Goldman alumni) and the regulators, like the CFTC, have a pretty strong track record of doing whatever was in the best interests of Goldman Sachs?"

Just the fact that the question can be so precisely formulated is not ultimately good for GS or for the integrity of the US financial system.

Jun 26 12:24 PM

[FDNY RET:]

I mean---Really-???---who are you kidding????!!.
It has been pointed out that Paulson's plan could potentially have some conflicts of interest, since Paulson was the former CEO of Goldman Sachs, a firm that may benefit largely from the plan. Questions remain about Paulson's interest, despite the fact that he had no direct financial interest in Goldman, since he had sold his entire stake in the firm prior to becoming Treasury Secretary, pursuant to ethics law.The Goldman Sachs benefit from AIG bailout was recently estimated as USD 12.9 billion and GS was the largest recipient of the public funds from AIG. Creating the collateralized debt obligation (CDO's) forming the basis of the current crisis was an active part of Goldman Sach's business during Paulson's tenure as CEO. An investigation into whether the creators of these debts had failed to disclose their underlying risk—likely in civil damage suits arising out of AIG's failure—would necessarily involve scrutiny of Paulson's own role. The fact that his sale of his Goldman Sach's interest was tax-deferred, netting him nearly $200 million in tax benefits, resulted in questions about the motives of his joining the government.

Opponents argued that Paulson remained a Wall Street insider who maintained close friendships with higher-ups of the bailout beneficiaries. If passed into law, the proposed bill would give the United States Treasury Secretary unprecedented powers over the economic and financial life of the U.S. Section 8 of Paulson’s original plan stated: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." For this reason, many bloggers referred to Mr. Paulson as "King Henry." Some time after the passage of this bill, the press reported that the Treasury was now proposing to use these funds ($700 billion) in ways other than what was originally intended in the bill.

Jun 26 02:45 PM

[Alan Young:]

Text of the Taibbi article in question is here: forums.somethingawful....

Jun 26 04:08 PM

[Wisdom vs. ...:]

Since Felix is usually in favor of expanding the power of technocrats, I am thinking he is hanging the difference on the millionaire thing-- not logical. they are all evil; furthermore, I do not see any scathing articles in RS about Congress' much-heavier hand in the disaster. editorially RS is pigsty, unless Jan has turned 180 degrees from when I used to read that trash when PJ Orourke was there. IMO, these wall st attacks are an organized conspiracy to draw attention from Congress' malfeasance. as far as GS being evil? as we used to say in the oilfield, "no shit!"

Jun 26 08:26 PM

[dcb:]

do you really expect the devil to tell you the truth. Esp considering he is the paid spokesman of Goldman.
1) I hope no goldman exec ever goes into public service, I would like the out of the federal reserve system as well, and please include no campaign contributions in the future.
the best thing that could ever happen to this country would be for that company to be broken into little pieces.

Take a look at Zero hedges article this week about the massive increase in program trading volume by goldman and keep believing they don't manipulate the markets. What one says, or has to say means nothing, what the overwhelming amount of evidence shows is another. fur sure look at the run down from jan to march and the following month and look at how much they were trading as a percent of volume in the exchange. there is no doubt the manipulated that drop and the following bounce.

I can't speak about other crisis. But in this one the overwhelming amount of evidence points to the fact that goldman played a huge role in it happening. If you flip a coin and it lands heads up 47/50 you know something is wrong with the coin. For goldman the coin has landed on their side 47/50 times and they have has the right people in the right places at the right time for this to happen. That just does not happen by chance. period!!!!

Just for grins to add to the point:
U.S. commercial banks see record Q1 trading revenue
Fri Jun 26, 2009 9:46pm EDT

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NEW YORK (Reuters) - U.S. commercial banks reported record trading revenue in the first quarter of 2009, benefiting from wide trading margins and gains from interest rate products, the Office of the Comptroller of the Currency said on Friday.

Banks generated a record $9.8 billion in revenue from trading derivatives and cash instruments, compared with a loss of $9.2 billion in the fourth quarter of 2008, the OCC said.

Interest rate products, including derivatives, generated the strongest revenue, rising to a record $9.1 billion, compared with a $3.4 billion loss in the previous quarter, the OCC said. Credit trading was the only asset class to generate a loss, of $3.2 billion, trimmed from a fourth-quarter loss of $8.9 billion.

Foreign exchange revenue fell to $2.4 billion from $4.1 billion in the fourth quarter, while equity trading generated $1 billion in trading revenue compared to a fourth quarter loss of $1.2 billion, the OCC said.

Trading revenue were boosted as banks wrote down fewer losses from bad loans and recorded the declining value of their debt as a liability. Banks can book the deteriorating value of their own debt as trading revenue.

"While trading performance was strong even without the liability value changes, this source did add materially to first quarter trading performance," the OCC said.

Notional volumes in all derivatives markets increased by $1.6 trillion in the quarter to $202 trillion, as more derivative contracts were recorded by commercial banks that had formerly been investment banks.

The notional volume does not represent the actual amount of risk as it includes a number of trades that offset each other. Eighty-nine percent of derivatives exposures at commercial banks were eradicated from netting positions in the first quarter, the OCC said.

LARGEST BANKS

JPMorgan Chase & Co(JPM.N), Goldman Sachs Group Inc (GS.N), Bank of America Corp (BAC.N), Citigroup (C.N) and HSBC Bank USA, part of HSBC Holdings (HSBA.L), have the largest derivatives exposures of U.S. commercial banks and account for 96 percent of total exposures, the OCC said.

As of March 31, their notional derivative exposures stood at $81.2 trillion, $39.9 trillion, $38.9 trillion, $29.6 trillion and $3.5 trillion, respectively.

Of these banks, Goldman had by far the largest credit exposure relative to its risk-based capital, at 1,048 percent, the OCC said. HSBC, JPMorgan, Citibank and Bank of America's ratios stood at 475 percent, 323 percent, 216 percent and 169 percent, respectively.

Goldman also got the largest overall boost from derivatives and cash trading revenue, which represented 69 percent of the bank's gross revenue in the quarter, the OCC said.

Trading revenue for JPMorgan represented 13 percent of its gross revenue and contributed 8 percent of both Citigroup and Bank of America's gross revenues. HSBC Bank USA's gross revenue lost 4 percent from trading revenue.

JPMorgan, Bank of America, Goldman Sachs, Morgan Stanley (MS.N) and Citigroup had the largest derivative exposures of all holding companies, at $81.1 trillion, $77.9 trillion, $47.7 trillion, $39.1 trillion and $31.7 trillion, respectively.

(Reporting by Karen Brettell; Editing by Padraic Cassidy)

No that company is legit. get real. capital punushment is the appropriate thing for these people. they did more damage to our country that Osama bin Laden and walk away with billions. They are traitors.

Jun 27 11:47 AM

[dcb:]

Mr. Van Pragg was quoted as saying "Of course we don't manipulate the markets" I have a bridge for sale if anyone is interested.


On Jun 27 11:47 AM dcb wrote:

> do you really expect the devil to tell you the truth. Esp considering
> he is the paid spokesman of Goldman.
> 1) I hope no goldman exec ever goes into public service, I would
> like the out of the federal reserve system as well, and please include
> no campaign contributions in the future.
> the best thing that could ever happen to this country would be for
> that company to be broken into little pieces.
>
> Take a look at Zero hedges article this week about the massive increase
> in program trading volume by goldman and keep believing they don't
> manipulate the markets. What one says, or has to say means nothing,
> what the overwhelming amount of evidence shows is another. fur sure
> look at the run down from jan to march and the following month and
> look at how much they were trading as a percent of volume in the
> exchange. there is no doubt the manipulated that drop and the following
> bounce.
>
> I can't speak about other crisis. But in this one the overwhelming
> amount of evidence points to the fact that goldman played a huge
> role in it happening. If you flip a coin and it lands heads up 47/50
> you know something is wrong with the coin. For goldman the coin has
> landed on their side 47/50 times and they have has the right people
> in the right places at the right time for this to happen. That just
> does not happen by chance. period!!!!
>
> Just for grins to add to the point:
> U.S. commercial banks see record Q1 trading revenue
> Fri Jun 26, 2009 9:46pm EDT
>
> Email | Print |
> Share
> | Reprints | Single Page
> [-] Text [+]
> Market News
> Palm lifts Nasdaq, but oil drags Dow down | Video
> Stocks eye jobs, other data in July 4th week
> Oil drops on Wall Street, Nigeria amnesty report
> More Business & Investing News...
>
> NEW YORK (Reuters) - U.S. commercial banks reported record trading
> revenue in the first quarter of 2009, benefiting from wide trading
> margins and gains from interest rate products, the Office of the
> Comptroller of the Currency said on Friday.
>
> Banks generated a record $9.8 billion in revenue from trading derivatives
> and cash instruments, compared with a loss of $9.2 billion in the
> fourth quarter of 2008, the OCC said.
>
> Interest rate products, including derivatives, generated the strongest
> revenue, rising to a record $9.1 billion, compared with a $3.4 billion
> loss in the previous quarter, the OCC said. Credit trading was the
> only asset class to generate a loss, of $3.2 billion, trimmed from
> a fourth-quarter loss of $8.9 billion.
>
> Foreign exchange revenue fell to $2.4 billion from $4.1 billion in
> the fourth quarter, while equity trading generated $1 billion in
> trading revenue compared to a fourth quarter loss of $1.2 billion,
> the OCC said.
>
> Trading revenue were boosted as banks wrote down fewer losses from
> bad loans and recorded the declining value of their debt as a liability.
> Banks can book the deteriorating value of their own debt as trading
> revenue.
>
> "While trading performance was strong even without the liability
> value changes, this source did add materially to first quarter trading
> performance," the OCC said.
>
> Notional volumes in all derivatives markets increased by $1.6 trillion
> in the quarter to $202 trillion, as more derivative contracts were
> recorded by commercial banks that had formerly been investment banks.
>
>
> The notional volume does not represent the actual amount of risk
> as it includes a number of trades that offset each other. Eighty-nine
> percent of derivatives exposures at commercial banks were eradicated
> from netting positions in the first quarter, the OCC said.
>
> LARGEST BANKS
>
> JPMorgan Chase & Co(seekingalpha.com/symbo...), Goldman
> Sachs Group Inc (seekingalpha.com/symbo...), Bank of America
> Corp (seekingalpha.com/symbo...), Citigroup (seekingalpha.com/symbo...)
> and HSBC Bank USA, part of HSBC Holdings (seekingalpha.com/symbo...),
> have the largest derivatives exposures of U.S. commercial banks and
> account for 96 percent of total exposures, the OCC said.
>
> As of March 31, their notional derivative exposures stood at $81.2
> trillion, $39.9 trillion, $38.9 trillion, $29.6 trillion and $3.5
> trillion, respectively.
>
> Of these banks, Goldman had by far the largest credit exposure relative
> to its risk-based capital, at 1,048 percent, the OCC said. HSBC,
> JPMorgan, Citibank and Bank of America's ratios stood at 475 percent,
> 323 percent, 216 percent and 169 percent, respectively.
>
> Goldman also got the largest overall boost from derivatives and cash
> trading revenue, which represented 69 percent of the bank's gross
> revenue in the quarter, the OCC said.
>
> Trading revenue for JPMorgan represented 13 percent of its gross
> revenue and contributed 8 percent of both Citigroup and Bank of America's
> gross revenues. HSBC Bank USA's gross revenue lost 4 percent from
> trading revenue.
>
> JPMorgan, Bank of America, Goldman Sachs, Morgan Stanley (seekingalpha.com/symbo...)
> and Citigroup had the largest derivative exposures of all holding
> companies, at $81.1 trillion, $77.9 trillion, $47.7 trillion, $39.1
> trillion and $31.7 trillion, respectively.
>
> (Reporting by Karen Brettell; Editing by Padraic Cassidy)
>
> No that company is legit. get real. capital punushment is the appropriate
> thing for these people. they did more damage to our country that
> Osama bin Laden and walk away with billions. They are traitors.
>

Jun 27 11:50 AM

[stckpkr7000:]

I'm sounding the BS alarm..... I'm 110% certain that GS causes more harm than good in our economy...... What do they add to the bottom line? I think GS need to get broken into 5-10 smaller firms.

Jun 27 12:58 PM

[Rumpole:]

Just because a Senate committee recommends that these exemptions be discontinued doesn't mean it'll happen. So I think it a bit pre-mature to say that GS hasn't got its claws effectively into the senate.
and frankly I find it odd that GS would respond to such an article if it thinks it's so hysterical. What does GS care what a Rolling Stone editorial says!?

Jun 27 02:26 PM

[H. T. Love:]

When will folks realize that we can't have the fox guarding the hen house? Bankers will have a point of view of bankers. When we make them regulators, they'll see things based on their background - bankers.

Then we all get upset and amazed when they act like bankers regulating bankers.

We need only have moral, intelligent, dedicated people with *access* to banking background expertise, and other expertise, in charge to stop these shenanigans.

And the elimination of the Fed.

HardToLove

Jun 27 03:26 PM

[User 438429:]

First of all,It is hard to believe that someone from GS decided to answer to Taibbi.
Second: people, try to read some economy textbooks and be a bit more materialistic! Banks do not entirely run the economy. They wish they could. And what about other big money? Business guys, who transferred their capitals and millions of jobs abroad? I wish I new how many households were forced from OK group to the high risk group of mortgages, because they lost their high paid jobs and barely could survive on a part-time income. Our media does not publish such details. Yes, banks are responsible for an improper lending but it is just a part of the story. If instead of loosing millions of jobs to India and China these jobs were added here in the USA, would we have a hosing crisis of such a magnitude? We are loosing really fast because of the free trade and globalization, while other nations are gaining. It is happening much faster than the global worming (assuming that the global worming exists :-) The country of such a size and population as the USA cannot become another Switzerland; we cannot survive as a society of bankers, doctors and lawyers with all other industries being outsourced. These are just some of our problems not entirely related to the GS evil…

Jun 29 08:48 PM