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April 1, 2010

On Wall Street: Is Matt Taibbi Wrong?

 Talkin’ Wall Street…


 A couple of opening points:

 (a)       I am a Wall Street alum (1994-98), I loved it there and it was my stepping stone to venture capital, my dream profession.

(b)       I believe that historically Wall Street’s financing of corporate growth and innovation has been a huge competitive advantage to the US.

(c)       On the one hand I think that Henry Paulson (as former US Treasury Secretary) is a patriot and helped save our country from economic collapse; on the other hand I think that he (Paulson) aided in creating the conditions for the crisis while he served as CEO of Goldman Sachs.

(d)       Wall Street is all about money, and that will never change.  It attracts extremely smart people who spend all of their time thinking of ways to make money.  Unfortunately many times Wall Street creativity spawns behavior that crosses ethical lines and on occasion becomes illegal.

(e)       Today, Wall Street has gotten completely carried away and needs to reform itself fast.  It is becoming an uncontrolled burden on the stability of its own milieu, the global financial system.


 This post catches me in the middle of reading two books on the financial crisis of 2008: On the Brink, by the aforementioned Henry Paulson, and Too Big to Fail (or maybe too big to carry or read, for that matter, we’ll see) by Andrew Ross Sorkin, a business reporter for the New York Times.  Both chronicle the action of what happened in the days before, during and after the financial crisis, but neither delves into the real causes for the crisis, or the questionable actions of its key participants. 

 This cannot be said for one Matt Taibbi.

Matt is the irreverent, liberally-biased, smart-ass, misanthropic, and, for many, insufferable contributing political editor (sports too) of Rolling Stone magazine.

 And I have grown to love him.

 Not for his technical grasp of Wall Street and all of its acronyms and crazy financial structures (he lacks this), but for his unmitigated, bone-quaking outrage.  As extreme as Wall Street is with its obsession with money for money’s sake, Matt is obsessed with Wall Street and its leader Goldman Sachs, marking it (them) the villain(s) in a calculated plot to control the world.

 The (once?) venerable Goldman Sachs provides Matt Taibbi with not only a villain, but also a synecdoche for Wall Street, which has now, unfortunately, become itself a populist synecdoche for anti-ethical greed, instead of the engine of capitalism and national wealth creation we all hope it would be.

 So let’s have some fun for a moment.

 Here is how Matt describes his villain:

 “The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money…  What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain, an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.”

 – From Rolling Stone – Matt Taibbi – Inside the Great Bubble Machine

And its plot to rule the world:

“The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.”

From Rolling Stone – Matt Taibbi – The Big Takeover

 And post-bailout:

 “The question everyone should be asking, as one bail-out recipient after another posts massive profits  – Goldman Sachs reported $13.4 billion in profits last year [2009], after paying out $16.2 billion in bonuses and compensation – is this:  In an economy as horrible as ours… where the hell did Wall Street’s eye-popping profits come?… A year and a half after they were minutes away from bankruptcy, how are [they] not only back on their feet again, but hauling in bonuses at the same rate they were during the bubble?”

 – From Rolling Stone – March 4, 2010 – Matt Taibbi – Wall Street’s Bailout Hustle

Matt’s writing is fun(ny), but his accusations, one being that Wall Street has obtained massive global power, seem pretty close to the truth, even if the details of his analysis bump against errors of nomenclature and the disadvantages of financial inexperience (Many a business reporter revile Matt and his errors.  For example see Megan McArdle  from Atlantic’s diatribe and its many links for a technical debunking of Matt’s work.  For what it is worth I don’t think Matt makes that many technical mistakes, and unlike most conspiracy theories his are worth considering and his writing is well worth reading as long as you can tolerate some cussing here and there.) 

Wall Street used to be about corporate finance, raising capital for corporations by selling debt (corporate bonds) and equity (e.g. IPOs) to public investors and providing liquidity by creating markets for the day-to-day exchange of these securities.  The firms made their profits by charging fees for underwriting new securities and trading in existing ones.

While corporate finance is still a part of Wall Street’s business, it has become small potatoes to its derivatives and proprietary trading businesses, businesses where rather than serve their trading customers, they compete with them.  In this business, not surprisingly, like Vegas, the “house” is set-up to win, and it does, unless your firm gets high-on-its-own-supply of risky underwritings, as was the case with Bear Stearns, Lehman, et al, in which case you go down in flames, unless of course you get bailed out…   

Essentially Matt Taibbi claims:  (1) that these firms have figured out more ways to bilk their clients than their clients could even imagine (again smart people obsessed with making money); (2) that many times these techniques cross ethical lines and might even be illegal; (3) that they are more than willing to bilk each other as well; and (4) that there are so many ex-Wall Streeters with regulatory and legal power that there is no chance for systemic punishment of, and thus no deterrent to, continuous bad behavior.

On this last point, it’s important to remember that it was a huge team of ex-Wall Streeters-in-government that engineered the bail-out and that the bail-out went well beyond the TARP money that was invested in firms like Goldman Sachs.  These ex-Wall Streeters-in-government also engineered: (a)  the bail-out of AIG, which was effectively the bail-out of all of the companies AIG owed money to (yes, Goldman was one) and (b) the conversion of Goldman Sachs and Morgan Stanley into bank holding companies that overnight allowed them to borrow massive amounts of money from the Federal Reserve (read: the US government) without the need for congressional approval, a move that effectively solved any threat to their liquidity.

All for the good of the nation and the world (of which I agree and approve, yes, we needed to save the finanical system).  And all for the continuation of massive profits and pay packages of the banks and their senior management, repsectively (no we did not need to save Wall Street’s plush lifestyle).

It confuses me to this day as to why the government does not own 85% of the equity in most of Wall Street.  Shouldn’t that have been the “market terms” for all of the bail-out investments, a la AIG?  (I will someday calculate how much profit the US government would have made if it would have taken meaningful equity stakes in these firms and sold it at today’s prices.)

You tell me – do you think Matt might have a point or two?  Is this not some kind of conspiracy?

Like most finance guys, I get most of my financial news from the Wall Street Journal, New York Times and CNBC, and I don’t hear any of them pursuing these questions in any meaningful way, and I wonder why?


Today I had coffee with an old hedge fund friend of mine and we came to the same conclusion.  Not different from the horror described by Arthur Jensen (played by Ned Beatty) in Paddy Chayefsky’s 1976 film Network, the world capital markets have become larger than and span well beyond the borders of sovereign nations, and the 2008 financial crisis proved more than ever that they carry much of the weight of the world.  Who do you think buys, markets and trades the debt and currencies of all sovereign nations?


Listen to Matt here:

Meet Arthur Jensen here:


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