CNBCfix review: Whether
it’s mortgages or television,
Goldman is always hedged

          Posted: Sunday, October 10, 2010

Goldman Sachs is phenomenally successful.

And that's the problem.

That success is a tempting subject for everyone from powerful mainstream media organizations such as CNBC to Internet conspiracy writers, some of whom have put together intriguing if incomplete arguments against the firm's influence.

The firm says it thrives on exceptional talent and business practices. Critics call it chicanery, a "gaming" of Wall Street stretching all the way to Washington.

Who's right?

David Faber tries to provide some answers in CNBC's "Goldman Sachs: Power and Peril." Unfortunately the program promises more than it delivers.

This production feels about 6 months late. The peak of Goldman Sachs controversy likely occurred in April 2010, when the SEC charged the firm and a trader with fraud, likely the extent of any official government punishment of the firm.

Also, the program is as much about what's not in it as what's in it. It makes no mention of perhaps the firm's peak of desperation, when Warren Buffett agreed to invest $5 billion in the firm in September 2008. Faber also repeatedly expresses frustration that the firm's leading executives were not made available for interviews and that many former employees refused to speak on the record. He ends up with saccharine and predictable sit-downs with 3 current executives — Edith Cooper, Stephen Scherr and Craig Broderick — but complains the firm "reneged" on a promised interview with Lloyd Blankfein.

As far as photography goes, the possibilities for depicting mortgage-security backlash are obviously limited. Too much of the footage is static shots of Goldman's headquarters or flashbulbs popping at Blankfein's congressional testimony.

Even so, this is a watchable hour of documentary-like television.

Faber's descriptions of the firm's history, and what got it in trouble, are authoritative yet simple. The best parts are the explanations of mortgage securitization that parallel Faber's outstanding 2009 documentary "House of Cards." He goes on location to Cleveland, where he and his crew found, apparently based on information from Senator Carl Levin's hearing, just the example they were looking for: A home bankrolled by Goldman Sachs in a mortgage-backed security sold to others that also became a subject of a Goldman in-house Synthetic Collateralized Debt Obligation, or tool for playing a decline in the housing market.

This is a troubling revelation. A firm intentionally selling junk so it can bet against it doesn't seem like something that's in the public interest.

Cuyahoga (Ohio) County Treasurer Jim Rokakis tells Faber that when a firm can package a product to be bought by others, then invest its own money against the security failing, "there's something wrong with the system."

Maybe there is, maybe there isn't. Hedging is not just smart strategy in the financial world, it's a must. Perhaps because Goldman Sachs only officially responded to some of Faber's questions with terse statements, he describes the CDO in question not as a possible risk-management tool but "simply a wager, a bet on whether mortgages will be paid back."

If there is a case to be made for Goldman's CDO, don't blame Faber for ignoring it — he tried to get the firm to defend itself and merely received these statements:

"We did extensive due diligence on the loans we bought and securitized. We did not purchase loans where we knew the borrowers were unable or unlikely to pay."

"We did not choose the referenced securities with the belief that they would lose value. ... If investors did not like the underlying securities, they could have chosen not to invest."

Goldman's official trouble stems from an SEC suit that accused the firm of misleading investors over 1 particular CDO. The firm settled with a $550 million fine — the largest by a Wall Street bank in SEC history — and issued a statement:

The firm entered into the settlement without admitting or denying the SEC’s allegations. As part of the settlement, however, we acknowledged “that the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.”

Whether that penalty is a significant declaration of wrongdoing, or a politically correct one-off to appease public anger about bailouts, depends on who you talk to. There is, however, a more important bigger-picture issue that Faber essentially ignores: Why does Goldman Sachs deserve more scorn than its competitors?

At Bear Stearns, which essentially failed and required a taxpayer-backed sale guarantee to prevent bankruptcy, 2 traders were criminally charged with lying to investors.

Merrill Lynch is accused of understating the extent of its losses prior to its sale to Bank of America, which cost the taxpayers in bailout funds.

Lehman Brothers took down the financial markets by going under. Lehman was horribly leveraged, used extremely questionable accounting practices, and (ultimately) unlike Goldman was too proud to do a deal with Warren Buffett that might've saved itself and, to some extent, the financial markets.

The Goldman people in Faber's program, including former chief John Whitehead, prefer to speak as humbly as possible in generalities about the firm's philosophies. Anthony Scaramucci, a CNBC contributor and Goldman alum who speaks candidly about the firm, notes that among the firm's strengths is the principle of gentlemanly conduct, that employees are expected to get along and avoid the type of internecine warfare that can split or damage firms.

Lloyd Blankfein, it has been said, "doesn't do TV." Neither do most senior Goldman executives. This type of media avoidance bolsters the firm's image of elitism and exclusivity — and makes critics all the more suspicious.

For Blankfein, that's too bad. He tends to come across well on television, much more a polite bureaucrat than raging buccaneer of subprime securities.

Maybe the best explanation for anti-Goldman outrage is in footage Faber showed from the 1990s, when Robert Rubin and Alan Greenspan were kings of the world. They were the architects of our great economy. Everyone was making money in the stock market, everyone had an appreciating home, unemployment was low, the federal budget was under control.

10 years later, Greenspan is disdained, Rubin is run out of Citigroup for making tens of millions of dollars for doing virtually nothing, and home ownership is viewed not as the ticket to prosperity but a hellish albatross of debt.

If nothing else, Goldman lives to fight another day; times will get better and its image will improve. Whatever's being dumped on it, it can handle. As Niall Ferguson tells Faber, "After every major financial crisis, it's the winners who really get the heat."

"Goldman Sachs: Power and Peril" (2010)

Featuring: Carl Levin, Niall Ferguson, Charles Ellis, John Whitehead, Leon Cooperman, Edith Cooper, Anthony Scaramucci, Robert Khuzami, Stephen Scherr, Tony Brancatelli, Jim Rokakis, Craig Broderick, Michael Greenberger, Jon Corzine, Nick Nyhart

Senior executive producer: Mitch Weitzner
Senior producer: James Segelstein
Producers: Jonathan Dann, Clem Taylor, Bob Waldman
Lead editor: Patrick Ahearn
Editors: Richard Korn, Lisa Orlando
Associate producer: Emily Bodenberg
Camera: Chris Balcom, Marc Bloomgarden, Victor Calderin, Jim Curtin, Paul Dougherty, Brian Frania, Phil Geyelin, Jerry Frasier, Sean Healey, Alex Herrera, Bill Irmscher, Joe Kalter, Brian Kiederling, Gim Lay, Jared Manders, Marco Mastrorilli, Gerard Miller, Oscar Molina, Dan Powles, George Weller, Mark Wilson
Audio: Tom Craca, Dave Grogan, Dave Foerder, Derek Johnston, Jason Nagelberg, David Schumacher, Thom Shafer, Tom Staton, Everett Wong
Broadcast associate: Kimberly Saunders
Coordinating producer: Judy Gee
Consultants: Tom Adams, Valdis Krebs
Jib operator: Mike Milia
Utility: Mike Lawrence
Prompter: Marieclare Rivera
Grip: Corey Gailit, Benjamin Suarez
Manager and chief photographer: Angel Perez
Director of post production: Vito Tattoli
Creative director: Victoria Todis
Senior designer/animator: Jackie Dessel
Designer/animator: Michael Schwartz
Unit manager: Pamela Gaskins
Production manager: Tracy Lawrence
Intern: Brittany Watts
Special thanks: Ronald Reagan Library
Additional material: Public Citizen
Vice president, long form programming: Ray Borelli

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