In my first blog post, I questioned whether investment houses might create a new speculative market by betting on the outcomes of lawsuits much the way they encouraged betting on mortgage-backed securities. In certain respects, that post now seems out of place in a blog devoted primarily to education issues. I, however, always intended to return to the general subject of market speculation, and Matt Taibbi’s masterful undressing of Goldman Sachs in the latest issue of Rolling Stone gives me a wonderful opportunity to do that.
While some of Mr. Taibbi’s language is a bit risqué and he singles out Goldman Sachs when other financial services firms are guilty of the same or similar practices, I encourage you to set aside all prudish compunctions and read Taibbi’s article from beginning to end. Indeed I predict that many of you will be spouting his colorful expletives freely by the time you finish.
Before doing so, however, reflect on the news from Wall Street last week. One after another, banks and investment houses announced large profits in the midst of the largest financial meltdown since the Great Depression. Leading the way was Goldman Sachs, which reported a $3.44 billion (that’s “billion” with a “b”) profit in the second quarter, followed closely by JPMorgan Chase with a $2.7 billion profit. ”One theme here,” said former Clinton Administration Labor Secretary Robert Reich in The New York Times, “is that Goldman Sachs and JPMorgan really emerged as the winners, as the last of the survivors.”
What is the recipe for Goldman Sach’s success, according to Mr. Taibbi? Consistent with all illicit money-making schemes, there are four elements:
- An Intangible Market. It’s difficult to defraud someone when he or she is paying you cash for a widget. Either you have the widget or you don’t. Either the widget works or it doesn’t. Not so with markets for intangibles, which can come and go like a magician’s rabbit.
- A Broken Rule. Contrary to popular belief, there is no new money-making scheme under the sun. Every scheme has been tried in one form or another before. As a result, there generally are rules in place to prevent the most significant abuses from occurring. These rules must be broken.
- An Insider. It helps to have someone who gets a better deal than everyone else or has a special relationship with you. Every money-making scheme needs champions. This is why Ponzi schemes are so successful.
- A Hedge. The savvy investment house always positions itself so that does not get harmed when the bubble bursts.
The lessons to be learned from the internet, housing and oil bubbles are so important that they need to be examined in detail. But first a tantalizing trinket: How much did Goldman Sachs pay to this nation in taxes last year? $14 million (that’s “million” with an “m”), or about 1/3 of what the company’s CEO made.
The take-away: Free markets are only “free” for companies like Goldman Sachs who are “too big to fail.”
