Matt Taibbi‘s Rolling Stone article on Goldman Sachs mentions Arthur Levitt ’52 and includes this fun section.

The bank [Goldman Sachs] might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners – old people, for God’s sake – pretending the whole time that it wasn’t grade-D horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. “The mortgage sector continues to be challenged,” David Viniar, the bank’s chief financial officer, boasted in 2007. “As a result, we took significant markdowns on our long inventory positions …. However, our risk bias in that market was to be short, and that net short position was profitable.” In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages.

“That’s how audacious these assholes are,” says one hedge-fund manager. “At least with other banks, you could say that they were just dumb – they believed what they were selling, and it blew them up. Goldman knew what it was doing.” I ask the manager how it could be that selling something to customers that you’re actually betting against – particularly when you know more about the weaknesses of those products than the customer – doesn’t amount to securities fraud.

“It’s exactly securities fraud,” he says. “It’s the heart of securities fraud.”

Who was the Goldman Sachers in charge of those short positions? Michael Swenson ’89. You go, Swenny!

Taibbi, although a good writer, is fundamentally clueless on this topic. In any large institution, there will be different departments doing/selling different products, often with no knowledge of each other. My local supermarket sells both low-fat yogurt and Ben & Jerry’s Brownie Batter Ice Cream. The former makes health claims that the latter implicitly denies. Yet, there is no “fraud.”

The same applies to Goldman. The Goldman folks selling ABS securities to idiots pension funds and municipalities probably believed (more or less) in what they were selling. It is hard to be a good salesman if you can’t even convince yourself. And — Look at history! — housing prices had never fallen nationwide. Isn’t part of a liberal arts education learning from history?

Swensen, and the other proprietary traders at Goldman, probably had little if any interaction with the people selling to ABS securities. They drew their own conclusions and made their own bets. They did what they were supposed to do: forecast future prices more accurately than the market and position their capital accordingly. No fraud here.

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