Tower of Babel.

by Justin

It’s cool, you know, because at the end of the day they’re really not that smart. Sure, the CEO gets paid $70 million and helms a labyrinthine behemoth of a corporation famed for recruiting the brightest stars in the financial world, but how could you expect him to understand the market? I mean, what reason does the public have for assuming that one of the only entities to profit from the recession did so by the grace of more than just chance?

This is blowing my mind. You plead ignorance? Blankfein played dumb as Senators challenge the ethical decisions of Goldman Sachs and argues that the company practiced exploitation and deliberately misled its clients. I don’t have the expertise (or anything close to it) to attack this monstrosity head on. In fact, the Senate Permanent Subcommittee on Investigations, for all its righteousness seems to be equally baffled by the Goldman defense of its actions. Jon Tester, Democrat from Montana, summed it up by saying, “It’s like we’re speaking a different language here.”

I tuned in to the NY Times live blog of the proceedings a little late in the hearing, but got there in time to generate the sort of rage I never expected out of politics. Even the rampant insanity and cherished ignorance of the Tea Party never took me to this remarkable place. Fortunately, after watching the inhumanly slimey Fabrice Tourre speak in his own defense, that anger did a quick about face and transformed into awe – and that’s a much easier place to be in. A lot of my initial frustration sprang from my own ignorance and inability to wrap my head around a financial market so far removed from the world the rest of us live in. Baudrillard’s mind would be blown by this degree of embraced simulacra. Couple things that leapt out and need clarification:

A) Speculative CDOs. No real mortgage bonds, no essential value, just derivatives – a shining beacon of pure speculation. This was the fodder for the Abacus deal that brought Fab into the spotlight and into the SEC’s sights. This was a sore point for the Senate committee, but I can’t make much sense of it beyond what seems to be Goldman’s conscious manipulation of assets and failure to disclose the genuine value of them. If it’s all numbers and paper nonsense, it’s probably easy to lie where convenient and bet against some clients to earn a profit.

B) “There are parts of the business where you are a money manager where you owe a duty to the client, and there are parts of the business where you are a principal,” [Goldfein] says. This seems like a conflict of interests: how can a firm realistically guide its investors and clients if it bets against them? If its own bottom line and identity as a principal and market maker competes with being a money manager?

C) In defense of speculation and its economic role, Blankfein referenced the trading in oil: “They provide the liquidity and opportunity for people who want to hedge themselves.” To steal from Matt Taibbi’s research, after 1936 the Commodity Futures Trading Commission guarded against too much speculation with regard to tangible goods and saw that prices rose and fell with supply and demand. All that changed when Goldman asked for an exception in 1991, and gas prices leapt into the wonderful world of arbitrary and consumers paid four bones a gallon. Taibbi broke it down like this:

Goldman and other banks were free to drive more investors into the commodities markets, enabling speculators to place increasingly big bets. That 1991 letter from Goldman more or less directly led to the oil bubble in 2008, when the number of speculators in the market — driven there by fear of the falling dollar and the housing crash — finally overwhelmed the real physical suppliers and consumers. By 2008, at least three quarters of the activity on the commodity exchanges was speculative, according to a congressional staffer who studied the numbers.

The question is: how can they use one practice of exploitation and profit-mongering to justify another?

D) This echoes point B, but is a little more precise and maybe gets closer to the fundamental discord: “The thing we are selling for them is supposed to give them the risk they want.” That was in defense of offering securities that were allegedly doomed to fail, the same ones that Goldman bet against to pad their own pockets. Here’s the glitch: does anyone want the risk? Isn’t that just a means to making money? Maybe the risk is part of the thrill, but surely Blankfein can’t believe the risk itself is what inspires people to throw money at his company? People don’t gamble to take risks, they take risks in order to make money. At least most of the time.

Something else is starting to diffuse my anger a bit. And that’s the sense that maybe everyone should have just known better. Why trust an unabashedly greedy establishment to invite anyone into its special circle of hell? I don’t know. But if any entity is exposed as a clear enemy of the people, shouldn’t the government respond appropriately? Last I checked, having a clear and indisputable villain was a boon to any administration and a thrill to the public. Oh, Republicans, if only you’d get over yourselves for long enough to fight the good fight. Here was a closing thought from the NY Times about the villain of the hour:

We’ve gotten to see a bit of Goldman’s soul today. We’ve seen how an employee and an executive, called out about distasteful behavior, said they regretted not the behavior itself but rather that it was documented in e-mail. (The executive later apologized.) We’ve seen how Goldman employees do not think they have a duty to their clients on other sides of trades. And we’ve seen how dug in and determined Goldman’s leaders, and the rank and file, are that they’ve done nothing wrong.