Ex-Villain Goldman Is Reborn as Today’s Victim: William D. Cohan

June 14 (Bloomberg) -- You didn’t really think Goldman Sachs Group Inc. would go down without a fight now did you? Of course not. So it should come as little surprise that recently Goldman has started to push back hard against its nemesis, Senator Carl Levin, Democrat of Michigan, and his narrative that the firm is the lead villain of the financial crisis.

In its new mission, Goldman has been very careful not to take on Levin directly -- after all he remains a very powerful figure in Congress and incurring his further wrath would be plain silly. Instead, the firm has taken its case to the court of public opinion, through a series of orchestrated presentations with members of the mainstream business press and to at least one Wall Street research analyst.

Aside from pointing out that Levin’s Permanent Subcommittee on Investigations got a number of facts wrong in its 650-page report about the financial crisis -- a legitimate point -- the gist of Goldman’s argument has been that, unlike every other Wall Street firm, before, during and after the financial meltdown, Goldman was nothing more than a simple market-maker that happened to corral a few extra bucks in 2007 by being a prudent manager of risks.

Remarkably, given how adversarial the news media have been toward Goldman for the past two years -- ever since the firm’s name appeared near the top of the American International Group Inc. counterparty list (Goldman got $14 billion in taxpayer dollars in the AIG bailout) -- the bank has been scoring some points lately. You could watch the whole play develop.

On the Offense

On June 6, Liz Rappaport of the Wall Street Journal wrote that Goldman was intent on taking on Levin, perhaps by releasing exculpatory documents on its website. “Even if the documents aren’t made public,” Rappaport wrote, “they could be used by Goldman to defend itself in ongoing investigations that appear to be linked to the Senate subcommittee’s report.”

Goldman hasn’t made its internal analysis public, nor does it intend to, but it has showed the documents around town (including to me). For instance, in one document, “reviewed by The Wall Street Journal,” Rappaport continued, “the Senate subcommittee failed to count billions of dollars of bullish positions in mortgage-backed bonds and CDOs when it calculated the firm’s overall holdings for Feb. 26, 2007. Those bullish bets were large enough to offset all of the bearish positions criticized by the subcommittee.”

A Witch Hunt

The next day, Journal columnist Holman Jenkins fully exonerated Goldman and Lloyd Blankfein, its chief executive officer, and said Levin was conducting a “political witch hunt,” which he concluded, “happily … already seems to be dying a deserved death.”

Also on June 7, Andrew Ross Sorkin of the New York Times discussed Goldman’s new defensive posture in his weekly opinion column. One might have expected a tough line, considering his April 18 article in which he challenged Goldman to come clean about its large bets against the mortgage market starting in December 2006. (He quoted me wondering why Goldman wasn’t admitting what it did.) If so, one was in for a surprise.

“The vampire squid haters won’t like this column,” his defense of the bank began, with a riff on the phrase made famous by Rolling Stone’s Matt Taibbi. He noted that he had been “talking with executives at Goldman, who pointed me to other documents” and had “come to a different and perhaps unsatisfying conclusion for those readers looking for a big scalp.”

Not Cooking Anything

He then pointed out a few of the mistakes in Levin’s report, and spoke at length to Robert Roach, the congressional investigator who wrote the report for Levin. Roach admitted mistakes had been made but insisted they were innocent: “We weren’t trying to cook anything.”

Sorkin’s column concluded that the firm wasn’t massively net short the mortgage market in 2007 -- as Levin contends -- and that it was simply being prudent about its exposure to mortgage risk. “This isn’t meant to say that part of the firm didn’t go short -- it did and the firm has repeatedly said so,” Sorkin wrote, paraphrasing Goldman’s argument. “But the suggestion that the short was a huge directional bet by the firm to profit off a real estate collapse may not completely stand up.”

A Moral Cudgel

Not surprisingly, Taibbi didn’t much like Sorkin’s defense of Goldman and took up his cudgel. “I’ve been trying not to say anything bad about Andrew Ross Sorkin,” Taibbi wrote on his blog. “I even made a point of not watching ‘Too Big to Fail’” -- the HBO movie made from Sorkin’s book of the same name -- “so as not to get upset - - and when I heard from friends that the film turned Hank Paulson into Joan of Arc, that decision seemed to have been validated.”

He continued: “Now I’m bummed to see that Sorkin has written an elaborate defense of Goldman in the New York Times ‘Dealbook’ section, arguing among other things that Lloyd Blankfein probably did not commit perjury and that the bank did not have a huge directional bet against mortgages in 2007.”

(Taibbi also pointed out that Goldman is a Dealbook sponsor, though in fairness Goldman advertised on Dealbook once in 2010 -- which hardly qualifies as a sponsor -- and there is no evidence to suggest that Sorkin’s thinking has been in any way swayed by the bank’s advertising dollars. Indeed, Goldman has recently become a large advertiser in many financial publications, as part of an effort to burnish its image.)

Brief Mea Culpa

Goldman’s news media offensive reached an apotheosis of sorts on June 8 when Dick Bove, the outspoken Wall Street research analyst who had placed a sell rating on Goldman’s stock after the Levin report came out, wrote a brief mea culpa to investors -- after he, too, heard from Goldman.

“It is becoming increasingly apparent that a terrible wrong may have been done to Goldman Sachs,” Bove wrote. “Evidence is now mounting that the company did not have a net short position at a crucial time under study and that the Senate Committee may have misread the numbers. It is also becoming apparent that Mr. Blankfein did not misrepresent to the Senate Committee because Goldman was not net short at the time the firm was accused of misrepresenting its position.”

Firm as Scapegoat

In an interview with me, Bove said he believed it was important that “if you are wrong, to get out there quickly” with a correction. He said he feels he owed an apology to the bank. “Goldman Sachs is the scapegoat of our time,” Bove told the Times. Wow.

What all this adds up to is a successful campaign of obfuscation on Goldman’s part, something the firm has been pretty darn good at through much of its 142-year history, proving repeatedly that it can get out of the trouble it gets into. The fact remains that Goldman -- alone on Wall Street -- was net short in the mortgage market for much of 2007 and one of its proprietary trading desks made about $4 billion as a result, helping the firm to book $17.2 billion in pre-tax profits for the year, while the rest of Wall Street was blowing up. Thanks to those enormous profits -- the second-best year in its history -- the top five executives at Goldman split about $350 million in compensation.

Another Big Short

Meanwhile, at the same time that it was undertaking this “big short” -- as Goldman’s chief financial officer, David Viniar, referred to it in an e-mail -- the firm continued to package and sell mortgage-backed securities at par to investors around the world. Is this illegal? Probably not.

But it sure seems unethical to continue to make and sell a product you believe will not perform as advertised, and that is exactly what Goldman did until July 2007, when the market for mortgage-backed securities collapsed after the liquidation of the two Bear Stearns hedge funds that had heavily invested in those securities.

Incredibly -- considering Viniar authorized the decision to short the mortgage market in December 2006, in his conference room -- Viniar also claimed, according to CNBC, in written follow-up testimony to Levin’s committee that he “was not personally involved in the transactions … I also have no memory of any particular transactions or the overall notional value of this position at any point in time.” Please.

Placing the Squeeze

One other thing: At the same time that Goldman had in place the “big short” against the mortgage market, it marked down the value of the mortgage securities it had in inventory -- taking its losses on them -- knowing full well that it would more than compensate for those losses with the gains it had on its large short positions. Goldman’s low marks -- which were famously much lower than the rest of Wall Street’s -- put a squeeze on other firms that weren’t as clever as Goldman and didn’t have a net short position on mortgages.

Not only did Goldman’s marks help drive down the value of the securities in the market, exacerbating the collapse of firms such as Bear Stearns, Merrill Lynch & Co. and AIG, but also Goldman alone on Wall Street stood to benefit. Of course, the firm informed nobody that it had the “big short” going on while it was marking down its mortgage portfolio.

Read the Report

Goldman effectively put a trade together that made the firm billions of dollars of profit while at the same time hastening the demise of its competitors. This is something that neither Levin nor Goldman talk much about, although the details can be found in the often-overlooked report of the Financial Crisis Inquiry Commission, on Page 237.

One day last year when I was in the middle of writing my book about Goldman, I ran into Nassim Nicholas Taleb, the author of the best-selling “The Black Swan.” He took out his pen and, on the spot, wrote me an aphorism, not unlike those collected in his latest book, “The Bed of Procrustes.”

“Goldman Sachs is an incredibly well-built machine to capture that free option from society,” Taleb wrote. “They have good lawyers and great penetration of the Gilded Establishment. Unlike the Mafia.”

Something to think about.

(William D. Cohan is a Bloomberg View columnist. The opinions expressed are his own.)

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