Goldman Sachs, vampire squid

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Thanks to the persistence and assistance of commenter audiospaceship, I finally read the samizdat version of Matt Taibbi’s Goldman Sachs screed. (Rolling Stone only posted excerpts, and while I may still go out and buy a print copy, I wouldn’t be able to link to it.) I generally liked it, and I actually learned a bunch from the section on Goldman and the oil market. The only thing that bothered me was that it’s all a bit of a bait and switch. Goldman hasn’t “engineered every major market manipulation since the Great Depression,” as the headline reads. At least, Taibbi offers no evidence for this. It’s just played a key—although not always the key—role in the big bubbles and crashes of the past decade. As I put it in Fortune four years ago, after Goldman engineered the merger of the New York Stock Exchange (run by Goldman alum John Thain) with electronic trading network Archipelago (in which Goldman was a major shareholder):

For most of its 136-year history, Goldman was a second-string player on a Wall Street ruled by J.P. Morgan, its stepchild Morgan Stanley, and since-departed firms like Dillon Read and Kuhn Loeb. But over the past quarter-century Goldman has ridden successive waves of market upheaval to the top—thanks in large part, as the stock exchange deal shows, to its almost unerring sense of just how far it can push the boundary between serving customers and serving itself.

“How remarkable that you can simultaneously act for all those people,” says former investment banker Philip Augar, whose new book, The Greed Merchants, explores how the Big Three investment banks—Goldman, Morgan Stanley, and Merrill Lynch—have thrived in an era of deregulation and global competition. “But that’s the system. It’s allowed.”

So yes, it’s fair (if unpleasant) to liken Goldman, as Taibbi does, to a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money,” but that’s true of all investment banks and a lot of hedge funds too. Goldman’s just better at it. Where Taibbi does have a very important point is here:

The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth—pure profit for rich individuals.

Again, this is true of all of Wall Street. Goldman’s just better at it. Also, it’s not completely true: There is surely something to the economic theory that investment banks and hedge funds perform a useful function in allocating capital. But as someone who has just written a big fat book explaining that the evidence for Wall Street’s brilliance at capital allocation has turned out to be pretty thin, I tend to think Taibbi is much closer to being right about this than the Wall Street mythology of a couple of years ago was.

Finally, it’s worth thinking a little harder than Taibbi did about why Goldman is in the position it’s in. I’ve been reading Charles Fishman’s book The Wal-Mart Effect, and it does a great job of explaining why Wal-Mart became so successful—because of a relentless focus on delivering the lowest possible prices for consumers. By now that relentless focus, in a company as giant and powerful as Wal-Mart has become, has brought all sorts of unpleasant side effects. But in itself it’s actually sort of admirable.

At Goldman the focus has been on hiring the smartest group of people employed by any American institution, and putting  them to work—in the most collegial atmosphere of any major Wall Street firm—in the relentless pursuit of arbitrage opportunities (a.k.a. money). It is Goldman’s edge at talent acquisition and development, together with a slightly more public-spirited ethos than is prevalent on Wall Street, that best explains its colonization of the federal government. The end result of it all is deeply disturbing and problematic for our democracy—no argument from me there. But it has come about because Goldman is really good at what it does.

Update: Now you can finally read the whole thing at Yay!