Uncovering The Goldman Sachs Myths

Last Updated Jul 1, 2009 4:52 PM EDT


Rolling Stone writes about as accurately about the banking industry as the pop stars the magazine more regularly profiles tell the heavily mythologized stories of their biographies.

In a recent sensational article titled The Great American Bubble Machine, Matt Taibbi "exposes" the bank for what he sees as a giant, greedy, political money machine which purposely calculates how it can do the most possible harm to the U.S. consumer in order to extract the vastest sums of money:

The bank's unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on unseen costs that are breaking families everywhere - high gas prices, rising consumer-credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts.
Unfortunately, Taibbi is not alone in harboring these paranoid fantasies about the bank. As one commenter on The Atlantic's business blog points out:
Goldman Sachs absolutely deserve to be called out for over-profiting on Americans & we all need to be aware of how they will benefit from the Cap & Trade proposal.

The facts are Hank Paulson was their ex-CEO & not only gave them $10 Billion tax dollars, but a healthy part of AIG's $150+ Billion went into their vaults. Obama is also going against his own word & aiding Goldman, by permitting their head lobbyist to be Tim Geithener's cheif of staff @ Treasury. What happened to the NO LOBBYIST in my administration promise??

Even The Atlantic's business writer Daniel Indiviglio confesses that he "found [himself] agreeing with a fair amount of the article as well, but I think it ventures a little too far out into conspiracy theory land."

And according to left-wing blog Daily Kos, Goldman Sachs is responsible for our personal spending habits, too (and believe it or not, maybe even Michael Jackson's death):

Goldman Sachs is a wealth devouring machine; its core business is to produce consumers. Like the old days, we become serfs, indentured for life with the promise of happier lives via the american dream and home ownership. The catch? Well, it's structured in such a way as to pay two/three times what the property is worth and, just for good measure, we are conditioned to create even more debt, which will make us even happier, because we can fill our homes with STUFF and our yards with STUFF. Keeping the ever-expanding model of consumerism alive.
If such theories seem beyond absurd to the discerning reader, remember that for the vast majority of ordinary Americans, they also seem entirely plausible: hence the impact of Taibbi's article.

The Real Goldman Sachs
So what exactly is Goldman Sachs? Essentially, the bank is a giant sales-trading machine with dubious research and excellent risk-management systems. It's a hedge fund wrapped into the organizational structure of an investment bank, which allows it to weather the ups-and-downs of market volatility far better than most funds, which are often purely leveraged trading vehicles.

Actually, Goldman Sachs has a far greater corporate finance component than many assume, too, which, contrary to popular belief, does not exist purely to serve the firm's trading divisions.

On a personnel level, Goldman Sachs is really no different to what McKinsey is in the consulting world: a firm where the best employees get to take their credentials on to the upper echelons of Washington DC, or to whatever corporate boardroom in the United States that they choose. It's a firm with a "life-long" culture, as I have pointed out here at BNET Finance before.

But that doesn't make it scheming or evil ... and most of all, the structure and the culture does not make it infallible. Ask most investors, however, and you wouldn't necessarily know that. The firm' shares are up 75% so far this year, giving Goldmans a price-to-earnings ratio of 31.

The problem is, Goldman Sachs needs big market volumes to come out trumps up every quarter and to be able to make the kind of money it does to pay the hefty bonuses it just has to key employees. With volumes easing over the summer, any significant turn in risk appetite at the same time may just show pundits and investors alike that, contrary to Taibbi's assumptions, the bank is far from infallible.

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  • Daniel Harrison

    Daniel M. Harrison is a business journalist who has written for publications such as The Wall Street Journal, Dow Jones Newswires, and Forbes.com.

    In 2007, Harrison initiated Asian market coverage for TheStreet.com, reporting from New York and Hong Kong. He also served for a while as Opening Bell Editor at the financial blog Dealbreaker.com. Harrison is the publisher, editor and writer of The Global Perspective, and you can follow him on Twitter at Twitter.com/bizjourno.