For years now we have suffered through the gradual disappearance of fact-based reporting and journalistic standards. As frustrating as it has been, there were always at least a few places we could turn where facts and accuracy still counted for something.
But for all this slippage over the last few years, this was the week that the music truly died. The feeding frenzy to demonize Goldman Sachs has claimed the last bastions of solid journalism in just a few days.
The all out attack against Goldman began months ago because, unlike their competitors, this was the one firm that was smart and responsible enough not to put their entire company and the world financial system at risk by using huge leverage to make a single bet on a losing number. Instead, Goldman chose to hedge its bets and as a result, unlike many of its former competitors, it is alive and thriving today.
Goldman has been unfairly singled out by the media and politicians from the outset, but on April 16, the SEC filed a civil fraud charge against them with so much fanfare that there was a general media presumption that Goldman must have been caught red-handed doing something really terrible.
The SEC accused Goldman of arranging a high stakes bet between a fund manager named John Paulson who was bearish on the sub-prime mortgage market and two sophisticated institutional investors who felt that high-yield lower quality mortgages represented a good investment since, even during bad economic times, most Americans always found a way to make their house payments.
Paulsen helped select the mortgage portfolio on which the bet was to be based. Goldman went to ACA, a highly respected firm which proudly declared on its website that they were the most sophisticated mortgage experts in the world. Paulson and ACA then sat down together and decided on the final portfolio. ACA made a lot of substitutions to the portfolio and eventually signed off on it.
A German bank bet $150 million and ACA bet $850 million that the value of the portfolio would go up. Paulson's fund bet $1 billion that it would go down. Goldman took a $15 million fee for being the bookie and says it bet $100 million of its own money along with the banks.
As the subprime mortgage market collapsed, Paulson pocketed the whole $1 billion while Goldman lost a net $85 million and the German bank and ACA lost their bets as well.
The SEC claims that Goldman committed fraud because it didn't tell ACA up front that Paulson was the one who was betting against the portfolio. This charge makes no sense for a number of reasons. First, given the magnitude of the collapse of the market, the outcome of the bet would have been the same no matter who picked the sub-prime mortgages.
Second, the claim is false on its face because Paulson did not, in fact, select the portfolio on his own. He did it along with ACA which made many changes before signing off.
Third, the only Goldman person named in the suit is a 28-year old junior vice-president who himself was bearish on the mortgage market (although, at the time, his bosses weren't) and was foolish or immature enough to try to impress his girlfriend with his power and prowess by raving about his own brilliance using his Goldman email. No managers. No bosses. No executives. Just one kid.
In a world where real journalists still existed, one might have expected them to point these things out in their news reports following the SEC charge. How the alleged "duped" investors were actually just two huge savvy institutions who wanted to make the bet they did. How no Goldman management was cited as having done anything wrong. How any winner-take-all bet between two willing and qualified parties by definition entails huge risk.
But instead, they caved and joined the Goldman-bashing party. It seems that the demand to feed the beast has just become too powerful. No media outlet (except the Wall Street Journal) has resisted the temptation to demonize the one firm that had the chutzpah to be right when everyone else was wrong. How dare they stay alive at a time when everyone else was doing the patriotic thing and going broke! They couldn't resist suggesting that the mighty omniscient pariah Goldman was preying on thousands of small helpless investors.
One might expect this kind of sensationalism from publications such as Rolling Stone which was first out of the box last year when reporter Matt Taibbi called Goldman "a great vampire squid wrapped around the face of humanity relentlessly jamming its blood funnel into anything that smells like money." In his current Truthout blog, Michael Winship calls Goldman "the Blackwater of finance--the latest in a long line of companies you love to hate."
But until now, there were cooler heads around in the media--reporters who realized that mass hysteria and a lynch mob mentality do not constitute proof of wrongdoing. No more. Everybody is now in the pool.
The first journalistic pillar to crumble was the New York Times, which ran a front page news story this week claiming that Goldman had unleashed "a ticking time bomb on unwitting investors." Why would Goldman deliberately help build a time bomb in an investment in which they themselves ended up losing $85 million?
But the more outrageous claim is that Goldman targeted "unwitting investors," implying that thousands of unsophisticated normal families were pressured by Goldman salesmen to put their nest eggs in these things. There were other firms out there doing that at the time, but Goldman was not one of them. Goldman doesn't deal with unwitting investors in transactions like this. They served as the casino where a few very sophisticated gamblers could find someone on the other side of their bet by paying Goldman a fee.
The second major pillar to fall was CBS News, which ran a story (watch it here) detailing how in 2007, while people who had borrowed $500,000 to buy a $400,000 home that cost $200,000 to build were losing their homes, Goldman Sachs executives were joking and laughing about all the money they were making on their cynical bets against America. This was based on 4 emails in which Goldman employees expressed joy over the fact that they were making money on bets they had recently placed against the mortgage market.
To link the two pieces of the story in the way they did was deceptive and outrageous. The foreclosure crisis that is still going on in America was caused when real estate developers, lenders, and real estate brokers encouraged ordinary people to pay more than they could afford for homes that were worth much less than the purchase price. Goldman Sachs had nothing to do with any of that.
We live in a 24-7 worldwide financial trading market where it is possible to bet on the future direction of the price of anything. For CBS, the New York Times, and others to suggest that this is somehow unpatriotic is the height of foolishness and only misleads Americans.
I am a huge University of Arizona sports fan. Five years ago, LSU was coming to Tucson to play our Wildcats. I had watched our team and knew they were just in the early stages of rebuilding and had no chance to win the game. LSU was favored by only 8 points. I thought the spread should have been 50 points so I bet $1000 on LSU--against the team I love. Arizona lost by 63 points and I made $1,000.
My bet had no impact on the outcome of the game just as Goldman's bets against the mortgage market had none on the catastrophe that befell millions of Americans. Neither the homeowners nor the sports teams even knew the bet existed and each bet was irrelevant to the result on the field.
Back in the good old days, the responsible media would be helping us understand the difference. Instead of piling on and adding to the distortions and misunderstanding, they would be writing articles like this one. But the appetite of the beast for outrage is growing daily and it needs to be fed with more and more villains.
Today was the worst--the true stake in the heart. The dagger. The final straw.
I stay up until midnight on Saturday night (it's only 9 here in Arizona) to read Frank Rich's column in the Sunday Times. On just about every issue, I think he has made sense over the years and has done the best job of any columnist of sorting through the political jungle during complicated times.
Part of today's column explained well how the Goldman saga has been used effectively by President Obama to push forward his agenda for new broader financial regulation. Classic Frank Rich. But then he picked up a burning cross and joined the mob concluding that Goldman and "those who shorted the housing market bet against America."
Does Rich also believe that those who buy life insurance are betting against themselves and rooting for their own demise or that those who buy fire or car insurance are hoping that they have a catastrophic accident? Was I untrue to my Wildcats when I used the mispricing of risk in Las Vegas to make some money?
Does Rich think that the firms like Lehman, Bear Stearns, Merrill, AIG, Fannie Mae, Freddie Mac, and dozens of others who placed huge bets on the home team with borrowed money and subsequently went broke and created a world financial crisis are the true patriots? Does he think that the network of regulatory and rating agencies who all failed to do their jobs were all just great patriots as well? That Goldman Sachs is the major and only villain in this passion play?
I'm sending this article to Rich. If he apologizes, I'll let you know. Otherwise I'm truly finished. If he doesn't, I'm just going to watch and read more about sports and weather, saddened by the thought that today's reporting bears about as much resemblance to journalism as Hulk Hogan does to an Olympic champion.
If arrogance were against the law, hundreds of people at Goldman Sachs would probably spend the rest of their lives in jail. They were major architects of a toxic Wall Street culture for which we have all paid dearly.
If a reporter says that, it's journalism. But if he writes the kind of trash I talk about in this piece, he's one of the many who have brought the media--all of it--to its current sorry state.
In the interest of full disclosure, I am a managing director of an international investment firm that works and competes with Goldman Sachs. I have many friends and a family member who are current or former employees of Goldman. It is my honest belief that none of those facts played a role in shaping the opinions expressed in this article.