Then the reserve of popular investment post-mortems fattens, and suddenly there's a lengthy litany of new complaints about Goldman: pumping, laddering, spinning. Eric Martin defends Taibbi on the grounds that it's all true. I myself firmly believe that these things are true (she said, looking demurely over her shoulder at the nice man from Legal). But it's all old, old news. It's not even a particularly well-written or thoughfully analyzed summary of the exhaustive treatments of the subject by the fuzzy headed moderate business journalists Taibbi disdains. Investment banks treated their clients disgracefully during the internet bubble, and a lot of the clients were managers who did the same to their shareholders. But what does this have to do with the current financial crisis? Perhaps more to the point, how is it a special indictment of Goldman, the ostensible topic of his piece? Other banks did more and worse.

Even as an indictment of the system this thing is lacking, and showcases Taibbi's lack of fundamental conceptual understanding. He complains about CDO's on the grounds that Goldman hid the atrocious risks inside a fancy dan derivative package that no one could understand. But in fact, everyone was aware that CDO's were repackaging crap mortgages--that was the point. The idea was pure portfolio theory, broadly agreed upon by everyone involved. Everyone knew a lot of the mortgages might go bad, either by defaulting or prepaying. (This is a risk for bankers, who don't like the idea that if interest rates drop, their 7% mortgage might suddenly turn into a pile of non-interest-bearing cash which can only be invested at 5%.) But if you pool the risk, only some of the bonds will go bad, while others pay off. The result is a less risky, less volatile investment than any individual junk mortgage bond. And it would have worked, too, if it hadn't been for those crazy kids a collapse in the housing market of a scale not seen since the Great Depression.

Did individual portfolio managers take on too much risk? Yes. Did some morons get sold these bonds without understanding what was going on? Undoubtedly. But Goldman's customers for CDOs are not little grannies who think a bond coupon is what you use to buy denture glue. They're institutions who could reasonably be expected to understand the risks. Which is why it is not, as Taibbi absurdly claims, "securities fraud" for Goldman to sell people mortgage-backed CDOs when they themselves were moderately short the overall housing market.

"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."





First of all, of course banks sell people positions they aren't themselves taking. Sometimes the bank is right, and sometimes the customers are; differences of opinion are what make marriages and horse races. Second of all, the banks that went down, the ones that arguably caused the financial crisis, were long their own toxic waste (and that of others). Third of all, Goldman itself might argue that its mortgages were not as toxic as others, and for all I or Matt Taibbi know, they might be telling the truth. Fourth of all, the disconnect between the underwriting and the customer side of the investment houses was not only legal, but in some cases, mandatory. Excessive entanglement between the two is why Henry Blodget, whom Taibbi references elsewhere, has been banned from the securities industry for life. That Taibbi could even ask how this was not securities fraud is really troubling.