New Matt Taibbi Feud with Goldman Sachs

Matt Taibbi has a new article that will be out in a few days in Rolling Stone. The article reportedly will review the factors leading up to the failures of Bear Stearns and Lehman Brothers. A lot of the article is apparently occupied by a discussion of naked short selling and the role it played in these two failures.

Associated with that discussion, a new feud has erupted between Goldman Sachs (GS) and Taibbi. I say "new," but maybe the feud is "continuing". Matt has reported that he has received some inside information from congressional aides about Goldman lobbying activities on behalf of naked short selling. Cyrus Sanati of The New York Times, writing on the DealBook.com blog (here), quotes Goldman spokesmen as saying that Taibbi has misrepresented their presentation documents given to congressmen.

A quote from the Sanati article is a good summary of his take on the situation:

“The adoption of Rule 204T of Regulation SHO has been very effective to eliminate potential short-selling abuses,” Goldman said in a letter to the S.E.C. in June.
“The marginal benefit of additional short-sale restrictions over the measures already taken by the commission does not outweigh the potential loss of liquidity and costs to investors in the form of wider bid-offer spreads,” the letter said.
“We therefore encourage the commission to conclude that the adoption of new short-sale price restrictions is unnecessary and would be damaging to market efficiency and liquidity.”

Nevertheless, the summary page highlighted by Mr. Taibbi clearly shows that Goldman wants senators to believe that further bans on naked short-selling would be detrimental to the market — a view that many believe goes against conventional wisdom. Taibbi maintains (in blog postings) that he believes that Goldman has deliberately attempted to confuse congressmen, conflating traditional short selling with naked short selling by selectively "cherry picking" data for their presentation. Matt points to the Goldman comparison of data from the market collapse in September and October, 2008 to data in a market that bottomed and started to rise (January through March, 2009). In both periods, naked short selling was rigorously prohibited, so using this data to address the issue of naked short selling seems, to Matt, to be inappropriate. His position sounds pretty logical to me. Here is an excerpt from Matt's post at True/Slant:

Goldman’s point seems to be that short-selling declined during a period when the market fell sharply, and short-selling went up when the market rallied. I guess on some planet, perhaps not on earth but some other spherical space-boulder, this is supposed to indicate that short-selling is good for the market overall.
(Which, incidentally, it might be. But we’re not talking about short-selling here. We’re talking about naked short-selling).
The thing is, you can’t deduce anything at all about naked short-selling by looking at a graph showing levels of normal short selling. This is like trying to draw conclusions about the frequency of date rape by looking at the number of weddings held. The two things have absolutely nothing to do with one another.

Matt has also posted a favorable piece on the DealBook.com article (here).

This entire story brings me back to a proposal I have made before. The lobbying process that Taibbi describes has "secret" communications from a special interest (Goldman) to congressmen. The only reason that this "secret" is out is because some congressional staffers felt that the presentation was misleading (Taibbi's representation).

My proposal is that private communication from lobbyists to congressmen should be illegal. All communication (even transcripts of all conversations) should be made public at least 30 days before any vote is taken that relates to the communication. These could be cataloged by subject, lobbyist, and congressman and posted on internet web sites. Public review and discussion could clean up a lot of skullduggery. Violation of this requirement should be a felony, for both lobbyist and congressman.

John R. Talbott has expressed the objective of implementing citizen review of lobbying efforts. When there are more details, I will be working to support his efforts.