Their Own Private Bailout: More On Goldman And AIG

Have I been going too easy on Goldman? One reader wrote yesterday to take me to task for turning a blind eye to Goldman's "double dealing." In his view, it's scandalous that Goldman was at one and the same time packaging mortgage backed derivates (CDOs) and betting on a crash through CDS contracts made with AIG. If  Goldman thought mortgage backed derivates were a bad deal, why were they selling them to clients? And if they didn't, why were they betting against them?

I don't think this is fair. Goldman wasn't one of the biggest CDO players by any means. This reader forwarded a column by Ben Stein that cited Goldman as one of the "top ten" issuers of these derivatives. But Goldman is one of the world's biggest investment banks; its rankings in these areas are far lower than Goldman's rankings in other areas of finance. I don't think you can say that if anybody at an investment bank sold a certain kind of instrument, then nobody else there can bet against it. That's not double dealing. That's hedging risk, and it's what an investment bank is supposed to do. There's a gray area here. If a bank systematically promotes bad products to clients, that is indeed a meaningful issue. But we don't have nearly enough insight into Goldman's workings to say that (by contrast, I think we can say that about Bear, Stearns, which seemed to have taken its worst, least sellable CDOs and dumped them in to Ralph Cioffi's funds).

It's also worth noting that some of the criticism of Goldman really puts any investment bank in an unwinnable position. If they hedge their exposure, they're "double dealing." But if they don't have lots of exposure to mortgage bonds, and are simply making bets on the derivatives market through its AIG contracts, they're "speculating." Either way, the investment bank is somehow supposed to be culpable. You can see the irony of this if you look over the broader landscape. The banks that lost money are supposed to have been criminally negligent because they didn't see where the market was going. Now it seems Goldman, one of the few banks that made money in all this, is supposed to be slimy because they did.

PS: Should we stop trading in the kinds of derivatives that AIG dealt in, as George Soros advocates? Yes. But that doesn't mean we should criticize and/or punish Goldman for having been on the right side of the trades when no one saw just how stupid and destabilizing AIG's business was.