The (Partial) Vindication of Matt Taibbi

MATT

When Rolling Stone reporter Matt Taibbi fingered Goldman Sachs as the main culprit behind the housing bubble-and most of the other commodities bubbles of the past seventy-odd years-financial journalists closed ranks to denounce every element of the case he sought to make. The story was “just plain wrong,” thundered Slate’s Heidi Moore. Taibbi was “the Sarah Palin of journalism,” sniffed Megan McArdle, without showing any serious flaws in the piece’s analysis or reasoning. CNBC contributor and Daily Beast columnist Charles Gasparino sputtered that the whole spectacle of the foul-mouthed, pugnacious Taibbi presuming to explain the Goldman-spurred ’08 meltdown was “making me ill.” This wasn’t merely “wrong”-the financial press has spent the better part of the last decade being wrong, after all-it was, rather, that thing that no aspiring inside chronicler of Wall Street can ever afford to be: “pretty naïve.”

There were, to be sure, problems with Taibbi’s piece, among them some fast-and-loose interpretations of how collateralized debt obligations and credit default swaps actually work. But the collective brio of the financial press’s attempted beatdown of Taibbi was so out of proportion to his alleged offenses, it was hard not to see a lot of status anxiety-and more than a little Stockholm Syndrome-at play. Moore summed up this sensibility in the classic, self-regarding voice of a concern troll, simultaneously citing her own expert authority and the tender outlook of the ever-impressionable public: “As someone who’s written about Wall Street for a decade, it annoys me to see the public that wasn’t fully educated about the financial crisis before it happened get snookered again by misleading reporting afterward.”

Never mind, of course, that the people who have “written about Wall Street for a decade” might be more properly viewed as the instigators, rather than the sworn foes, of widespread public miseducation in financial matters, given the everybody-into-the-pool ethos of most writers covering the investment community.

Just consider what, for many of Taibbi’s detractors, was the clinching demonstration of the man’s fecklessness: Goldman couldn’t be a prime mover in the meltdown, since so many banks were planting their snouts in the mortgage trough, and emerging with lavish (if gossamer) rewards. Moore again sums the consensus up nicely, denying that Goldman-famously Washington’s best-connected investment house-was the real target of the government’s massive bailout of AIG because it was exposed to the tune of $12.9 billion in notes that AIG owed on Goldman-backed credit-default swaps. “When AIG collapsed-in fact because AIG collapsed-it owed money to several banks, and when the government took over AIG, it owed money to the banks, too.” Translation: Nothing to see here people; move along.

So it probably made Gasparino, Moore et al. ill in an entirely different way to see the headline in a Wall Street Journal analysis piece last Friday: “Goldman Fueled AIG Gambles.”

For one thing, Journal reporters Serena Ng and Carrick Mollenkamp found that Goldman’s exposure to botched AIG trades was much greater than initially reported; the bailout rescued “a total of $22 billion in assets” belonging to Goldman, about one-and-three-quarters the $12.9 reported at the time of the AIG rescue.

So much, then, for Moore’s point that Goldman wasn’t appreciably more exposed than other banks trading with AIG, since “Merrill Lynch received $12 billion, as did France’s Société Générale and Germany’s Deutsche Bank” after the $80 billion insurers’ bailout.

[Note: The above statement of Moore’s actually refers to the government bailout money received by Goldman Sachs, not their total exposure to AIG, as we originally indicated.]

Goldman’s overall portfolio with AIG ran to $33 billion-inconveniently enough, “roughly twice as much as Société Générale and Merrill Lynch the banks with the biggest exposure to AIG after Goldman.” And funnily enough, Ng and Mollenkamp, go on to explain, the AIG-Goldman nexus functioned pretty much as Taibbi said it did-as a patty-cake Ponzi scheme of concealed risk.

When a bank like Merrill created a collateralized debt obligation-ie., one of the super-mystical “tranches” of bum home loans packaged so as to allegedly disperse risk in the mortgage market-the banks roped into these deals “wanted protection in case the housing market tanked,” the reporters note. “Many turned to Goldman, which effectively insured the securities against losses. Then, to cover its own potential losses, Goldman bought protection from AIG, in the form of credit default swaps.”

What’s more, Ng and Mollenkamp explain, “Goldman charged more for the protection, so it was able to pocket the difference, making millions while moving the default risk to AIG, according to people familiar with the trades.”

In other words, Goldman was charging a fee for a nonproduct that offered pretty much the opposite of what it professed to be-protection from bad mortgage deals-and shifted the real exposure down river to AIG. No wonder when AIG officials-no mean hands at pitching their own brand of phony risk protection, of course-questioned the way Goldman was pricing these, um, exotic instruments in an early 2008 audit meeting, Goldman was “was unwilling or unable to provide any sources for their determination of market prices,” as a memo of the gathering drily noted.

All the scheme needed was Marvin Hamlisch performing some Scott Joplin theme music.

And when Goldman wasn’t performing its beguiling water ballet with AIG, it was also leaving an enormous footprint as an originator of CDO’s, Ng and Mollenkamp write-a business that sent yet more business AIG’s way in the form of Goldman-backed insurance of these third-party bank transactions. This was another role that, as our Journal correspondents note, “few competitors appreciated at the time.”

So much then, for McArdle waving away Taibbi’s characterization of Goldman’s wayward handling of CDO’s with the overcivilized retort that, my goodness, “the idea was pure portfolio theory, broadly agreed by everyone involved”-unless, of course, “everyone” in this usage is meant to be read as “everyone at Goldman.”

Now, none of this is meant to serve as a full-scale vindication of Taibbi-who, I should disclose, I recently edited in the forthcoming return issue of The Baffler. (Really!) Nor is to revisit the whole question of Goldman’s role as government-backed risk profiteer in any real detail (if you’re in the mood for that reading experience, though, hie over to Bethany McLean’s excellent breakdown in this month’s Vanity Fair).

It is merely to ask, if your initial view of an outside-the-caste chronicler of Wall Street’s financial abuses is simply to vent reflexive indignation verging on nausea, well, then isn’t it about high fucking time you started healing yourself?

[Correction appended.]

Previously: Moneyster. Moneybook. MoneySpace?

Chris Lehmann has some sophisticated financial instruments he’d like to interest you in.