The Lying Liars at Goldman Sachs

Today, Goldman Sachs sent its second-highest-ranking officer to Washington, D.C. to tell the Financial Crisis Inquiry Commission that his company is staffed and managed by complete idiots. In an effort to evade investigation, Goldman Sachs Chief Financial Officer David Viniar claimed that his company really just doesn't know how to do basic bookkeeping. It was a silly and transparent lie, but if it were true, every investor the world over would be pulling its money from Goldman as fast as possible.

At this point, Goldman Sachs execs have made clear that are very good at making themselves look like jerks. Viniar's comments at yesterday's hearing follow a series of, let's say, unflattering public appearances over the past few months involving fraud investigations, "shitty deals" and "God's work." But Viniar still had some real whoppers ready for the FCIC:

"We don't have a derivatives business."

Viniar actually said that, and he said it to FCIC Commissioner Brooksley Born, one of the world's most seasoned experts on derivatives. Her response, somewhat incredulous, was to point out that Goldman has well over $40 trillion worth of derivatives housed at its commercial bank. That's a lot of money for a business that doesn't exist.

Viniar backed off a bit, saying that, sure Goldman does do derivatives operations, but they don't separate those businesses from other activities. This fact, according to Viniar, makes it impossible to say anything substantive about Goldman's derivatives deals at all.

Derivatives, of course, have gotten Goldman Sachs into an awful lot of trouble. The SEC's fraud suit against the company is based on a horrific derivatives deal the company set up, and investigators are looking into other transactions the company established that their own employees described as "shitty." They entered into several billions of dollars worth of derivatives bets with AIG that would have bankrupted Goldman had AIG gone down. In 2008, Goldman used derivatives to quite literally make a killing by jacking up the price of food around the world, causing mass starvation, along with tidy speculative profits for Goldman. That same year, Goldman was also heavily involved in pushing the price of oil through the roof with, you guessed it, derivatives.

So it's no surprise that Goldman wants to evade answers from the FCIC on the subject. These businesses are enormously profitable for the company and help the company make money by doing things that are morally repulsive (setting their own clients up to fail, starving people, etc.).

But while nobody at the hearing took Viniar's evasive tactics seriously, the claims he made about Goldman certainly make the firm look bad. Viniar claimed that Goldman operates with basically no internal accounting or transaction oversight, under a bookkeeping system more akin to Bernie Madoff than a prestigious Wall Street investment bank. Viniar insisted that it is absolutely technically impossible for Goldman to provide the FCIC with any information regarding Goldman's derivatives revenues, profits or losses, because the company just doesn't organize its finances that way. And what's more, it has no way of tracking or adding up the revenues from individual derivatives contracts.

"Are you telling me you have no system at your company that tracks revenues under contracts?" FCIC Chair Phil Angelides demanded. To the astonishment of everyone in the room, Viniar insisted that the answer to this question was yes.

If Goldman Sachs is truly not technologically capable of simply adding up the values of its derivatives contracts, every investor in the world should run screaming from the firm. Fundamentally, Viniar is claiming that Goldman Sachs cannot do basic bookkeeping. Other banks have provided the FCIC with exactly this kind of information, and for Goldman to be incapable of doing so would be evidence of mass incompetence across the entire firm.

Nobody believed Viniar. But you really have to wonder why Goldman would go to such absurd lengths to conceal such basic information about its derivatives operations from the Financial Crisis Inquiry Commission, when they know it makes them come across like shadowy villains. Which, of course, they are.

UPDATE: Yves Smith has a very thoughtful post up on yesterday's hearing, in which she draws the exact opposite conclusion about Goldman's testimony than I did. It's always dangerous to disagree with Yves Smith, but I think her take is an unfair characterization of what happened at the hearing, although it's a very instructive point about why we talk about derivatives the way we do. Here's Yves:

This is a ridiculous line of questioning. What the hell is the FCIC trying to get at? There is NO SUCH THING as a 'derivatives business.' This in fact illustrates how industry lobbyists have managed to muddy policy debates, to the advantage of the industry, by lumping a lot of disparate activities under the derivatives banner.

Goldman no doubt has commodities futures businesses, [foreign exchange] and currency swaps, and corporate and asset backed credit default swaps activities. I'm sure it also engages in stock and bond index and futures trading in a number of markets. I'm a big believer in knowing what questions you are trying to answer when drilling into data, and I see no utility in having an aggregate figure across these activities.

I think Yves is basically right about the facts here. It is ridiculous that so many very different kinds of transactions are all classified under the banner of "derivatives" and this is very clearly a result of effective lobbying. That's a really important insight--one of the reasons why "derivatives" are so confusing to most people who don't work in finance is that they can't figure out what the damn things are, and that is partially a result of so many activities being called "derivatives" activities. And bank lobbyists have done their best to establish a very broad swath of businesses as "derivatives" businesses, because doing so has helped them skirt regulatory oversight for a bigger chunk of their business.

But I really don't see why that point is significant in the Viniar-Born-Angelides exchange. The battle to define derivatives was lost by 1994, or 2000 at the latest, with the passage of landmark legislation deregulating wide swaths of the derivatives industry. Derivatives, for better or for worse, now have a legal existence as a deregulated class of banking activities, even though derivatives operations vary widely.

I also think there are plenty of good reasons why the FCIC might want Goldman's aggregate derivatives information. Let's say the FCIC just wants to explain to the public how big banks make their money (hint: derivatives). Given the extensive deregulation of derivatives, banks have different incentives to pursue derivatives income than they have for other types of banking. It would be a valuable public service to explain to people outside of the financial world exactly what different bank profit-machines do to support real activity in the broader economy. The FCIC isn't the only entity after aggregate derivatives data. The OCC collects less-specific aggregate derivatives information for every commercial bank in the country.

The OCC data itself is instructive. Goldman Sachs opened a commercial bank in the fall of 2008 in order to get access to cheap loans from the Federal Reserve. Their commercial bank unit, Goldman Sachs Bank USA, really doesn't exist to do anything other than borrow from the Fed. And yet, Goldman has a $40 trillion (notional) business in various derivatives businesses housed at that commercial bank unit, which it moved there as soon as it established the commercial bank. Why did Goldman immediately move $40 trillion worth of generally unrelated activities under the same legal entity? That strikes me as a very interesting question for the FCIC to pursue.

The answer probably has something to do with taxpayer perks, and the higher credit ratings that result from those perks. Do we want banks to be backing derivatives operations with cheap funding from the Fed? To me, that seems like a question worthy of investigation by the FCIC.