Goldman – The Baseline Scenario

By James Kwak

The instinctive defense from Wall Street bankers is that they deserve the money they make: they’re just that good. By that logic, Jon Corzine was the best of the best: he was the head of Goldman, after all (although in his days, if I recall correctly, Goldman and Morgan Stanley were roughly tied in prestige). The failure of MF Global may have had many causes, but it does make one wonder: Are the people at Goldman really that good individually, or is it the firm (and its reputation, and its information flow) that makes them so good?

Andrew Ross Sorkin speculates that MF Global got Goldman-style risk-taking without Goldman-style compliance and risk management. I would just add: they also got it without a Goldman-style too-big-to-fail government guarantee.

Yesterday’s release of detailed information regarding with whom AIG settled in full on credit default swaps (CDS) at the end of 2008 was helpful. We learned a great deal about the precise nature of transactions and the exact composition of counterparties involved.

We already knew, of course, that this “close out” at full price was partly about Goldman Sachs – and that SocGen was involved. There was also, it turns out, some Merrill Lynch exposure (affecting Bank of America, which was in the process of buying Merrill). Still, it’s striking that no other major banks had apparently much of this kind of insurance from AIG against their losses – Citi, Morgan Stanley, and JPMorgan, for example, are not on the list.

This information is useful because it will help the House Oversight and Government Reform Committee structure a follow up subpeona to be served on Goldman Sachs with the following purpose: Continue reading “The Next Subpoena For Goldman Sachs” →