Over the weekend I finally relented and read schmuck “journalist” Matt Taibbi’s most recent allegations against Goldman “Vampire Squid” Sachs. The plan is to write a longer, more formal response, but in the interim I just want to take a few minutes to address the primary shortcoming of Taibbi’s “work,” namely, that he has no fucking clue what he’s talking about.
He says Goldman and its executives broke several laws, but cites not a single one as far as I can tell. He says they are guilty; not that they might be found to be so, GUILTY. I find that odd, since I’ve yet to read any guilty verdict. He claims they stole money from customers and lied to Congress, but again, where is the support? Have I been unconscious and only recently awoken to some sort of alternate reality in which he is not only judge, but jury, and executioner as well?
He says, verbatim, that Goldman defrauded clients, yet last I checked, in each case GS has not had dismissed, they’ve “neither admitted nor denied wrongdoing.”** He repeatedly cites the Levin report, Wall Street & The Financial Crisis: Anatomy of a Financial Collapse (650pg pdf), which itself seems to in no small part be based on the rants of Yves Smith, Janet Tavakoli, Tom Adams and the rest of the Naked Capitalism crew. That is not to say there isn’t some truth there, rather, that there has consistently appeared to be an extremely strong bias, possibly because like Taibbi, the authors of these rants have books (speaking engagements, reputations, etc) to sell, which should lead us to question their objectivity.
He talks about how the Consolidated Supervised Entity (CSE) program was “the ultimate soft-touch to end all soft touches,” and then describes it as “voluntary regulation, as if the banks got to choose whether to be regulated or not. This is more than just hyperbole, this is egregious misrepresentation. In its report on Bear Stearns & Related Entities, the SEC Inspector General (pdf) describes the program as such:
The CSE program is a voluntary program that was created in 2004 by the Commission pursuant to rule amendments under the Securities Exchange Act of 1934. This program allows the Commission to supervise these broker-dealer holding companies on a consolidated basis. In this capacity, Commission supervision extends beyond the registered broker-dealer to the unregulated affiliates of the broker-dealer to the holding company itself. The CSE program was designed to allow the Commission to monitor for financial or operational weakness in a CSE holding company or its unregulated affiliates that might place United States regulated broker-dealers and other regulated entities at risk.
A broker-dealer becomes a CSE by applying to the Commission for an exemption from computing capital using t he Commission’s standard net capital rule, and the broker-dealer’s ultimate holding company consenting to group-wide Commission supervision ( if it does not already have a principal regulator). By obtaining an exemption from the standard net capital rule, the CSE firms’ broker-dealers are permitted to compute net capital using an alternative method. The Commission designed the CSE program to be broadly consi stent with the Federal Reserve’s oversight of bank holding companies.
Taibbi claims this program allowed “Goldman and other banks won the right to lend in virtually unlimited amounts, regardless of their cash reserves,” a claim which, after reading the regulation, seems to be a gross exaggeration, at best. The regulation says explicitly if banks voluntarily decide and are approved to be regulated on a consolidated basis (i.e. at the ultimate holding company level, not just the broker-dealer), they are subject to certain conditions, for example, they must:
- Provide information about the financial and operational condition of the ultimate holding company. Specifically, it must provide the Commission with certain capital and risk exposure information provided to the ultimate holding company’s senior risk managers. This information would include market and credit risk exposures, as well as an analysis of the ultimate holding company’s liquidity risk;
- Comply with rules regarding the implementation and documentation of a comprehensive, group-wide risk management system for identifying, measuring, and managing market, credit, liquidity, legal, and operational risk;
- Consent to Commission examination of the ultimate holding company and its material affiliates; and
- As part of its reporting requirements, compute, on a monthly basis, group-wide allowable capital and allowances for market, credit, and operational risk in accordance with the standards (“Basel Standards”)8 adopted by the Basel Committee on Banking Supervision (“Basel Committee”).
As far as I can tell, the program was at least born out of good intentions as all of the above seem like solid ideas. Now I’m hardly a shill or apologist for the banks and their stupid, short-sighted, greedy behavior, which is why I think other details of the regulation were fantastically naive (to put it extremely gently), for example allowing banks to use their own “mathematical models” to compute their net capital. The danger inherent with such an approach – banks systematically understating risk and thus overstating capital – should have been at least in-part alleviated as the regulation requires continuous (not constant, continuous) compliance with minimum capital rules. Unfortunately, as many others have explained in detail, it appears the combination of banks/accountants/lawyers’ shifty methods and regulators ineptitude (lack of resources, etc) was simply too much. (Perhaps this is what Taibbi calls “the right to lend in virtually unlimited amounts,” although there certainly was a limit on leverage ratios, it wast just entirely too high and poorly enforced.)
The shifty methods should be relatively well-known (at least in part) to most readers by now, but the regulatory failure may not be, as its far less popular in the media. As Economics of Contempt noted in his review of the Lehman Examiner’s report (the above link):
Now, Lehman wasn’t always misrepresenting its liquidity pool. By the end of May, at least, it had a legitimate liquidity pool of over $40bn. But over the Summer of 2008, its liquidity pool steadily deteriorated, and Lehman simply refused to recognize this deterioration in its reported liquidity. JPMorgan and Citi demanded around $14bn more in collateral, and large asset managers — most importantly, Fidelity — pulled Lehman’s repo lines and stopped rolling their paper. As of June 30, 2008, Fidelity had $14.1bn of repo lines in place with Lehman; by Thursday, September 11, Fidelity had pulled the entire $14.1bn balance.
Lehman’s liquidity problems did not develop overnight, although they become critical during its final week or two. Under CSE, firms were to calculate and provide the SEC with MONTHLY reports on its capital. You’d think from May through August some semblance of a pattern must have emerged and some flags should have been raised – even despite management fudging numbers – with the not-exactly-reassuring happenings in the capital markets over that time, no?
To say that the CSE program “let(ting) us (Goldman) ignore all those pesky regulations while we turn the staid underwriting business into a Charlie Sheen house party” again seems like a serious mischaracterization. First of all, it wasn’t just underwriting that got the investment banks into trouble. Second, Charlie Sheen’s house parties generally have much hotter, more scantily-clad, and morally casual girls than you’re apt to find on Goldman’s trading desks. Additionally, remember pre-crisis, derivatives regulation was, well, it wasn’t very good, let alone comprehensive. For example (from EoC):
Lehman was also including in its liquidity pool non-central bank eligible CLOs and CDOs. And they had the audacity to mark these CLOs and CDOs at 100 (par) for purposes of the liquidity pool, even though JPMorgan’s third-party pricing vendor marked them at 50–60.
That doesn’t seem like a failure of the CSE program (which had little if any effect on such things), but the entire regulatory apparatus as a whole (in this case, I’m thinking GAAP). This was the same apparatus under which Merrill cleared over $30 billion of CDO’s off its books for less than 20 (or 6, if you want to be really accurate) cents on the dollar in July, over a month and a half before Lehman went bankrupt.
Later this week I should be publishing a closer look at the rest of Taibbi’s various (and there are many) failings so stay tuned!
**For whatever its worth, I’m not a big fan of such practice, for reasons which those far better-versed than I have explained at length.