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[http://www.rollingstone.com/]
THE GREAT AMERICAN BUBBLE MACHINE
From tech stocks to high gas prices, Goldman Sachs has engineered
every major market manipulation since the Great Depression - and
they're about to do it again
By MATT TAIBBI
The first thing you need to know about Goldman Sachs is that it's
everywhere. The world's most powerful investment bank is a great
vampire squid wrapped around the face of humanity, relentlessly
jamming its blood funnel into anything that smells like money. In
fact, the history of the recent financial crisis, which doubles
as a history of the rapid decline and fall of the suddenly
swindled-dry American empire, reads like a Who's Who of Goldman
Sachs graduates.
By now, most of us know the major players. As George Bush's last
Treasury secretary, former Goldman CEO Henry Paulson was the
architect of the bailout, a suspiciously self-serving plan to
funnel trillions of Your Dollars to a handful of his old friends
on Wall Street. Robert Rubin, Bill Clinton's former Treasury
secretary, spent 26 years at Goldman before becoming chairman of
Citigroup - which in turn got a $300 billion taxpayer bailout
from Paulson. There's John Thain, the rear end in a top hat chief
of Merrill Lynch who bought an $87,000 area rug for his office as
his company was imploding; a former Goldman banker, Thain enjoyed
a multibillion-dollar handout from Paulson, who used billions in
taxpayer funds to help Bank of America rescue Thain's sorry
company. And Robert Steel, the former Goldmanite head of
Wachovia, scored himself and his fellow executives $225 million
in golden parachute payments as his bank was self-destructing.
There's Joshua Bolten, Bush's chief of staff during the bailout,
and Mark Patterson, the current Treasury chief of staff, who was
a Goldman lobbyist just a year ago, and Ed Liddy, the former
Goldman director whom Paulson put in charge of bailed-out
insurance giant AIG, which forked over $13 billion to Goldman
after Liddy came on board. The heads of the Canadian and Italian
national banks are Goldman alums, as is the head of the World
Bank, the head of the New York Stock Exchange, the last two heads
of the Federal Reserve Bank of New York - which, incidentally, is
now in charge of overseeing Goldman - not to mention ...
But then, any attempt to construct a narrative around all the
former Goldmanites in influential positions quickly becomes an
absurd and pointless exercise, like trying to make a list of
everything. What you need to know is the big picture: If America
is circling the drain, Goldman Sachs has found a way to be that
drain - an extremely unfortunate loophole in the system of
Western democratic capitalism, which never foresaw that in a
society governed passively by free markets and free elections,
organized greed always defeats disorganized democracy.
The bank's unprecedented reach and power have enabled it to turn
all of America into a giant pump-and-dump scam, manipulating
whole economic sectors for years at a time, moving the dice game
as this or that market collapses, and all the time gorging itself
on the unseen costs that are breaking families everywhere - high
gas prices, rising consumer-credit rates, half-eaten pension
funds, mass layoffs, future taxes to pay off bailouts. All that
money that you're losing, it's going somewhere, and in both a
literal and a figurative sense, Goldman Sachs is where it's
going: The bank is a huge, highly sophisticated engine for
converting the useful, deployed wealth of society into the least
useful, most wasteful and insoluble substance on Earth - pure
profit for rich individuals.
They achieve this using the same playbook over and over again.
The formula is relatively simple: Goldman positions itself in the
middle of a speculative bubble, selling investments they know are
crap. Then they hoover up vast sums from the middle and lower
floors of society with the aid of a crippled and corrupt state
that allows it to rewrite the rules in exchange for the relative
pennies the bank throws at political patronage. Finally, when it
all goes bust, leaving millions of ordinary citizens broke and
starving, they begin the entire process over again, riding in to
rescue us all by lending us back our own money at interest,
selling themselves as men above greed, just a bunch of really
smart guys keeping the wheels greased. They've been pulling this
same stunt over and over since the 1920s - and now they're
preparing to do it again, creating what may be the biggest and
most audacious bubble yet.
If you want to understand how we got into this financial crisis,
you have to first understand where all the money went - and in
order to understand that, you need to understand what Goldman has
already gotten away with. It is a history exactly five bubbles
long - including last year's strange and seemingly inexplicable
spike in the price of oil. There were a lot of losers in each of
those bubbles, and in the bailout that followed. But Goldman
wasn't one of them.
IF AMERICA IS NOW CIRCLING THE DRAIN, GOLDMAN SACHS HAS FOUND A
WAY TO BE THAT DRAIN.
BUBBLE #1 - THE GREAT DEPRESSION
Goldman wasn't always a too-big-to-fail Wall Street behemoth, the
ruthless face of kill-or-be-killed capitalism on steroids - just
almost always. The bank was actually founded in 1869 by a German
immigrant named Marcus Goldman, who built it up with his
son-in-law Samuel Sachs. They were pioneers in the use of
commercial paper, which is just a fancy way of saying they made
money lending out short-term IOUs to small-time vendors in
downtown Manhattan.
You can probably guess the basic plotline of Goldman's first 100
years in business: plucky, immigrant-led investment bank beats
the odds, pulls itself up by its bootstraps, makes shitloads of
money. In that ancient history there's really only one episode
that bears scrutiny now, in light of more recent events:
Goldman's disastrous foray into the speculative mania of
pre-crash Wall Street in the late 1920s.
This great Hindenburg of financial history has a few features
that might sound familiar. Back then, the main financial tool
used to bilk investors was called an "investment trust." Similar
to modern mutual funds, the trusts took the cash of investors
large and small and (theoretically, at least) invested it in a
smorgasbord of Wall Street securities, though the securities and
amounts were often kept hidden from the public. So a regular guy
could invest $10 or $100 in a trust and feel like he was a big
player. Much as in the 1990s, when new vehicles like day trading
and e-trading attracted reams of new suckers from the sticks who
wanted to feel like big shots, investment trusts roped a new
generation of regular-guy investors into the speculation game.
Beginning a pattern that would repeat itself over and over again,
Goldman got into the investment-trust game late, then jumped in
with both feet and went hog-wild. The first effort was the
Goldman Sachs Trading Corporation; the bank issued a million
shares at $100 apiece, bought all those shares with its own money
and then sold 90 percent of them to the hungry public at $104.
The trading corporation then relentlessly bought shares in
itself, bidding the price up further and further. Eventually it
dumped part of its holdings and sponsored a new trust, the
Shenandoah Corporation, issuing millions more in shares in that
fund - which in turn sponsored yet another trust called the Blue
Ridge Corporation. In this way, each investment trust served as a
front for an endless investment pyramid: Goldman hiding behind
Goldman hiding behind Goldman. Of the 7,250,000 initial shares of
Blue Ridge, 6,250,000 were actually owned by Shenandoah - which,
of course, was in large part owned by Goldman Trading.
The end result (ask yourself if this sounds familiar) was a daisy
chain of borrowed money, one exquisitely vulnerable to a decline
in performance anywhere along the line; The basic idea isn't hard
to follow. You take a dollar and borrow nine against it; then you
take that $10 fund and borrow $90; then you take your $100 fund
and, so long as the public is still lending, borrow and invest
$900. If the last fund in the line starts to lose value, you no
longer have the money to pay back your investors, and everyone
gets massacred.
In a chapter from The Great Crash, 1929 titled "In Goldman Sachs
We Trust," the famed economist John Kenneth Galbraith held up the
Blue Ridge and Shenandoah trusts as classic examples of the
insanity of leverage-based investment. The trusts, he wrote, were
a major cause of the market's historic crash; in today's dollars,
the losses the bank suffered totaled $475 billion. "It is
difficult not to marvel at the imagination which was implicit in
this gargantuan insanity," Galbraith observed, sounding like
Keith Olbermann in an ascot. "If there must be madness, something
may be said for having it on a heroic scale."
BUBBLE #2 - TECH STOCKS
Fast-Forward about 65 years. Goldman not only survived the crash
that wiped out so many of the investors it duped, it went on to
become the chief underwriter to the country's wealthiest and most
powerful corporations. Thanks to Sidney Weinberg, who rose from
the rank of janitor's assistant to head the firm, Goldman became
the pioneer of the initial public offering, one of the principal
and most lucrative means by which companies raise money. During
the 1970s and 1980s, Goldman may not have been the planet-eating
Death Star of political influence it is today, but it was a
top-drawer firm that had a reputation for attracting the very
smartest talent on the Street.
It also, oddly enough, had a reputation for relatively solid
ethics and a patient approach to investment that shunned the fast
buck; its executives were trained to adopt the firm's mantra,
"long-term greedy." One former Goldman banker who left the firm
in the early Nineties recalls seeing his superiors give up a very
profitable deal on the grounds that it was a long-term loser. "We
gave back money to 'grownup' corporate clients who had made bad
deals with us," he says. "Everything we did was legal and fair -
but 'long-term greedy' said we didn't want to make such a profit
at the clients' collective expense that we spoiled the
marketplace."
But then, something happened. It's hard to say what it was
exactly; it might have been the fact that Goldman's co-chairman
in the early Nineties, Robert Rubin, followed Bill Clinton to the
White House, where he directed the National Economic Council and
eventually became Treasury secretary. While the American media
fell in love with the story line of a pair of baby-boomer,
Sixties-child, Fleetwood Mac yuppies nesting in the White House,
it also nursed an undisguised crush on Rubin, who was hyped as
without a doubt the smartest person ever to walk the face of the
Earth, with Newton, Einstein, Mozart and Kant running far behind.
Rubin was the prototypical Goldman banker. He was probably born
in a $4,000 suit, he had a face that seemed permanently frozen
just short of an apology for being so much smarter than you, and
he exuded a Spock-like, emotion-neutral exterior; the only human
feeling you could imagine him experiencing was a nightmare about
being forced to fly coach. It became almost a national cliche
that whatever Rubin thought was best for the economy - a
phenomenon that reached its apex in 1999, when Rubin appeared on
the cover of Time with his Treasury deputy, Larry Summers, and
Fed chief Alan Greenspan under the headline THE COMMITTEE TO SAVE
THE WORLD. And "what Rubin thought," mostly, was that the
American economy, and in particular the financial markets, were
over-regulated and needed to be set free. During his tenure at
Treasury, the Clinton White House made a series of moves that
would have drastic consequences for the global economy -
beginning with Rubin's complete and total failure to regulate his
old firm during its first mad dash for obscene short-term
profits.
The basic scam in the Internet Age is pretty easy even for the
financially illiterate to grasp. Companies that weren't much more
than pot-fueled ideas scrawled on napkins by up-too-late
bong-smokers were taken public via IPOs, hyped in the media and
sold to the public for megamillions. It was as if banks like
Goldman were wrapping ribbons around watermelons, tossing them
out 50-story windows and opening the phones for bids. In this
game you were a winner only if you took your money out before the
melon hit the pavement.
It sounds obvious now, but what the average investor didn't know
at the time was that the banks had changed the rules of the game,
making the deals look better than they actually were. They did
this by setting up what was, in reality, a two-tiered investment
system - one for the insiders who knew the real numbers, and
another for the lay investor who was invited to chase soaring
prices the banks themselves knew were irrational. While Goldman's
later pattern would be to capitalize on changes in the regulatory
environment, its key innovation in the Internet years was to
abandon its own industry's standards of quality control.
"Since the Depression, there were strict underwriting guidelines
that Wall Street adhered to when taking a company public," says
one prominent hedge-fund manager. "The company had to be in
business for a minimum of five years, and it had to show
profitability for three consecutive years. But Wall Street took
these guidelines and threw them in the trash." Goldman completed
the snow job by pumping up the sham stocks: "Their analysts were
out there saying Bullshit.com is worth $100 a share."
The problem was, nobody told investors that the rules had
changed. "Everyone on the inside knew," the manager says. "Bob
Rubin sure as hell knew what the underwriting standards were.
They'd been intact since the 1930s."
Jay Ritter, a professor of finance at the University of Florida
who specializes in IPOs, says banks like Goldman knew full well
that many of the public offerings they were touting would never
make a dime. "In the early Eighties, the major underwriters
insisted on three years of profitability. Then it was one year,
then it was a quarter. By the time of the Internet bubble, they
were not even requiring profitability in the foreseeable future."
Goldman has denied that it changed its underwriting standards
during the Internet years, but its own statistics belie the
claim. Just as it did with the investment trust in the 1920s,
Goldman started slow and finished crazy in the Internet years.
After it took a little-known company with weak financials called
Yahoo! public in 1996, once the tech boom had already begun,
Goldman quickly became the IPO king of the Internet era. Of the
24 companies it took public in 1997, a third were losing money at
the time of the IPO. In 1999, at the height of the boom, it took
47 companies public, including stillborns like Webvan and eToys,
investment offerings that were in many ways the modern
equivalents of Blue Ridge and Shenandoah. The following year, it
underwrote 18 companies in the first four months, 14 of which
were money losers at the time. As a leading underwriter of
Internet stocks during the boom, Goldman provided profits far
more volatile than those of its competitors: In 1999, the average
Goldman IPO leapt 281 percent above its offering price, compared
to the Wall Street average of 181 percent.
How did Goldman achieve such extraordinary results? One answer is
that they used a practice called "laddering," which is just a
fancy way of saying they manipulated the share price of new
offerings. Here's how it works: Say you're Goldman Sachs, and
Bullshit.com comes to you and asks you to take their company
public. You agree on the usual terms: You'll price the stock,
determine how many shares should be released and take the
Bullshit.com CEO on a "road show" to schmooze investors, all in
exchange for a substantial fee (typically six to seven percent of
the amount raised). You then promise your best clients the right
to buy big chunks of the IPO at the low offering price - let's
say Bullshit.com's starting share price is $15 - in exchange for
a promise that they will buy more shares later on the open
market. That seemingly simple demand gives you inside knowledge
of the IPO's future, knowledge that wasn't disclosed to the
day-trader schmucks who only had the prospectus to go by: You
know that certain of your clients who bought X amount of shares
at $15 are also going to buy Y more shares at $20 or $25,
virtually guaranteeing that the price is going to go to $25 and
beyond. In this way, Goldman could artificially jack up the new
company's price, which of course was to the bank's benefit - a
six percent fee of a $500 million IPO is serious money.
Goldman was repeatedly sued by shareholders for engaging in
laddering in a variety of Internet IPOs, including Webvan and
NetZero. The deceptive practices also caught the attention of
Nichol as Maier, the syndicate manager of Cramer & Co., the hedge
fund run at the time by the now-famous chattering television rear
end in a top hat Jim Cramer, himself a Goldman alum. Maier told
the SEC that while working for Cramer between 1996 and 1998, he
was repeatedly forced to engage in laddering practices during IPO
deals with Goldman.
"Goldman, from what I witnessed, they were the worst
perpetrator," Maier said. "They totally fueled the bubble. And
it's specifically that kind of behavior that has caused the
market crash. They built these stocks upon an illegal foundation
- manipulated up - and ultimately, it really was the small person
who ended up buying in." In 2005, Goldman agreed to pay $40
million for its laddering violations - a puny penalty relative to
the enormous profits it made. (Goldman, which has denied
wrongdoing in all of the cases it has settled, refused to respond
to questions for this story.)
Another practice Goldman engaged in during the Internet boom was
"spinning," better known as bribery. Here the investment bank
would offer the executives of the newly public company shares at
extra-low prices, in exchange for future underwriting business.
Banks that engaged in spinning would then undervalue the initial
offering price - ensuring that those "hot" opening price shares
it had handed out to insiders would be more likely to rise
quickly, supplying bigger first-day rewards for the chosen few.
So instead of Bullshit.com opening at $20, the bank would
approach the Bullshit.com CEO and offer him a million shares of
his own company at $18 in exchange for future business -
effectively robbing all of Bullshit's new shareholders by
diverting cash that should have gone to the company's bottom line
into the private bank account of the company's CEO.
In one case, Goldman allegedly gave a multimillion-dollar special
offering to eBay CEO Meg Whitman, who later joined Goldman's
board, in exchange for future i-banking business. According to a
report by the House Financial Services Committee in 2002, Goldman
gave special stock offerings to executives in 21 companies that
it took public, including Yahoo! co-founder Jerry Yang and two of
the great slithering villains of the financial-scandal age -
Tyco's Dennis Kozlowski and Enron's Ken Lay. Goldman angrily
denounced the report as "an egregious distortion of the facts" -
shortly before paying $110 million to settle an investigation
into spinning and other manipulations launched by New York state
regulators. "The spinning of hot IPO shares was not a harmless
corporate perk," then-attorney general Eliot Spitzer said at the
time. "Instead, it was an integral part of a fraudulent scheme to
win new investment-banking business."
Such practices conspired to turn the Internet bubble into one of
the greatest financial disasters in world history: Some $5
trillion of wealth was wiped out on the NASDAQ alone. But the
real problem wasn't the money that was lost by shareholders, it
was the money gained by investment bankers, who received hefty
bonuses for tampering with the market. Instead of teaching Wall
Street a lesson that bubbles always deflate, the Internet years
demonstrated to bankers that in the age of freely flowing capital
and publicly owned financial companies, bubbles are incredibly
easy to inflate, and individual bonuses are actually bigger when
the mania and the irrationality are greater.
GOLDMAN SCAMMED HOUSING INVESTORS BY BETTING AGAINST ITS OWN
CRAPPY MORTGAGES.
Nowhere was this truer than at Goldman. Between 1999 and 2002,
the firm paid out $28.5 billion in compensation and benefits - an
average of roughly $350,000 a year per employee. Those numbers
are important because the key legacy of the Internet boom is that
the economy is now driven in large part by the pursuit of the
enormous salaries and bonuses that such bubbles make possible.
Goldman's mantra of "long-term greedy" vanished into thin air as
the game became about getting your check before the melon hit the
pavement.
The market was no longer a rationally managed place to grow real,
profitable businesses: It was a huge ocean of Someone Else's
Money where bankers hauled in vast sums through whatever means
necessary and tried to convert that money into bonuses and
payouts as quickly as possible. If you laddered and spun 50
Internet IPOs that went bust within a year, so what? By the time
the Securities and Exchange Commission got around to fining your
firm $110 million, the yacht you bought with your IPO bonuses was
already six years old. Besides, you were probably out of Goldman
by then, running the U.S. Treasury or maybe the state of New
Jersey. (One of the truly comic moments in the history of
America's recent financial collapse came when Gov. Jon Corzine of
New Jersey, who ran Goldman from 1994 to 1999 and left with $320
million in IPO-fattened stock, insisted in 2002 that "I've never
even heard the term 'laddering' before.")
For a bank that paid out $7 billion a year in salaries, $110
million fines issued half a decade late were something far less
than a deterrent - they were a joke. Once the Internet bubble
burst, Goldman had no incentive to reassess its new,
profit-driven strategy; it just searched around for another
bubble to inflate. As it turns out, it had one ready, thanks in
large part to Rubin.
BUBBLE #3 - THE HOUSING CRAZE
Goldman's role in the sweeping disaster that was the housing
bubble is not hard to trace. Here again, the basic trick was a
decline in underwriting standards, although in this case the
standards weren't in IPOs but in mortgages. By now almost
everyone knows that for decades mortgage dealers insisted that
home buyers be able to produce a down payment of 10 percent or
more, show a steady income and good credit rating, and possess a
real first and last name. Then, at the dawn of the new
millennium, they suddenly threw all that poo poo out the window
and started writing mortgages on the backs of napkins to cocktail
waitresses and ex-cons carrying five bucks and a Snickers bar.
None of that would have been possible without investment bankers
like Goldman, who created vehicles to package those lovely
mortgages and sell them en masse to unsuspecting insurance
companies and pension funds. This created a mass market for toxic
debt that would never have existed before; in the old days, no
bank would have wanted to keep some addict ex-con's mortgage on
its books, knowing how likely it was to fail. You can't write
these mortgages, in other words, unless you can sell them to
someone who doesn't know what they are.
Goldman used two methods to hide the mess they were selling.
First, they 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 lovely ones: The CDO, as a whole, was sound.
Thus, junk-rated mortgages were turned into AAA-rated
investments. Second, to hedge its own bets, Goldman got companies
like AIG to provide insurance - known as credit-default swaps -
on the CDOs. The swaps were essentially a racetrack bet between
AIG and Goldman: Goldman is betting the ex-cons will default, AIG
is betting they won't.
There was only one problem with the deals: All of the wheeling
and dealing represented exactly the kind of dangerous speculation
that federal regulators are supposed to rein in. Derivatives like
CDOs and credit swaps had already caused a series of serious
financial calamities: Procter & Gamble and Gibson Greetings both
lost fortunes, and Orange County, California, was forced to
default in 1994. A report that year by the Government
Accountability Office recommended that such financial instruments
be tightly regulated - and in 1998, the head of the Commodity
Futures Trading Commission, a woman named Brooksley Born, agreed.
That May, she circulated a letter to business leaders and the
Clinton administration suggesting that banks be required to
provide greater disclosure in derivatives trades, and maintain
reserves to cushion against losses.
More regulation wasn't exactly what Goldman had in mind. "The
banks go crazy - they want it stopped," says Michael Greenberger,
who worked for Born as director of trading and markets at the
CFTC and is now a law professor at the University of Maryland.
"Greenspan, Summers, Rubin and [SEC chief Arthur] Levitt want it
stopped."
Clinton's reigning economic foursome - "especially Rubin,"
according to Greenberger - called Born in for a meeting and
pleaded their case. She refused to back down, however, and
continued to push for more regulation of the derivatives. Then,
in June 1998, Rubin went public to denounce her move, eventually
recommending that Congress strip the CFTC of its regulatory
authority. In 2000, on its last day in session, Congress passed
the now-notorious Commodity Futures Modernization Act, which had
been inserted into an 1l,000-page spending bill at the last
minute, with almost no debate on the floor of the Senate. Banks
were now free to trade default swaps with impunity.
But the story didn't end there. AIG, a major purveyor of default
swaps, approached the New York State Insurance Department in 2000
and asked whether default swaps would be regulated as insurance.
At the time, the office was run by one Neil Levin, a former
Goldman vice president, who decided against regulating the swaps.
Now freed to underwrite as many housing-based securities and buy
as much credit-default protection as it wanted, Goldman went
berserk with lending lust. By the peak of the housing boom in
2006, Goldman was underwriting $76.5 billion worth of
mortgage-backed securities - a third of which were subprime -
much of it to institutional investors like pensions and insurance
companies. And in these massive issues of real estate were vast
swamps of crap.
Take one $494 million issue that year, GSAMP Trust 2006-S3. Many
of the mortgages belonged to second-mortgage borrowers, and the
average equity they had in their homes was 0.71 percent.
Moreover, 58 percent of the loans included little or no
documentation - no names of the borrowers, no addresses of the
homes, just zip codes. Yet both of the major ratings agencies,
Moody's and Standard & Poor's, rated 93 percent of the issue as
investment grade. Moody's projected that less than 10 percent of
the loans would default. In reality, 18 percent of the mortgages
were in default within 18 months.
Not that Goldman was personally at any risk. The bank might be
taking all these hideous, completely irresponsible mortgages from
beneath-gangster-status firms like Countrywide and selling them
off to municipalities and pensioners - old people, for God's sake
- pretending the whole time that it wasn't grade-D horseshit. But
even as it was doing so, it was taking short positions in the
same market, in essence betting against the same crap it was
selling. Even worse, Goldman bragged about it in public. "The
mortgage sector continues to be challenged," David Viniar, the
bank's chief financial officer, boasted in 2007. "As a result, we
took significant markdowns on our long inventory positions ....
However, our risk bias in that market was to be short, and that
net short position was profitable." In other words, the mortgages
it was selling were for chumps. The real money was in betting
against those same mortgages.
"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."
Eventually, lots of aggrieved investors agreed. In a virtual
repeat of the Internet IPO craze, Goldman was hit with a wave of
lawsuits after the collapse of the housing bubble, many of which
accused the bank of withholding pertinent information about the
quality of the mortgages it issued. New York state regulators are
suing Goldman and 25 other underwriters for selling bundles of
crappy Countrywide mortgages to city and state pension funds,
which lost as much as $100 million in the investments.
Massachusetts also investigated Goldman for similar misdeeds,
acting on behalf of 714 mortgage holders who got stuck ho1ding
predatory loans. But once again, Goldman got off virtually
scot-free, staving off prosecution by agreeing to pay a paltry
$60 million - about what the bank's CDO division made in a day
and a half during the real estate boom.
The effects of the housing bubble are well known - it led more or
less directly to the collapse of Bear Stearns, Lehman Brothers
and AIG, whose toxic portfolio of credit swaps was in significant
part composed of the insurance that banks like Goldman bought
against their own housing portfolios. In fact, at least $13
billion of the taxpayer money given to AIG in the bailout
ultimately went to Goldman, meaning that the bank made out on the
housing bubble twice: It hosed the investors who bought their
horseshit CDOs by betting against its own crappy product, then it
turned around and hosed the taxpayer by making him payoff those
same bets.
And once again, while the world was crashing down all around the
bank, Goldman made sure it was doing just fine in the
compensation department. In 2006, the firm's payroll jumped to
$16.5 billion - an average of $622,000 per employee. As a Goldman
spokesman explained, "We work very hard here."
But the best was yet to come. While the collapse of the housing
bubble sent most of the financial world fleeing for the exits, or
to jail, Goldman boldly doubled down - and almost single-handedly
created yet another bubble, one the world still barely knows the
firm had anything to do with.
BUBBLE #4 - $4 A GALLON
By the beginning of 2008, the financial world was in turmoil.
Wall Street had spent the past two and a half decades producing
one scandal after another, which didn't leave much to sell that
wasn't tainted. The terms junk bond, IPO, subprime mortgage and
other once-hot financial fare were now firmly associated in the
public's mind with scams; the terms credit swaps and CDOs were
about to join them. The credit markets were in crisis, and the
mantra that had sustained the fantasy economy throughout the Bush
years - the notion that housing prices never go down - was now a
fully exploded myth, leaving the Street clamoring for a new
bullshit paradigm to sling.
Where to go? With the public reluctant to put money in anything
that felt like a paper investment, the Street quietly moved the
casino to the physical-commodities market - stuff you could
touch: corn, coffee, cocoa, wheat and, above all, energy
commodities, especially oil. In conjunction with a decline in the
dollar, the credit crunch and the housing crash caused a "flight
to commodities." Oil futures in particular skyrocketed, as the
price of a single barrel went from around $60 in the middle of
2007 to a high of $147 in the summer of 2008.
That summer, as the presidential campaign heated up, the accepted
explanation for why gasoline had hit $4.11 a gallon was that
there was a problem with the world oil supply. In a classic
example of how Republicans and Democrats respond to crises by
engaging in fierce exchanges of moronic irrelevancies, John
McCain insisted that ending the moratorium on offshore drilling
would be "very helpful in the short term," while Barack Obama in
typical liberal-arts yuppie style argued that federal investment
in hybrid cars was the way out.
GOLDMAN TURNED A SLEEPY OIL MARKET INTO A GIANT BETTING PARLOR -
SPIKING PRICES AT THE PUMP.
But it was all a lie. While the global supply of oil will
eventually dry up, the short-term flow has actually been
increasing. 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. Not only was the short-term supply of oil
rising, the demand for it was falling - which, in classic
economic terms, should have brought prices at the pump down.
So what caused the huge spike in oil prices? Take a wild guess.
Obviously Goldman had help - there were other players in the
physical-commodities market - but the root cause had almost
everything to do with the behavior of a few powerful actors
determined to turn the once-solid market into a speculative
casino. Goldman did it by persuading pension funds and other
large institutional investors to invest in oil futures - agreeing
to buy oil at a certain price on a fixed date. The push
transformed oil from a physical commodity, rigidly subject to
supply and demand, into something to bet on, like a stock.
Between 2003 and 2008, the amount of speculative money in
commodities grew from $13 billion to $317 billion, an increase of
2,300 percent. By 2008, a barrel of oil was traded 27 times, on
average, before it was actually delivered and consumed.
As is so often the case, there had been a Depression-era law in
place designed specifically to prevent this sort of thing. The
commodities market was designed in large part to help farmers: A
grower concerned about future price drops could enter into a
contract to sell his corn at a certain price for delivery later
on, which made him worry less about building up stores of his
crop. When no one was buying corn, the farmer could sell to a
middleman known as a "traditional speculator," who would store
the grain and sell it later, when demand returned. That way,
someone was always there to buy from the farmer, even when the
market temporarily had no need for his crops.
In 1936, however, Congress recognized that there should never be
more speculators in the market than real producers and consumers.
If that happened, prices would be affected by something other
than supply and demand, and price manipulations would ensue. A
new law empowered the Commodity Futures Trading Commission - the
very same body that would later try and fail to regulate credit
swaps - to place limits on speculative trades in commodities. As
a result of the CFTC's oversight, peace and harmony reigned in
the commodities markets for more than 50 years.
All that changed in 1991 when, unbeknownst to almost everyone in
the world, a Goldman-owned commodities-trading subsidiary called
J. Aron wrote to the CFTC and made an unusual argument. Farmers
with big stores of corn, Goldman argued, weren't the only ones
who needed to hedge their risk against future price drops - Wall
Street dealers who made big bets on oil prices also needed to
hedge their risk, because, well, they stood to lose a lot too.
This was complete and utter crap - the 1936 law, remember, was
specifically designed to maintain distinctions between people who
were buying and selling real tangible stuff and people who were
trading in paper alone. But the CFTC, amazingly, bought Goldman's
argument. It issued the bank a free pass, called the "Bona Fide
Hedging" exemption, allowing Goldman's subsidiary to call itself
a physical hedger and escape virtually all limits placed on
speculators. In the years that followed, the commission would
quietly issue 14 similar exemptions to other companies.
Now Goldman and other banks were free to drive more investors
into the commodities markets, enabling speculators to place
increasingly big bets. That 1991 letter from Goldman more or less
directly led to the oil bubble in 2008, when the number of
speculators in the market - driven there by fear of the falling
dollar and the housing crash - finally overwhelmed the real
physical suppliers and consumers. 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.
What is even more amazing is that the letter to Goldman, along
with most of the other trading exemptions, was handed out more or
less in secret. "I was the head of the division of trading and
markets, and Brooksley Born was the chair of the CFTC," says
Greenberger, "and neither of us knew this letter was out there."
In fact, the letters only came to light by accident. Last year, a
staffer for the House Energy and Commerce Committee just happened
to be at a briefing when officials from the CFTC made an offhand
reference to the exemptions.
"1 had been invited to a briefing the commission was holding on
energy," the staffer recounts. "And suddenly in the middle of it,
they start saying, 'Yeah, we've been issuing these letters for
years now.' I raised my hand and said, 'Really? You issued a
letter? Can I see it?' And they were like, 'Duh, duh.' So we went
back and forth, and finally they said, 'We have to clear it with
Goldman Sachs.' I'm like, 'What do you mean, you
have to clear it with Goldman Sachs?'"
The CFTC cited a rule that prohibited it from releasing any
information about a company's current position in the market. But
the staffer's request was about a letter that had been issued 17
years earlier. It no longer had anything to do with Goldman's
current position. What's more, Section 7 of the 1936 commodities
law gives Congress the right to any information it wants from the
commission. Still, in a classic example of how complete Goldman's
capture of government is, the CFTC waited until it got clearance
from the bank before it turned the letter over.
Armed with the semi-secret government exemption, Goldman had
become the chief designer of a giant commodities betting parlor.
Its Goldman Sachs Commodities Index - which tracks the prices of
24 major commodities but is overwhelmingly weighted toward oil -
became the place where pension funds and insurance companies and
other institutional investors could make massive long-term bets
on commodity prices. Which was all well and good, except for a
couple of things. One was that index speculators are mostly "long
only" bettors, who seldom if ever take short positions - meaning
they only bet on prices to rise. While this kind of behavior is
good for a stock market, it's terrible for commodities, because
it continually forces prices upward. "If index speculators took
short positions as well as long ones, you'd see them pushing
prices both up and down," says Michael Masters, a hedge-fund
manager who has helped expose the role of investment banks in the
manipulation of oil prices. "But they only push prices in one
direction: up."
Complicating matters even further was the fact that Goldman
itself was cheerleading with all its might for an increase in oil
prices. In the beginning of 2008, Arjun Murti, a Goldman analyst,
hailed as an "oracle of oil" by The New York Times, predicted a
"super spike" in oil prices, forecasting a rise to $200 a barrel.
At the time Goldman was heavily invested in oil through its
commodities-trading subsidiary, J. Aron; it also owned a stake in
a major oil refinery in Kansas, where it warehoused the crude it
bought and sold. Even though the supply of oil was keeping pace
with demand, Murti continually warned of disruptions to the world
oil supply, going so far as to broadcast the fact that he owned
two hybrid cars. High prices, the bank insisted, were somehow the
fault of the piggish American consumer; in 2005, Goldman analysts
insisted that we wouldn't know when oil prices would fall until
we knew "when American consumers will stop buying gas-guzzling
sport utility vehicles and instead seek fuel-efficient
alternatives."
But it wasn't the consumption of real oil that was driving up
prices - it was the trade in paper oil. By the summer of2008, in
fact, commodities speculators had bought and stockpiled enough
oil futures to fill 1.1 billion barrels of crude, which meant
that speculators owned more future oil on paper than there was
real, physical oil stored in all of the country's commercial
storage tanks and the Strategic Petroleum Reserve combined. It
was a repeat of both the Internet craze and the housing bubble,
when Wall Street jacked up present-day profits by selling suckers
shares of a fictional fantasy future of endlessly rising prices.
In what was by now a painfully familiar pattern, the
oil-commodities melon hit the pavement hard in the summer of
2008, causing a massive loss of wealth; crude prices plunged from
$147 to $33. Once again the big losers were ordinary people. The
pensioners whose funds invested in this crap got massacred:
CalPERS, the California Public Employees' Retirement System, had
$1.1 billion in commodities when the crash came. And the damage
didn't just come from oil. Soaring food prices driven by the
commodities bubble led to catastrophes across the planet, forcing
an estimated 100 million people into hunger and sparking food
riots throughout the Third World.
Now oil prices are rising again: They shot up 20 percent in the
month of May and have nearly doubled so far this year. Once
again, the problem is not supply or demand. "The highest supply
of oil in the last 20 years is now," says Rep. Bart Stupak, a
Democrat from Michigan who serves on the House energy committee.
"Demand is at a 10-year low. And yet prices are up."
Asked why politicians continue to harp on things like drilling or
hybrid cars, when supply and demand have nothing to do with the
high prices, Stupak shakes his head. "I think they just don't
understand the problem very well," he says. "You can't explain it
in 30 seconds, so politicians ignore it."
BUBBLE #5 - RIGGING THE BAILOUT
After the oil bubble collapsed last fall, there was no new bubble
to keep things humming - this time, the money seems to be really
gone, like worldwide-depression gone. So the financial safari has
moved elsewhere, and the big game in the hunt has become the only
remaining pool of dumb, unguarded capital left to feed upon:
taxpayer money. Here, in the biggest bailout in history, is where
Goldman Sachs really started to flex its muscle.
It began in September of last year, when then-Treasury secretary
Paulson made a momentous series of decisions. Although he had
already engineered a rescue of Bear Stearns a few months before
and helped bail out quasi-private lenders Fannie Mae and Freddie
Mac, Paulson elected to let Lehman Brothers - one of Goldman's
last real competitors - collapse without intervention.
("Goldman's superhero status was left intact," says market
analyst Eric Salzman, "and an investment-banking competitor,
Lehman, goes away.") 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. Thanks to the rescue
effort, the bank ended up getting paid in full for its bad bets:
By contrast, retired auto workers awaiting the Chrysler bailout
will be lucky to receive 50 cents for every dollar they are owed.
Immediately after the AIG bailout, Paulson announced his federal
bailout for the financial industry, a $700 billion plan called
the Troubled Asset Relief Program, and put a heretofore unknown
35-year-old Goldman banker named Neel Kashkari in charge of
administering the funds. In order to qualify for bailout monies,
Goldman announced that it would convert from an investment bank
to a bankholding company, a move that allows it access not only
to $10 billion in TARP funds, but to a whole galaxy of less
conspicuous, publicly backed funding - most notably, lending from
the discount window of the Federal Reserve. By the end of March,
the Fed will have lent or guaranteed at least $8.7 trillion under
a series of new bailout programs - and thanks to an obscure law
allowing the Fed to block most congressional audits, both the
amounts and the recipients of the monies remain almost entirely
secret.
Converting to a bank-holding company has other benefits as well:
Goldman's primary supervisor is now the New York Fed, whose
chairman at the time of its announcement was Stephen Friedman, a
former co-chairman of Goldman Sachs. Friedman was technically in
violation of Federal Reserve policy by remaining on the board of
Goldman even as he was supposedly regulating the bank; in order
to rectify the problem, he applied for, and got, a
conflict-of-interest waiver from the government. Friedman was
also supposed to divest himself of his Goldman stock after
Goldman became a bank-holding company, but thanks to the waiver,
he was allowed to go out and buy 52,000 additional shares in his
old bank, leaving him $3 million richer. Friedman stepped down in
May, but the man now in charge of supervising Goldman - New York
Fed president William Dudley - is yet another former Goldmanite.
The collective message of all this - the AIG bailout, the swift
approval for its bank-holding conversion, the TARP funds - is
that when it comes to Goldman Sachs, there isn't a free market at
all. The government might let other players on the market die,
but it simply will not allow Goldman to fail under any
circumstances. Its edge in the market has suddenly become an open
declaration of supreme privilege. "In the past it was an implicit
advantage," says Simon Johnson, an economics professor at MIT and
former official at the International Monetary Fund, who compares
the bailout to the crony capitalism he has seen in Third World
countries. "Now it's more of an explicit advantage."
Once the bailouts were in place, Goldman went right back to
business as usual, dreaming up impossibly convoluted schemes to
pick the American carcass clean of its loose capital. One of its
first moves in the post-bailout era was to quietly push forward
the calendar it uses to report its earnings, essentially wiping
December 2008 - with its $1.3 billion in pretax losses - off the
books. At the same time, the bank announced a highly suspicious
$1.8 billion profit for the first quarter of 2009 - which
apparently included a large chunk of money funneled to it by
taxpayers via the AIG bailout. "They cooked those first-quarter
results six ways from Sunday," says one hedge-fund manager. "They
hid the losses in the orphan month and called the bailout money
profit."
Two more numbers stand out from that stunning first-quarter
turnaround. The bank paid out an astonishing $4.7 billion in
bonuses and compensation in the first three months of this year,
an 18 percent increase over the first quarter of 2008. It also
raised $5 billion by issuing new shares almost immediately after
releasing its first-quarter results. Taken together, the numbers
show that Goldman essentially borrowed a $5 billion salary payout
for its executives in the middle of the global economic crisis it
helped cause, using half-baked accounting to reel in investors,
just months after receiving billions in a taxpayer bailout.
Even more amazing, Goldman did it all right before the government
announced the results of its new "stress test" for banks seeking
to repay TARP money - suggesting that Goldman knew exactly what
was coming. The government was trying to carefully orchestrate
the repayments in an effort to prevent further trouble at banks
that couldn't pay back the money right away. But Goldman blew off
those concerns, brazenly flaunting its insider status. "They
seemed to know everything that they needed to do before the
stress test came out, unlike everyone else, who had to wait until
after," says Michael Hecht, a managing director of JMP
Securities. "The government came out and said, 'To pay back TARP,
you have to issue debt of at least five years that is not insured
by FDIC - which Goldman Sachs had already done, a week or two
before."
And here's the real punch line. After playing an intimate role in
four historic bubble catastrophes, after helping $5 trillion in
wealth disappear from the NASDAQ, after pawning off thousands of
toxic mortgages on pensioners and cities, after helping to drive
the price of gas up to $4 a gallon and to push 100 million people
around the world into hunger, after securing tens of billions of
taxpayer dollars through a series of bailouts overseen by its
former CEO, what did Goldman Sachs give back to the people of the
United States in 2008?
Fourteen million dollars.
That is what the firm paid in taxes in 2008, an effective tax
rate of exactly one, read it, one percent. The bank paid out $10
billion in compensation and benefits that same year and made a
profit of more than $2 billion - yet it paid the Treasury less
than a third of what it forked over to CEO Lloyd Blankfein, who
made $42.9 million last year.
How is this possible? According to Goldman's annual report, the
low taxes are due in large part to changes in the bank's
"geographic earnings mix." In other words, the bank moved its
money around so that most of its earnings took place in foreign
countries with low tax rates. Thanks to our completely hosed
corporate tax system, companies like Goldman can ship their
revenues offshore and defer taxes on those revenues indefinitely,
even while they claim deductions upfront on that same untaxed
income. This is why any corporation with an at least occasionally
sober accountant can usually find a way to zero out its taxes. A
GAO report, in fact, found that between 1998 and 2005, roughly
two-thirds of all corporations operating in the U.S. paid no
taxes at all.
This should be a pitchfork-level outrage - but somehow, when
Goldman released its post-bailout tax profile, hardly anyone said
a word. One of the few to remark on the obscenity was Rep. Lloyd
Doggett, a Democrat from Texas who serves on the House Ways and
Means Committee. "With the right hand out begging for bailout
money," he said, "the left is hiding it offshore."
BUBBLE #6 - GLOBAL WARMING
Fast-Forward to today. It's early June in Washington, D.C. Barack
Obama, a popular young politician whose leading private campaign
donor was an investment bank called Goldman Sachs - its employees
paid some $981,000 to his campaign - sits in the White House.
Having seamlessly navigated the political minefield of the
bailout era, Goldman is once again back to its old business,
scouting out loopholes in a new government-created market with
the aid of a new set of alumni occupying key government jobs.
AS ENVISIONED BY GOLDMAN, THE FIGHT TO STOP GLOBAL WARMING WILL
BECOME A "CARBON MARKET" WORTH $1 TRILLION A YEAR.
Gone are Hank Paulson and Neel Kashkari; in their place are
Treasury chief of staff Mark Patterson and CFTC chief Gary
Gensler, both former Goldmanites. (Gensler was the firm's co-head
of finance) And instead of credit derivatives or oil futures or
mortgage-backed CDOs, the new game in town, the next bubble, is
in carbon credits - a booming trillion-dollar market that barely
even exists yet, but will if the Democratic Party that it gave
$4,452,585 to in the last election manages to push into existence
a groundbreaking new commodities bubble, disguised as an
"environmental plan," called cap-and-trade.
The new carbon-credit market is a virtual repeat of the
commodities-market casino that's been kind to Goldman, except it
has one delicious new wrinkle: If the plan goes forward as
expected, the rise in prices will be government-mandated. Goldman
won't even have to rig the game. It will be rigged in advance.
Here's how it works: If the bill passes; there will be limits for
coal plants, utilities, natural-gas distributors and numerous
other industries on the amount of carbon emissions (a.k.a.
greenhouse gases) they can produce per year. If the companies go
over their allotment, they will be able to buy "allocations" or
credits from other companies that have managed to produce fewer
emissions. President Obama conservatively estimates that about
$646 billions worth of carbon credits will be auctioned in the
first seven years; one of his top economic aides speculates that
the real number might be twice or even three times that amount.
The feature of this plan that has special appeal to speculators
is that the "cap" on carbon will be continually lowered by the
government, which means that carbon credits will become more and
more scarce with each passing year. Which means that this is a
brand-new commodities market where the main commodity to be
traded is guaranteed to rise in price over time. The volume of
this new market will be upwards of a trillion dollars annually;
for comparison's sake, the annual combined revenues of an
electricity suppliers in the U.S. total $320 billion.
Goldman wants this bill. The plan is (1) to get in on the ground
floor of paradigm-shifting legislation, (2) make sure that
they're the profit-making slice of that paradigm and (3) make
sure the slice is a big slice. Goldman started pushing hard for
cap-and-trade long ago, but things really ramped up last year
when the firm spent $3.5 million to lobby climate issues. (One of
their lobbyists at the time was none other than Patterson, now
Treasury chief of staff.) Back in 2005, when Hank Paulson was
chief of Goldman, he personally helped author the bank's
environmental policy, a document that contains some surprising
elements for a firm that in all other areas has been consistently
opposed to any sort of government regulation. Paulson's report
argued that "voluntary action alone cannot solve the
climate-change problem." A few years later, the bank's carbon
chief, Ken Newcombe, insisted that cap-and-trade alone won't be
enough to fix the climate problem and called for further public
investments in research and development. Which is convenient,
considering that 'Goldman made early investments in wind power
(it bought a subsidiary called Horizon Wind Energy), renewable
diesel (it is an investor in a firm called Changing World
Technologies) and solar power (it partnered with BP Solar),
exactly the kind of deals that will prosper if the government
forces energy producers to use cleaner energy. As Paulson said at
the time, "We're not making those investments to lose money."
The bank owns a 10 percent stake in the Chicago Climate Exchange,
where the carbon credits will be traded. Moreover, Goldman owns a
minority stake in Blue Source LLC, a Utah-based firm that sells
carbon credits of the type that will be in great demand if the
bill passes. 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.
There's also a $500 million Green Growth Fund set up by a
Goldmanite to invest in green-tech ... the list goes on and on.
Goldman is ahead of the headlines again, just waiting for someone
to make it rain in the right spot. Will this market be bigger
than the energy-futures market?
"Oh, it'll dwarf it," says a former staffer on the House energy
committee.
Well, you might say, who cares? If cap-and-trade succeeds, won't
we all be saved from the catastrophe of global warming? Maybe -
but cap-and-trade, as envisioned by Goldman, is really just a
carbon tax structured so that private interests collect the
revenues. Instead of simply imposing a fixed government levy on
carbon pollution and forcing unclean energy producers to pay for
the mess they make, cap-and trade will allow a small tribe of
greedy-as-hell Wall Street swine to turn yet another commodities
market into a private tax-collection scheme. This is worse than
the bailout: It allows the bank to seize taxpayer money before
it's even collected.
"If it's going to be a tax, I would prefer that Washington set
the tax and collect it," says Michael Masters, the hedge fund
director who spoke out against oil-futures speculation. "But
we're saying that Wall Street can set the tax, and Wall Street
can collect the tax. That's the last thing in the world I want.
It's just asinine."
Cap-and-trade is going to happen. Or, if it doesn't, something
like it will. The moral is the same as for all the other bubbles
that Goldman helped create, from 1929 to 2009. In almost every
case, the very same bank that behaved recklessly for years,
weighing down the system with toxic loans and predatory debt, and
accomplishing nothing but massive bonuses for a few bosses, has
been rewarded with mountains of virtually free money and
government guarantees - while the actual victims in this mess,
ordinary taxpayers, are the ones paying for it.
It's not always easy to accept the reality of what we now
routinely allow these people to get away with; there's a kind of
collective denial that kicks in when a country goes through what
America has gone through lately, when a people lose as much
prestige and status as we have in the past few years. You can't
really register the fact that you're no longer a citizen of a
thriving first-world democracy, that you're no longer above
getting robbed in broad daylight, because like an amputee, you
can still sort of feel things that are no longer there.
But this is it. This is the world we live in now. And in this
world, some of us have to play by the rules, while others get a
note from the principal excusing them from homework till the end
of time, plus 10 billion free dollars in a paper bag to buy
lunch. It's a gangster state, running on gangster economics, and
even prices can't be trusted anymore; there are hidden taxes in
every buck you pay. And maybe we can't stop it, but we should at
least know where it's all going.
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