Price Taker or Price Maker (& Fixer, Stealer, etc.)?
The devil theory of Goldman Sachs, at bottom, rests on the premise that Goldman knows the future better than its customers or the rest of us.
–Holman Jenkins, “‘Defining the Facebook Deal“; The Wall Street Journal (Jan. 15-16, 2011)
THAT’S “the devil theory of Goldman Sachs??” Really?
What’s “the angel theory?”
Jenkins’ “devil theory” is really just the same repackaged public relations pablum the firm has been peddling for decades — although never more vociferously than the last few, uncomfortably high-profile years.
Namely, that due to superior smarts, the firm is simply better at what it does (making money) than anyone else.
How . . . . meritocratic.
Public Relations vs. Reality
The truth is quite a bit darker.
Rather than a “price taker,” as Goldman Sachs’ myriad defenders assert, evidence abounds that the firm not infrequently operates — through a variety of nefarious practices — as a “price maker.”
Just consider all the less-than-virtuous roles that the firm recently played — and continues to play — in today’s capital markets:
â€¢Price Stealer. In essence, that’s what “high frequency trading” really is: peeking at clients’ order flow, then using ultra-fast computers to front-run those same orders to pocket infinitesimal — and risk-free — returns.
Repeat frequently enough, and the profits are anything but infinitesimal.
â€¢Price Fixer. With looming IPO’s for Facebook and its social media brethren, Goldman Sachs (and Wall Street generally) are clearly gearing up to reprise the sordid role they played kiting tech stocks more than a decade ago.
Step #1: Secure the lion’s share of supply of such companies’ shares, by insinuating themselves as underwriter(s) of the eventual IPO’s, while negotiating “lock-up” agreements that keeps insiders’ shares off the market (or at least, other insiders’ shares).
Step #2: At least initially, parsimoniously dole out company shares to favored clients, to whip up public demand (that’s the current stage of the Goldman Sachs – Facebook pas de deux).
Step #3: Once demand has reached fever pitch, open the supply floodgates, being sure to dump your own shares into the first few waves of “buy” orders.
Just to make sure investors’ appetites don’t flag prematurely, support the young, new stock offerings with so-called “booster shots”: glowing securities reports issued by your own analysts.
While such practices are supposedly now illegal, they no doubt will be supplanted by others just as sleazy.
Of course, what’s different about the process this time is that Goldman Sachs can now borrow any capital it puts into such deals — at least in their early stages — from The Federal Reserve for free, courtesy of Goldman’s status as a bank holding company.
â€¢Price Gouger. As is now well-documented, much of the U.S. government’s $180 billion bailout of AIG didn’t go to AIG, it went to AIG’s counter-parties — companies like Goldman Sachs that made bets on a falling U.S. housing market.
When AIG was unable to pay off, Goldman collected — at 100 cents on the dollar — from U.S. taxpayers.
That’s even though such claims would have been worth mere cents if AIG had filed for bankruptcy.
Signing the check? Former Goldman Sachs chief (and then-Treasury Secretary cum bailout architect) Henry Paulson.
Better Crystal Ball? Hardly
Ironically, both Goldman Sachs’ defenders and critics ultimately are in agreement that the firm does in fact know where prices are headed.
The difference is that its critics understand that this has very little to do with superior financial acumen, brilliance, industry, etc.
Rather, it’s all about access to information and political influence.
When you control markets — and market regulators — you hardly need a crystal ball.