New York Times columnist Thomas Friedman lashes out at Goldman Sachs today, writing, "The behavior of some leading Wall Street banks, particularly Goldman Sachs, has been utterly selfish. U.S. taxpayers saved Goldman by saving one of its big counterparties, A.I.G. By any fair calculation, the U.S. Treasury should own a slice of Goldman today." This is a flawed line of reasoning, for at least four reasons.
First, as I point out in the long Goldman post, Société Générale, Deutsche Bank, and the combination of Merrill Lynch and Bank of America were each AIG counterparties about as big as Goldman. Yet Mr. Friedman isn't condemning them.
Second, Goldman's CEO, Lloyd Blankfein, was asked about this in his sworn testimony before the Financial Crisis Inquiry Commission created by Congress. Commissioner Peter Wallison asked Mr. Blankfein, who, again, was under oath, what the consequences would have been for Goldman if AIG had been allowed to fail. Mr. Blankfein replied that Goldman had about $10 billion of exposure to AIG, against which it was holding $7.5 billion in cash that had been forwarded by AIG, and $2.5 billion in credit protection. Now, you can argue that if AIG had failed, Goldman's counterparties in the credit protection wouldn't have been able to pay, or that AIG's other creditors would have tried to come after the $7.5 billion that Goldman had in cash. But it's by no means a sure thing that, had that happened, Goldman Sachs itself would have failed. It might have survived despite the losses. Even if, by some stretch, Goldman had lost the whole $10 billion, while it would have been a big loss, it might not have been unsustainable in the overall context of Goldman's future earnings power and balance sheet.
Third, even if you grant the flawed argument that "U.S. taxpayers saved Goldman" via the AIG deal, the consequence that "the U.S. Treasury should own a slice of Goldman today" doesn't necessarily follow. Look at the companies that the U.S. Treasury does still own a slice of: AIG, Citigroup, General Motors, Fannie Mae, Freddie Mac. They are all struggling. Goldman, on the other hand, has returned to big profits. Which would be better for America, if the government owned part of a struggling Goldman because it fits with Thoman Friedman's definition of fairness, or if a successful Goldman hires bankers and pays them big bonuses that wind up flowing back to the federal, state, and local governments in the form of income tax revenue?
Fourth is the criticism of Goldman Sachs as "selfish." Look, if these guys were a bunch of altruists, they'd have been social workers, not bankers. But the fact is, they've got a fiduciary duty to their shareholders to maximize profits. Now, one can argue that being too aggressive about that actually hurts the shareholders by diminishing the firm's reputation and triggering a government and public backlash. But that's an argument about tactics or strategy, not about the end goal of maximizing shareholder value. And the fact is, it's a fiercely competitive business. If Goldman had been less "selfish," as Mr. Friedman puts it, the likely outcome isn't that the money left over would have flowed to Haitian widows and orphans. It would have ended up in the pockets of other selfish bankers at Morgan Stanley or JPMorgan Chase or Société Générale or Deutsche Bank.
As regular readers know, I am no knee-jerk defender of Goldman or of bankers in general. I was against the federal takeover of AIG without a shareholder vote, and I was against the TARP. But I don't think Mr. Friedman's slap at Goldman today makes much sense.