Why Do We Get Angry at Goldman and Not Citi?

Charlie Gasparino Fox Business April 10, 2010

Existing users please login

| Respond to Editor | Print

By Charles Gasparino FOXBusiness .ybuzz { float: right; margin-top: -4px; margin-left: -2px; } // get ybuzz li to show up properly on the right

Back in late 2006, the first tremors of the collapse of the financial markets began with a modest downturn in housing prices, and an increase in mortgage defaults on the part of high-risk borrowers.

Nearly all of Wall Street ignored what those signs meant, even though the big firms and large bank were holding billions of dollars of bonds on their books backed by the same risky loans. In other words, if these trends continued, the housing downturn could turn into something much more horrific for the banking system, and the country as well.

And yet just one firm took action to protect itself, its shareholders and, yes, the country's financial system. That firm is Goldman Sachs (GS), and for that Goldman has been defined as the very epitome of what's wrong with Wall Street.

As most people on Wall Street know, Goldman began "shorting" investments tied to the housing market in late 2006 and early 2007, particularly risky "subprime" loans, meaning it was betting that the markets would decline and was looking to profit from that decline. The conventional wisdom among most of the mainstream media, members of Congress and many of the firm's competitors is that this was an act of pure evil. Goldman was, after all, selling some of the same bonds to its customers that it was now betting would decline, and not disclosing that it believed those bonds would lose value. It made huge profits in the process; in 2007 its CEO Lloyd Blankfein earned nearly $70 million based largely on the profitable short position, more than any other CEO running a big firm.

In other words, Goldman thumbed its nose at the world while everyone else suffered. There's just one problem with the conventional wisdom: It's largely untrue.

I was reminded how absurd this scenario is (even as its repeated almost daily in the media) by listening on Wednesday two former Citigroup (C) executives, including CEO Chuck Prince and his chief deputy, Robert Rubin, the former US Treasury Secretary, testify before a new committee, commissioned by Congress to delve into the root causes of the financial crisis headed by former California Treasurer Phil Angelides. First, a little context: the pre-financial crisis Citigroup was like no other firm. It was huge, a combination of traditional commercial banking (it had $800 billion in deposits) and massive Wall Street risk taking. It was able to legally combine those two disparate functions, in part thanks to Rubin, who as Treasury Secretary helped overturn a law that divided commercial and investment banking.

There were warning signs about Citigroup's problems as far back as 2002 when it became involved in just about every corporate scandal imaginable from Enron to WorldCom to conflicts of interest involving its research analysts. As far back as 2005, analysts were telling management to sell off pieces of the monster because it was not just too big to fail, but too big to govern. When the financial crisis hit, it hit Citi particularly hard: Billions in losses and in the end, a massive government bailout costing tax payers hundreds of billions of dollars when you add up all the guarantees and loans needed to stave off insolvency.

All this happened under the nose of what was then considered one of the best and most stable management teams on the Street.

Citigroup's board, made up of such luminaries as Rubin and Dick Parson's of TimeWarner (TWX), were regularly lauded in the press for their business acumen. Citigroup's founder, long-time deal maker Sandy Weill, handed the CEO job to Chuck Prince, a long time executive at the firm, in 2003, a post he held until he was ousted in 2007 amid mounting losses. Rubin remained a board member and senior executive at the firm throughout this time, until he too, under pressure and criticism from shareholders over Citi's demise, stepped down in 2009.

But according to Rubin and Prince they had no idea the financial world was coming unglued until something in late 2007 when all those bad investments held on the books and some off in concoctions known as Structured Investment Vehicles were exposed as toxic waste eroding the value of the firm's balance sheet. "Like so many others, we couldn't see the unprecedented market collapse before us," Prince told the Angelides committee. "All of us in the industry failed to see the potential for this serious crisis. We failed to see the multiple factors at work," Rubin said in response to a question.

At least Prince had enough class to apologize for his mismanagement; Rubin on the other hand, acted as if he wasn't working at one of the most dysfunctional banks in the history of modern finance.

Listening to these once formidable men of high finance (Rubin, it should be noted, was chairman of Goldman Sachs before joining Treasury, so he presumably knows a thing or two about risk taking) pass the buck for Citigroup's implosion by blaming consultants, underlings, the arbitrary nature of the markets makes me sick, and demonstrates that for all of its faults, Goldman doesn't deserve its status as the most ridiculed and toxic bank on Wall Street.

Consider the following: While Rubin was passing the buck and Prince was clueless, senior executives at Goldman were worried in late 2006 that the firm's bet on the housing market was wrong. Yes, Goldman sold bonds backed by mortgages to its clients, but it held those same bonds on its balance sheet. In other words, without a hedge, Blankfein and his team, particularly CFO David Viniar, worried they would be rolling the dice on the company's future, as was Lehman, Bear Stearns, Merrill Lynch and, most of all, Citigroup, which had some of the largest positions in the most toxic debt. So Goldman did what all good gamblers do -- it took some money off the table, just in case it bet wrong.

Of course, Goldman is not perfect, either. The firm has a well-deserved reputation for trading on information gleaned from clients to make money for itself. By shorting the housing market Goldman was only able to postpone the inevitable -- the firm still had big positions in toxic debt that would crush its balance sheet if the markets continued to tank through 2007, as they did. And yet, Blankfein and his senior management team have tried (without much success) to promote the myth that Goldman wasn't in such bad shape during the height of the financial crisis after all, and thus didn't need a bailout.

These same guys also try with a straight face to suggest that the bailout of insurance giant American International Group (AIG) didn't really help the firm, even though Goldman held insurance policies known as credit default swaps on its holdings of mortgage-related debt bought from AIG. So when AIG was bailed out, those policies were covered at 100 cents on the dollar, and Goldman's holdings were protected from the massive price decline that occurred after the Lehman bankruptcy in September 2008. And yes, Blankfein was a bonehead for telling a newspaper in London that the firm does "God's work" when it trades bonds and acts as a middle man on an investment banking deal. (Although he maintains his comment was misinterpreted.)

Earlier in the week, Goldman tried to explain why it shorted the housing market in its annual letter to shareholders to quell the controversy over its trading practices. Like much of what Goldman does from a PR-perspective, my guess is it will fail. Already I hear the Angelides committee is thinking about recalling Wall Street CEOs for another round of public questioning about the financial crisis; people close to the committee say Blankfein is high on its list, and he is sure to be interrogated as he was earlier in the year about the firm's contrarian bet and the massive profits it produced while everyone else was losing money.

But barring some email showing Goldman was looking to harm its clients while it made out big from its now infamous subprime short, Goldman's trade should be heralded as among the most prudent moves taken during an imprudent time, where Goldman emerged as the only big firm with intellectual honesty to think that they might be wrong.

/**/adsonar_placementId=1456487;adsonar_pid=884767;adsonar_ps=-1;adsonar_zw=294;adsonar_zh=323;adsonar_jv='ads.adsonar.com';/**/ var ratingInnerHtml = ''; var ratingInnerHtml1 = ''; var ratingInnerHtml2 = ''; var popupnotloggedin = ''; var popuploggedin = ''; var loggingUrlHtml = ''; var addCommentHtml= ''; var un = readCookie('p_UN'); function isCommentingEnabled(){ try{ if(commenting && (commenting=='Yes' || commenting=='YES') ){ return true; } return false; } catch(e) { //alert ('commenting not defined'); } return true; } function readCookie(name) { var nameEQ = name + "="; var value = 'false'; var ca = document.cookie.split(';'); for(var i=0;i < ca.length;i++) { var c = ca[i]; while (c.charAt(0)==' ') { c = c.substring(1,c.length); } if (c.indexOf(nameEQ) == 0) { value = c.substring(nameEQ.length,c.length); break; } } // JavaScript Debugging //alert('Read... Cookie name = '+name+', Cookie value ='+value); return value; } ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; ratingInnerHtml1 += " "; // ratingInnerHtml1 += ' x '; // ratingInnerHtml1 += '

in order to recommend a story, you must login or register.

'; // ratingInnerHtml1 += ' '; // ratingInnerHtml1 += "x"; // ratingInnerHtml1 += "