Rolling Stone on Goldman Sachs... and energy

There has been a lot of hullabaloo about Goldman Sachs' recent announcement of its return to profitability, to put it mildly. Now, Rolling Stone has published quite an interesting article that explains the history of the bank's involvement in bubbles in language that its lay readers (like me) can understand:

[Goldman] bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK, there was no reason to worry so much about the shitty ones: The CDO, as a whole, was sound. Thus, junkrated mortgages were turned into AAArated investments.

Though there are also frequent forays into foul-mouthing for frat boys:

[Goldman] fucked the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and fucked the taxpayer by making him pay off those same bets.

I don't know much about all that banking stuff, but I do have an opinion about the author's arguments that the recent spike in oil prices is the result of speculations:

In the six months before prices spiked, according to the U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million.

It seems in both of those cases that demand outstripped supply, which the author ignores. During those six months, the world was obviously working down some stockpile of oil somewhere. Under those circumstances, I would expect oil prices to rise considerably.

Having said that, I do think the author provides some interesting energy information:

By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.... By 2008, at least three quarters of the activity on the commodity exchanges was speculative, according to a congressional staffer who studied the numbers — and that's likely a conservative estimate. By the middle of last summer, despite rising supply and a drop in demand, we were paying $4 a gallon every time we pulled up to the pump.

Of course, all of this specualtion is potentially dangerous, but I would actually argue that higher oil prices do us a favor by allowing us to use this finite resource more efficiently -- we waste things less when they are expensive. This thinking is behind the concept of environmental taxation, which I support. Most proponents of "eco-taxes" would, of course, prefer not to have the mechanism left up to speculators, not least because proper taxation allows price hikes to be planned so that people can prepare, whereas speculation leads to unpredictability. But overall, higher oil prices are a good thing.

Finally, the Rolling Stone article gives us a good taste of the skepticism that Americans have towards carbon trading, which I am not particularly fond of, but which we are apparently going to get in the US soon:

Nobel Prize winner Al Gore, who is intimately involved with the planning of cap-and-trade, started up a company called Generation Investment Management with three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter Harris. Their business? Investing in carbon offsets.

So there you have it: because everything in the US is corrupt, renewables and clean tech must also be. The world sure is a much different place over here in Germany...

Anyway, I actually do like the article overall because of the way it boils the financial scandal down:

Paulson elected to let Lehman Brothers — one of Goldman's last real competitors — collapse without intervention.... The very next day, Paulson greenlighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman.

I suppose if I knew more about the banking scandal, I might find that to be an oversimplification, but it certainly seems like a poignant way of summing up events given my limited knowledge.