Does Ben Stein, who writes the more-or-less weekly “Everyone’s Business” column at the New York Times, have any pride of authorship? Stein’s articles have a cobbled-together quality, as if he agglomerated whatever was rattling around in his brain and called it a day when he got to his word count (I’ll concede he might have put a little more effort into his opening and closing paragraphs).
Stein’s target this week is Goldman Sachs, but he fails to land a single blow. He tries to go after Goldman Sachs’ chief economist Jan Hatzius for his recent, widely publicized note that said the subprime-induced credit crunch could lead to a $2 trillion reduction in lending.
Press reports said that Hatzius admitted to using some back of the envelope computations, which would make it reasonable to subject his findings to further scrutiny. Yet Stein not only fails to describe Hatzius’ reasoning, he doesn’t even deign to set forth Hatzius’ $2 trillion conclusion. It’s hard to mount a credible attack on someone’s work if you don’t bother to tell readers what his report said beyond “[subprime related problems] would affect aggregate lending extremely adversely and slow down growth.”
Stein is equally lazy about his other charges against Goldman. He criticizes the firm for selling toxic mortgage products to customers while shorting them, citing a now six week old article by Fortune writer Allan Sloan:
Mr. Sloan brilliantly makes clear, is that as Goldman was peddling C.M.O.’s, it was also shorting the junk on a titanic scale through index sales — showing, at least to me, how horrible a product it believed it was selling.
The Fortune article says no such thing. It dissects a particularly dodgy 2006 securitization of second mortgages. The article reports that the deal was “assembled” in spring 2006. It doesn’t say when it was sold, but presumably no later than the end of the summer.
Goldman kept the weakest of 13 tranches, with a face value of $14 million, as its compensation. The article notes Goldman may have kept parts of other tranches (but knowing Goldman, I somehow doubt that). The story also reports on Goldman’s third quarter financial reports:
Goldman’s profits came from hedging the mortgage securities it keeps in inventory in order to make trading markets. It said in a recent SEC filing, “Although we recognized significant losses on our non-prime mortgage loans and securities, those losses were more than offset by gains on short mortgage positions.”
There’s no smoking gun here. This bit refers to third quarter 2007, not 2006 when Goldman was selling the deal in question. Whether Stein likes it or not, it’s acceptable to hedge your trading inventory. Now if Stein could find some proof that the firm was net short mortgage risk in 2006 when it was peddling this paper, that would be damning indeed.
Similarly, Stein mutters darkly about the Goldman mafia now in senior government positions, and how unseemly it is to have Paulson, who presided at the firm while it was selling dubious debt, now at the Treasury working on remediation. Yes, this doesn’t look right, and there could very well be something dastardly afoot, but very little of what the Bush Administration does passes the smell test. Without evidence of improprieties, this sort of talk sound a lot like what the conspiracy theorists put out.
Finally, we have this priceless bit of analysis:
He [Hatzius] is also postulating that lenders would have to retrench so deeply that lending would stall and growth would falter — an event that, again, has not happened on any scale in the postwar world, except when planned by the central bank.
Stein apparently can’t locate Japan on the map. Its post-bubble contraction was even worse than what Hatzius forecasts for America, and was most certainly not planned by the Japanese authorities. In fact, an article by Mark Thornton points out that Japan,and foreign commentators for the most part described the Japan of the late 1980s in terms of the supremacy of advanced technology and evidence of a new paradigm, the kind of ungrounded confidence we saw during the dot-com era. Jim Surowiecki points out that:
The problem was that the Japanese state and the Japanese financial establishment had enormous amounts of political and cultural capital invested in an ever-rising Nikkei, and as a result, literally refused to allow it to find what one might crudely call a more natural level…
The proximate cause of the bubble bursting was, at least in part, the introduction of futures trading on the Nikkei on the Singapore Stock Exchange (Simex), of all places. Warren Buffett has said that stock futures and options should be outlawed, and it’s not really clear what they contribute to long-term investing. In the case of Japan, what they contributed was a chance to gamble against the boom, which, in a sense, was a chance to make Japanese investors step back and look at how out of control they had gotten. Since the boom had been built on credit, with paper gains in one area (stock) leveraging gains in another (real estate) and vice versa, once the bust began a bad-debt spiral began that continues, to a some degree, today.
But no, Stein would rather ignore the example of the biggest economic crash since the Depression to make his point. With critics like this, Goldman’s PR department won’t be losing any sleep.
Update 12/2 10:15 PM: Roger Ehrenberg weighs in, finding yet another basis for criticizing Stein.