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Genius is Before the Fall

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By TMFCogitarius
July 2, 2008

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

In his fascinating book, "A short history of financial euphoria", Harvard's Prof. J.K. Galbraith wrote:
"Only after the speculative collapse does the truth emerge. What was thought to be unusual acuity turns out to be only a fortuitous and unfortunate association with the assets.... financial genius is before the fall."

Recently, the New York Times hailed a Goldman Sachs analyst as "An oracle of oil", apparently because he's predicting a ‘super spike' in oil prices. Of course oil prices have, obligingly, been on a roll for a while now.

According to the NYT, then Goldman CEO Henry Paulson, when challenged on the proprietary trading motives behind the analyst's forecasts, said "Our research department is totally independent"!

Wow! What a concept!

In 2003, Goldman was one of ten Wall Street worthies charged with fraudulent research and IPO ‘spinning' and fined a collective $1.4 billion by the SEC, NASD, and others. Despite that, we continue to see evidence of Wall St. shafting its clients. The latest example, also in the NYT, is of a UBS executive openly writing about the classic Wall St. conflict of interest - "risk management versus client franchise". That's the sanitized modern version of "put the lipstick on the pig".

Just as Galbraith found in his study of bubbles over the years, Goldman just happens to have that "unusual acuity (which) turns out to be "only a fortuitous and unfortunate association with the assets". According to the Financial Times, Goldman not only ‘has a prominent role as a proprietary trader of oil', but also, handles nearly 60% of commodities trading investors polled in a survey.

Also, at the time of that NYT report, Goldman had a 'Buy' rating on 28 firms in the Energy sector and either had, or expected to have, investment banking, market making and other financial interests in most of them.

So, why wouldn't Goldman happen to have "An oracle of oil" conveniently at hand?

Perhaps Ben Graham put it best in describing Wall Street's mentality:

An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news.
"You're qualified for residence", said St. Peter, "but, as you can see, the compound reserved for oil men is packed. There's no way to squeeze you in."

After thinking a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hands and yelled, "Oil discovered in hell."

Immediately the gate to the compound opened and all of the oil men marched out to head for the nether regions. Impressed, St. Peter invited the prospector to move in and make himself

The prospector paused. "No," he said, "I think I'll go along with the rest of the boys. There might be some truth to that rumor after all."