Matt Stoller: MF Global, MBS, and the Goldman Resignation

Matt Stoller is a fellow at the Roosevelt Institute.  You can follow him on twitter at http://www.twitter.com/matthewstoller

Matt Taibbi has a good piece on the important and public resignation of a former Goldman executive, Greg Smith.

The essence of Smith’s piece is devastating. He points to one simple, specific problem in the company: the fact that Goldman routinely screws its own clients.

Paul Volcker has already referred to Smith’s op-ed, blaming Goldman for the change in the culture of Wall Street.  Taibbi argues that having an insider come out and blast the culture of Goldman is “the endgame for reforming Wall Street.”

It was never going to happen by having the government sweep through and impose a wave of draconian new regulations, although a more vigorous enforcement of existing laws might have helped. Nor could the Occupy protests or even a monster wave of civil lawsuits hope to really change the screw-your-clients, screw-everybody, grab-what-you-can culture of the modern financial services industry.

Real change was always going to have to come from within Wall Street itself, and the surest way for that to happen is for the managers of pension funds and union retirement funds and other institutional investors to see that the Goldmans of the world aren’t just arrogant sleazebags, they’re also not terribly good at managing your money.

There’s a lot to like about this method of thinking.  As Tom Ferguson routinely points out, it is changes in the coalition of elites that are necessary (though often not sufficient) for changes in political economy.  That said, I don’t think it’s right to argue that the policy choices made by the Bush and then the Obama administration around foreclosures, bailouts, and banking regulations were marginal.

It’s important to recognize that Tim Geithner’s policy architecture mattered deeply, that Barack Obama and Shaun Donovan have pursued certain policies with aggressiveness and sharpness, and that the consequences of those policies are not small.  Moreover, the entire housing finance space is a deeply co-mingled Wall Street – government structure designed ostensibly to house Americans and create a channel for investment and savings as well as macroeconomic regulation.  Just saying that change will have to come from Wall Street misses this angle, as well as the political corruption that has been part of the space since the 1970s.

Smith is a brave and courageous soul, and it’s great that he’s speaking out as aggressively as he is.  Hopefully this will prompt investors, many of whom know they are getting ripped off, to organize against the power of these large banks.  We see, with Goldman, with MBS investors and Shaun Donovan, and with MF Global, the powerlessness of the investor community.

Bloomberg bankruptcy columnist Bill Rochelle and Bloomberg anchor Lee Pacchia talked about this last week regarding MF Global, as the Bankruptcy Trustees are causing profound anger among investors who have lost money.  This is not something that can be fixed by investors taking their business “elsewhere” – there is no elsewhere.

This is a political problem, and investors better get wise to whose ox will be gored if they don’t fix it.

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About Matt Stoller

From 2011-2012, Matt was a fellow at the Roosevelt Institute. He contributed to Politico, Alternet, Salon, The Nation and Reuters, focusing on the intersection of foreclosures, the financial system, and political corruption. In 2012, he starred in “Brand X with Russell Brand” on the FX network, and was a writer and consultant for the show. He has also produced for MSNBC’s The Dylan Ratigan Show. From 2009-2010, he worked as Senior Policy Advisor for Congressman Alan Grayson. You can follow him on Twitter at @matthewstoller.

40 comments

  1. Richard

    Matt,

    It didn’t receive a lot of attention, but PIMCO quit the American Securitization Forum because it was dominated by the sell side (think Goldman et al) and did not fairly represent the buy-side.

    The disagreement came over Obama’s gift to Wall Street in the form of the $25 billion settlement.

    Clearly PIMCO has woken up to whose ox is getting gored.

  2. EH

    So…are there people working at, say, GS, who are probably lawyers or former regulatory officers, who are aware of regulatory loopholes and promulgate them as profit opportunities? If so, would this information be held as trade secrets?

  3. Conscience of a Conservative

    I disagree with Taibi that this resignation will effect firms doing business. I believe firms have already stopped. This is not exactly a news flash. What this may do is hasten Blanfein’s eventual exit, but not before we see a schmere campaign against Greg Smith.

    We don’t know everything, Smith may be disgruntled, there may be some small dirt, but in the end I think the Times Op-ed was spot on. Nobody at Goldman is a saint, but I think what happened is that this guy made enough money, had enough and got tired of making compromises.

  4. falun bong

    Sorry if I’m not hopeful that anything at all will come of this. Reminds me of the reaction to the massacre in Afghanistan. In the headlines for 24 hours, then gone (unless of course you are an Afghani victim).

  5. The Blago Hit

    Ridiculous. Taibbi is strictly an establishment agitator.
    The whole resignation episode (broadcast via the Ministry of Truth) is to begin the reform process for a venerable American syndicate – what Taibbi called a vampire-squid. Taibbi can’t go much further then a whimsical putdown, for that would be Taboo. (Like discussing who underwrites the destruction of other countries and the accompanying mass murders of civilians.) Rocket docket? – sure that’s PG13.
    Taibbi, as a cuss word laden jockstrap, wrote a piece of pre-election crap in 2008, that went to bizarre lengths to humorize the most unlikely 9/11 conspiracies. It’s largely a piece of sh#t. Matt may smell too.

    1. Up the Ante

      Hitting the Blago is not working out for you. We’ll give you the chance to go back, rewrite your comment, and publicly admit that the “Vampire Squid wrapped around the face of humanity” can not be undone.

  6. JTFaraday

    “Hence we see headlines this morning like this item from Forbes.com: “Greg Smith Quits, Should Clients Fire Goldman Sachs?””

    Didn’t Mitt Romney park a lot of his money at the Squid?

    “A review of his personal financial disclosure records shows that a chunk of Romney’s wealth—he’s worth an estimated $190 million to $250 million—comes from investments in an array of Wall Street banks and investment houses, none more so than Goldman Sachs.

    Romney and his wife, Ann, have investments in nearly three-dozen various Goldman funds together valued at between $17.7 million to $50.5 million, according to a financial disclosure form (PDF) filed in August 2011. Those investments appear in the blind trusts and individual retirement accounts belonging to the Romneys. Romney’s been a loyal Goldman Sachs client. His 2007 disclosure, filed before his first presidential run, showed Goldman investments valued at between $18.2 million and $51.5 million.”

    http://motherjones.com/politics/2012/01/mitt-romney-goldman-sachs-investments

    Somebody need a move yer money campaign.

  7. LarryR

    Smith’s piece was a crock of shit — not that Goldman isn’t as he described, but that this is a recent phenomena. Bankers are greedy, have always been so. Smith made a shitload of money, and must have an issue with Blankfein and Cohn — he clearly wants them sacked. Cuz we’re not going to believe that Corzine and Rubin or any of the rest were angels.

    1. Conscience of a Conservative

      Have to keep in mind that there’s two Goldman’s Investment banking side and Trading Side. It’s when one is dealing with the Trading Side that this comes out most most.

      Yes. Wall Street is about making money, but Goldman, perhaps more than most, treats their clients as counter-parties. Watching the news this evening it’s interesting how the accounts back up Smith’s assessment.

      Does this take Goldman down? Of course not. But banks, these days more than ever, are mindful of perception. Many clients have already reduced/stopped trading with Goldman. Long term this could take down Blankfein and return power to the investment banking side. And the trading side, probably won’t be returning to pre-2008 glory days any time soon.

      1. Lyle

        Some times I think that the whole broker dealer model is one big conflict of interest, in that the broker has things to push on clients. One wonders if the old UK model where a broker dealt with the public and the jobber (market maker) dealt only with brokers and not with the public avoids this conflict. If a broker is basically in the job of taking orders and executing the trades, and does not make markets or loans or have any inventory then there is no reason for the broker to push things (anyway the brokers are really used car salespeople wannbes, selling securities the way the prototypical used car salesperson sells cars).
        If one were a jobber then they make markets, but limit their sales efforts to prospectuses only (which indeed is really the rule now but clearly ignored) no sales calls allowed by the jobber.

      2. JTFaraday

        “But banks, these days more than ever, are mindful of perception.”

        And just where have you see that exactly?

    2. LucyLulu

      The only issue I had with the article was the same about this not being anything new to the last 10 years, which begged the question of why he would say so. My sister was well on her way to a career as a hot shot Wall St. finance attorney doing the 9+ digit deals and switched areas of practice in the late 90’s because of disgust, singling out GS in particular as all being huge assholes (and she rarely says anything negative about anybody, not her style, so it took me by surprise when she said made the remark and has stuck with me). So was it a function of starry-eyed youth and naivete when he started? Or some other motivation? But does it really matter? No doubt it is all true, and those in the business all know it. BTW, did anybody catch Bloomberg’s editorial in defense of GS?

      “Apparently, when Greg Smith arrived at Goldman Sachs Group Inc. (GS) almost 12 years ago, the legendary investment firm was something like the Make-A-Wish Foundation — existing only to bring light and peace and happiness to the world.
      http://www.bloomberg.com/news/2012-03-14/yes-mr-smith-goldman-sachs-is-all-about-making-money-view.html

      Because of the position he held, and the timing being right now, it will get a lot of attention and traction, far more than had he written it three years ago. Between the foreclosures, MBS, MF Global clients being screwed, manipulation of equities by HFT, etc., investors are already disillusioned and becoming spooked out of the markets, flying into safe havens like Treasuries that are earning almost nothing. I have. Thank you, Greg Smith. You have done your country a favor, no matter what your motivations might have been.

  8. Glen

    It’s nice for Mr Smith to take the effort when he leaves (hopefully to a nice safe, fulfilling retirement), but he didn’t really tell us anything we didn’t already know for the last fifteen or twenty years. This whole “greed is good” thing hasn’t exactly been a big secret.

    I fully expect that the 99% will find out that not only have our 401Ks been wiped out and our pensions have been robbed. Then we’ll watch our Social Security be given to the same guys that tanked the TBTF banks and Wall St.

    There is already a huge amount of anger about watching the government give our country’s financial future to the exact same people that just wrecked it’s immediate past, but this has not caused our government to make any meaningful changes (it would be good if you could list some real consequences for Obama’s efforts in this area) which make any meaningful change. The only place there will be any real screams of anger which register in Congress is when one of the 0.01% rips off another of the 0.01%.

    However, the absolute corruption and fraud is so blatant and ugly at present that we finally seem to have arrived at the beginning of a tipping point to a new path. Hopefully OWS will be enough of a wake up call to the younger generation that investing in Wall St is both a financial and moral dead end. This in and of itself, will result in massive changes over the next twenty years which will do much more to force change – what that exact change will be is too early to tell.

    1. Jesse

      I think it’s more about who said it (a man who was an executive of GS just a few days ago) than what he said.

  9. Mac

    I would have to think that Larry R has a point. I do not think GS is honest or even a reasonable organization. I do suspect that Smith has some other issue.

  10. Schofield

    Hey. America was built on hustling and screwing anything with a pulse! Don’t like the attitude then find another one!

  11. watercarrier4diogenes

    Actually, I could care less about what prompted Smith to make a clear and compelling statement from insideGS. It doesn’t detract from the statement, and certainly doesn’t downgrade the examples he gave. As much as people in the know (eCONNed readers and denizens of this blog), not nearly enough people in the country in general know squat about what’s covered here daily. ANY light shined on Blankfein and his minions is a “Good Thing”™.

  12. MIWill

    Smith brave and courageous. Until he’s not.

    Schneiderman was all warm and fuzzy for a while. Heh.

    Heroes. Git yer red hot heroes.

  13. Jon

    This is an important point.

    Considering Taibbi’s approach–that lawful and reformed behavior can only come from within Wall Street–leaves no agency or mechanism in which the 99% can coalesce and assert their aggregate political power.

    Isn’t it convenient, in an election year, that one should declare change comes from within rather than without.

    This is nothing more than subtle propaganda to divert the hopes and energies of the Occupy movement. We should instead focus on culture and lure Wall Street insiders to cross the ocean. We shouldn’t waste our time on political protests.

    This is revealing. Essentially, Taibbi concludes political power derives not from the public but from those within the existing power structure. This is true on a circumstantial basis, but Taibbi is making the argument it is true on an absolute basis–that our best hope is to shame Wall Street–rather than to confront power with power; violence with violence. (Civil disobedience often takes the form of commercial deprivation so I consider it a violent act-that of taking.)

    In essence, it is a passive approach. Just wait for the guys on Wall Street to be shamed enough and things will change for the better. No need to pick up a pitchfork or poster.

    What a load of crap. Thanks for calling him out on this one.

    -Jon

    1. Bolshy ballet

      There are elites and there are elites.

      http://exiledonline.com/letter-from-athens-inside-the-greek-crisis-with-anarchists-and-the-radicalized-ex-middle-class/

      The .01% can probably prey on the 99%
      indefinitely. But now that the parasitic banker larvae have battened on to the 99.8%, the cashed-out rentiers and the scions of local gentry and the discerning technocrats, they’re in deep shit. These people can do damage. They don’t pray to flags. They have keen self-preservation instincts. They know how to take down a regime.

    2. SqueakyRat

      Well, Taibbi’s gotten pretty cynical about the prospect of reform from outside — because there isn’t much outside left, given the political power Wall Street has amassed. His point is that the looting has gotten so bad that the system is breaking down from inside.

  14. Abigail Caplovitz Field

    The very best that could happen is that clients leave goldman and the rest of the wall street establishment, voting with their feet. But it won’t happen, and even if it did on a scale large enough to shutter a firm or two, it alone wouldn’t solve the problem. Unless and until investment bankers and traders are again housed in partnerships instead of public corporations the risk/reward incentives are wrong. The only thing that keeps the greed from being overwhelmingly self- and society- destructive is the knowledge that the risks come home to each and every partner. And that change takes legislation, not a single, high profile resignation.

    (Incidentally, the Goldman IPO preceded Smith’s arrival by only a couple years, so the old partnership culture was probably still there when he got there, but without the constraints of the partnership, it probably dissipated rapidly.)

    1. lambert strether

      It’s possible, though I hate to admit it, that even criminal convictions wouldn’t work, since the banksters would run their enterprises from jail, like the mobsters they are.

  15. Hugh

    Goldman was already a criminal enterprise when Smith arrived at it 12 years ago and it still took him 3 1/2 years after the 2008 meltdown to realize that it was toxic although he still has doesn’t “know of any illegal behavior.” That sounds like a severe case of ongoing myopia.

    While I don’t have any sympathy for Smith, I suppose anything that publicly tarnishes the Goldman brand is to the good. But it’s not much more than a glancing blow. The financial elite will go after him largely to protect their own crooked enterprises and you have to remember just how deep Goldman’s tentacles go. In the week following the meltdown, the company with all of its smartest guys in the room had to be saved twice, first with the decision on the derivatives payouts at AIG and then its pseudo-conversion into a bank to get access to Fed and Treasury lifelines. And of course one of the principals arranging all this was the then Secretary of the Treasury and former CEO and chairman of Goldman Hank Paulson.

    Goldman doesn’t survive on its smarts. It survives on its connections, period. Rubin, another Goldman chairman, was an important economic adviser to Obama and still visits the White House. Goldman still has a ton of people at Treasury and William Dudley, the head of the New York Fed which is as big as all the other regional Fed banks combined and positioned at ground zero on Wall Street, was Goldman’s chief economist.

    So I wouldn’t write Goldman off just yet.

  16. Abe, NYC

    But why, oh why have investors never woken up? Why have they agreed to be screwed so many times over, most recently with AG settlement? Honestly, who still had illusions about the Squid after it paid $550 million to settle fraud claims?

    I think there’s little hope that the Ents will be aroused. It is, as Yves says, an agent problem. It’s mostly contributors who get fried, not fund managers who, I suspect, are mostly part of the club.

    Reminds me of the Russian default of 1998, as well as any number of blown-up pyramids. Those connected got their money back, the rest could go screw themselves.

  17. kravitz

    Goldman lost 3.4% of its value after the Greg Smith piece.

    Hello 1%.

    “The shares dropped 3.4 percent in New York trading yesterday, the third-biggest decline in the 81-company Standard & Poor’s 500 Financials Index, after London-based Greg Smith made the accusations in a New York Times op-ed piece.”

    Goldman Stunned by Op-Ed Loses $2.2 Billion for Shareholders
    http://www.bloomberg.com/news/print/2012-03-15/goldman-stunned-by-op-ed-loses-2-2-billion-for-shareholders.html

  18. PAUL TIOXON

    There is a reason why I advocate picking a side. It is not the same as picking a stock. There may be no return in your lifetime on the political path you take, in the same manner you expect a return on your investment. At least Matt S. is acknowledging and confirming via Tom Fergueson the basic political conditions for change: power. Not good ideas, or a lot of money, or luck or preparation taking advantage of opportunity but power, being to achieve policy goals in the face of opposition, organized and otherwise. Notice, I don’t include right or wrong, or the rule of law or other ethical luxuries. Can’t afford to.

    “As Tom Ferguson routinely points out, it is changes in the coalition of elites that are necessary (though often not sufficient) for changes in political economy. That said, I don’t think it’s right to argue that the policy choices made by the Bush and then the Obama administration around foreclosures, bailouts, and banking regulations were marginal.”

    Capitalists compete with one another, trying to win market share and bury the other guy. In addition to exploiting humanity, they war among themselves. In an era of deregulation, the very concept of territorial restraint represented by the nation state system, with laws, regulations and competing national currencies is a drag on efficiently getting the market to effortlessly come to the right price. Electric vehicles, solar electric panels and SOlyndra and the Chevy Volt are derided by conservatives on behalf of the mineral extraction oil energy interests. And the American auto industry, along with the UAW escaped sure death by means of government intervention under the leadership of Democrats.

    While no one thinks that capitalism will be restructured, or Wall Street will be reduced to serve the greater good of the social order, there is a death knell to neo-liberalism that is overlooked in the health care reform act. The entire private health care insurance industry is completely regulated by virtue of a statutory limit on their profits margins, held at 15-20%. So for the most part, 85 cents of every premium is to go to health care and not its administration in the hands of insurance companies. Needless to say the government manages so much better at3% or less to administer its health care insurance programs.

    Why this means anything at all significant? In order to have any politics, what you do to acquire power, you want to actually have someTHING to control. Forcing the private insurance companies to limit their profit margins is not the hall mark of capitalism by any definition. There is a reason why the conservatives go so nutso over this, and there is more to it than individual mandate. Consider the use of that argument when over a dozen states are considering women to undergo government mandated vaginal exams to get an abortion or birth control. It is the statutory economics of the reform, not the high minded rule of law bullshit that is trotted out when you don’t really want to talk about power.

    The nationalization of student loans as well as expanded Pell Grants so there will be less debt is another bench mark of the retreat from neo-liberalism. But the big over arching principle of private capital being held beyond the reach of political control by the nation state mechanisms via democratic elections is the necessary political policy to be expanded into other areas, other than health care and student loans. This is the line that is being drawn, as well as economic priorities, such as leaving oil energy out of the most favored sector status and replacing it with the electrical powered industrial model that is solar powered.

    My politics is not built around the people who should go to jail but don’t. The very composite population of the commanding heights of capitalism will or will not go to jail just because there are laws on the books. Not when they took over the mechanism of state that enforces laws. Not when they are the mechanism of the economy that makes food appear on supermarket shelves, gasoline in plentiful supply to get people to work, and housing with AC and heat at the flip of a switch. The people who run this system will not go to jail anytime soon unless the system can be absolutely sure that everything will run like clock work with so many thousands of them locked up, barred for life from working in these fields as well as other political conditions necessary to make sweeping justice a reality.

    There is a reason while there are billionaire politicians, mayors, governors even PBS talk show hosts. When Oprah firmly consolidated her position of wealth, she stopped the talk show the gave her that wealth. When Bloomberg made his media empire billions, he goes to work to be a 3 term mayor? Politics matters, in the grubby vote for someone who will actually take office sense of the word. The policies, although not changing the entire world historical process, are monumentally different in measurable ways that lead to completely distinct consequences. The elites fight each other for position in the economy as well as in the elected arena. And that is when they are not using the military option against one another.

    But for now, in this battle between the buy side and the sell side, I do not see how the politics that seems to pursue the ability to wipe out the debt of individuals by allowing insolvent banks as well as insolvent funds to go bankrupt and have credit write downs marked to market, allowing underwater homeowners to to avoid foreclosure, stay in their homes or sell and move on in stable housing market with values firmly agreed upon as realistic. How do we demand principle modifications without hurting investors? Ultimately taxpayers in many cases who insure some of the insolvent entities like Fannie and Freddie? In many cases, even after all private banks and private mortgage note holders were made to pay, there would still be government entities, FHA and VA loans as well. Systemic risk results in systemic damage, to investors, taxpayers, retired pension holders… the public at large. How is it avoidable, even an arguable position to take in the face of the systemic nature of the disaster? The fact that the banks try to isolate themselves and avoid damage is not the answer. And a utopian scheme is not a valid response either.

    1. Mark P.

      I think you make some central points.

      But your syntax is trashed in your last paragraph. I don’t want to guess what you’re trying to say. Could you rewrite it more coherently if you get a chance?

      (I think you’re saying “I do not see how the politics WORKS” and then the rest of that run-on sentence follows. Right?)

  19. gs_runsthiscountry

    If you combine the above video commentary on bankruptcy loophole with the SEC proposal [shenanigans] going on in regards to money market funds (i.e. floating NAV etc) – what course of action do you have as an investor? – I assert, you only have one, cash sweeps must go into FDIC insured accounts, and thus, banks.

    Through exploring this I am finding my brokers seem to only deal with the big 6 banks. As of 12 months ago one big name in discount broker DID NOT allow cash sweeps to FDIC insured accounts; note, this is no longer the case.

    Quite the chess game being played here IMHO. If the end game is to shrink the Money Market funds they will surely prevail.

    Big Banks 1 Discount brokers/custodians 0

  20. Hal (GT)

    RE: “This is a political problem, and investors better get wise to whose ox will be gored if they don’t fix it.”

    I personally think that it’s far more than a political problem. I do agree that it will require more than just investors taking their money elsewhere, but the problem I see is a culture where morality has been thrown out the back door in favor of self-enrichment at the cost of everybody else. It goes beyond politics.

  21. Kunst

    “the endgame for reforming Wall Street” will not come until we find a way to stop them (and their close relatives) from bribing our government.

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