Goldman: brokers and shorts are now the bad guys – how did that happen?

Last Saturday, the Senate Permanent House Committee on Investigations released email messages among Goldman Sachs executives in 2007 saying that they would make “some serious money” by betting against the housing market. According to the New York Times, these messages “appear to contradict statements by Goldman that left the impression the firm lost money on mortgage-related investments”.

With Goldman now being criticized for shorting, or betting against, the housing market, the media blame game has shifted.

As the financial meltdown worsened in 2008, the banks that came in for the most opprobrium were those that bet heaviest into the subprime mortgage arena – Bear Stearns, Lehman, Merrill Lynch, among others. They were joined later by AIG’s Financial Products in the Hall of Shame. These institutions were the ones that were seen as the most greedy, dumb, reckless – and setting off a crisis that had disastrous consequences for the economy.

At the same time, certain banks, in particular Goldman Sachs, were recognized as having the smarts to note that the market had turned and to begin to extract themselves from it. When Hank Paulsen, Ben Bernanke and Timothy Geithner insisted that all major banks take TARP money, many noted that Goldman probably didn’t need it, because of its foresight. In the event, Goldman paid back the TARP money as soon as it could. When the financial sector recovered, Goldman’s results were the best of the bunch.

But now with the latest Goldman news, we see a shift among the media as to which banks and investors are getting the blame for the financial crisis. A curious thing about the SEC case against Goldman over the Abacus deal - that is, the broader condemnation of Goldman, rather than the pedestrian details of the legal case - is that the broker is getting the blame. In other words, the organization that arranged the deal is at fault.

As it happens, I don’t believe it is fruitful to try to identify particular financial actors as especially blame-worthy; I think the problems are systemic and economy-wide. But if you were going to pick on a certain type, I would have guessed that the earlier media approach of singling out those betting on the housing bubble would have persisted. Yet, if you follow that logic, the blame in the Abacus deal would have gone to those foolish to bet long - namely ACA, IKB, ABN Amro. But instead, these institutions are now portrayed as hapless victims. Can you imagine anyone saying “poor Bear Stearns” or “poor Lehman Brothers”? 

As I mentioned, it is now the deal-arranger who is getting knocked. Moreover, Goldman is also criticized for being in cahoots with John Paulson, that is, the guy who shorted the bubble. In many prior accounts, including Michael Lewis’ number one bestseller, The Big Short, shorts were portrayed as the wise men, those who cut through the hype and put their money where their mouth was. But now Goldman is seen as tainted for associating with such a character, someone who malevolently set out to pick mortgage bonds that were “designed to fail”.

And today, with the publication of its emails from 2007, Goldman itself is criticized for shorting the housing market. But these are hardly major revelations: everyone knew that Goldman was reversing its stance, and thus of course it needed to take short positions as a means of balancing against the long positions it was stuck with. In 2008 and 2009 Goldman was praised for such foresight; today it is vilified.

In his Sunday op-ed piece in the Times on Goldman and financial reform, Frank Rich concludes by citing the radio program "This American Life", which had commissioned a song called “Bet Against the American Dream”. This song, says Rich, “distills a complex financial saga to its essence: Those who shorted the housing market shorted the country.” But the “housing market” was an over-inflated, speculative bubble. Everyone seemed to agree on this until about a week ago. And furthermore, if the shorts are now the bad guys, then those who bet on the bubble, and helped to inflate it, must be the good guys, right? Like Bear Stearns and Lehman?

The reality is that critics of Goldman aren’t really all that bothered with trying to understand the particular workings of the market, or being consistent. They want a scapegoat to rally against, and Goldman will do.