Goldman Sachs is a trading company. It was set up to be a trading company and it remains a trading company. It goes long and short to make money, takes risks and mostly manages them pretty well. When the sub-prime damages began to be tallied in 2008, GS came out OK because it had shorted the market. Bravo, everyone said. Clever boys!
Then Washington finally got around to digging into the whole mess, and lit upon GS like a duck on a Junebug. Cries of "trading against The American People" rang throughout the country. Outrage ensued. Butts were hauled in front of a senate panel yesterday to explain why they were net short the mortgage market.
For several grueling hours in front of the panel, the poor mugs from Goldman Sachs' mortgage-backed market making desk tried in vain to explain how markets work. Although it was clear that Goldman Sachs' lawyers briefed their clients well, they were no match for the irate - if often ill informed - questioners. In the end, they had to answer some of the questions. (And Fabulous Fab, cool as 'le concombre', was the most forthright.)
But, as my Mum always told me, when someone criticizes you maybe they should take a look in the mirror. The senate is bashing a trading company (turned investment bank) for packaging, selling and buying instruments that the government itself allowed - even encouraged - to exist. There were no regulators screaming about sub-prime mortgages until it was too late. "Free markets" was the term bandied about with absolute certainty during the years after Glass-Steagall's demise.
After the dot com bubble burst, the government was thrilled to have a new bubble to take people's mind off it. The housing market. The similarities are remarkable. When I started writing about dealing room technology in 1999, there were over 1,200 companies in London that were on my 'talk to' list. After the dot com bubble burst, there were about 12. Before the bubble burst, I remember hearing people say it would never end. That technology stocks would go up and up forever. They didn't, of course.
When I moved to the US in 2003, it was clear to me that the housing market was overheated. But everyone kept saying it would never go down. Look at all the Baby Boomers that have to buy retirement property or second homes, they said. Even the most sophisticated investors believed it, clearly. Five years later, the market collapsed. And the traders that were taking advantage of people's naiveté were both buying and selling instruments based on the very mortgages the government had encouraged.
GS happened to be net short at the time. Whether by design or by accident, GS was not fiddling while America burned. It was simply trading. Today Goldman Sachs must be wondering whatever possessed it to get into investment banking. And to go public with an IPO. I would be absolutely astonished if the powers-that-be at Goldman Sachs were not currently investigating the quickest path back to partnership.