2018-02-23 18:58:03 +00:00
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---
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created_at: '2017-07-10T12:46:56.000Z'
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title: 'Goldman Sachs: The Great American Bubble Machine (2009)'
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url: https://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405
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author: arbuge
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points: 75
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story_text:
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comment_text:
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num_comments: 28
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story_id:
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story_title:
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story_url:
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parent_id:
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created_at_i: 1499690816
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_tags:
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- story
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- author_arbuge
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- story_14735384
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objectID: '14735384'
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2018-06-08 12:05:27 +00:00
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year: 2009
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2018-02-23 18:58:03 +00:00
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---
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2018-03-03 09:35:28 +00:00
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The first thing you need to know about Goldman Sachs is that it's
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everywhere. The world's most powerful investment bank is a great vampire
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squid wrapped around the face of humanity, relentlessly jamming its
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blood funnel into anything that smells like money. In fact, the history
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of the recent financial crisis, which doubles as a history of the rapid
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decline and fall of the suddenly swindled dry American empire, reads
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like a Who's Who of Goldman Sachs graduates.
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2018-02-23 18:19:40 +00:00
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2018-03-03 09:35:28 +00:00
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By now, most of us know the major players. As George Bush's last
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Treasury secretary, former Goldman CEO Henry Paulson was the architect
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of the bailout, a suspiciously self-serving plan to funnel trillions of
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Your Dollars to a handful of his old friends on Wall Street. Robert
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Rubin, Bill Clinton's former Treasury secretary, spent 26 years at
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Goldman before becoming chairman of Citigroup — which in turn got a $300
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billion taxpayer bailout from Paulson. There's John Thain, the asshole
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chief of Merrill Lynch who bought an $87,000 area rug for his office as
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his company was imploding; a former Goldman banker, Thain enjoyed a
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multi-billion-dollar handout from Paulson, who used billions in taxpayer
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funds to help Bank of America rescue Thain's sorry company. And Robert
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Steel, the former Goldmanite head of Wachovia, scored himself and his
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fellow executives $225 million in golden-parachute payments as his bank
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was self-destructing. There's Joshua Bolten, Bush's chief of staff
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during the bailout, and Mark Patterson, the current Treasury chief of
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staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the
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former Goldman director whom Paulson put in charge of bailed-out
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insurance giant AIG, which forked over $13 billion to Goldman after
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Liddy came on board. The heads of the Canadian and Italian national
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banks are Goldman alums, as is the head of the World Bank, the head of
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the New York Stock Exchange, the last two heads of the Federal Reserve
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Bank of New York — which, incidentally, is now in charge of overseeing
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Goldman — not to mention …
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2018-02-23 18:19:40 +00:00
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2018-03-03 09:35:28 +00:00
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But then, any attempt to construct a narrative around all the former
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Goldmanites in influential positions quickly becomes an absurd and
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pointless exercise, like trying to make a list of everything. What you
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need to know is the big picture: If America is circling the drain,
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Goldman Sachs has found a way to be that drain — an extremely
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unfortunate loophole in the system of Western democratic capitalism,
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which never foresaw that in a society governed passively by free markets
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and free elections, organized greed always defeats disorganized
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democracy.
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2018-02-23 18:19:40 +00:00
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2018-03-03 09:35:28 +00:00
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The bank's unprecedented reach and power have enabled it to turn all of
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America into a giant pump-and-dump scam, manipulating whole economic
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sectors for years at a time, moving the dice game as this or that market
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collapses, and all the time gorging itself on the unseen costs that are
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breaking families everywhere — high gas prices, rising consumer credit
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rates, half-eaten pension funds, mass layoffs, future taxes to pay off
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bailouts. All that money that you're losing, it's going somewhere, and
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in both a literal and a figurative sense, Goldman Sachs is where it's
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going: The bank is a huge, highly sophisticated engine for converting
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the useful, deployed wealth of society into the least useful, most
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wasteful and insoluble substance on Earth — pure profit for rich
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individuals.
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[The Feds vs.
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Goldman](../../../politics/news/the-feds-vs-goldman-20100426)
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They achieve this using the same playbook over and over again. The
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formula is relatively simple: Goldman positions itself in the middle of
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a speculative bubble, selling investments they know are crap. Then they
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hoover up vast sums from the middle and lower floors of society with the
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aid of a crippled and corrupt state that allows it to rewrite the rules
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in exchange for the relative pennies the bank throws at political
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patronage. Finally, when it all goes bust, leaving millions of ordinary
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citizens broke and starving, they begin the entire process over again,
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riding in to rescue us all by lending us back our own money at interest,
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selling themselves as men above greed, just a bunch of really smart guys
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keeping the wheels greased. They've been pulling this same stunt over
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and over since the 1920s — and now they're preparing to do it again,
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creating what may be the biggest and most audacious bubble yet.
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If you want to understand how we got into this financial crisis, you
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have to first understand where all the money went — and in order to
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understand that, you need to understand what Goldman has already gotten
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away with. It is a history exactly five bubbles long — including last
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year's strange and seemingly inexplicable spike in the price of oil.
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There were a lot of losers in each of those bubbles, and in the bailout
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that followed. But Goldman wasn't one of them.
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BUBBLE \#1 The Great Depression
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Goldman wasn't always a too-big-to-fail Wall Street behemoth, the
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ruthless face of kill-or-be-killed capitalism on steroids —just almost
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always. The bank was actually founded in 1869 by a German immigrant
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named Marcus Goldman, who built it up with his son-in-law Samuel Sachs.
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They were pioneers in the use of commercial paper, which is just a fancy
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way of saying they made money lending out short-term IOUs to smalltime
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vendors in downtown Manhattan.
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You can probably guess the basic plotline of Goldman's first 100 years
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in business: plucky, immigrant-led investment bank beats the odds, pulls
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itself up by its bootstraps, makes shitloads of money. In that ancient
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history there's really only one episode that bears scrutiny now, in
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light of more recent events: Goldman’s disastrous foray into the
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speculative mania of pre-crash Wall Street in the late 1920s.
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[Wall Street's Big
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Win](../../../politics/news/wall-streets-big-win-20100804)
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This great Hindenburg of financial history has a few features that might
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sound familiar. Back then, the main financial tool used to bilk
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investors was called an "investment trust." Similar to modern mutual
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funds, the trusts took the cash of investors large and small and
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(theoretically, at least) invested it in a smorgasbord of Wall Street
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securities, though the securities and amounts were often kept hidden
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from the public. So a regular guy could invest $10 or $100 in a trust
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and feel like he was a big player. Much as in the 1990s, when new
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vehicles like day trading and e-trading attracted reams of new suckers
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from the sticks who wanted to feel like big shots, investment trusts
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roped a new generation of regular-guy investors into the speculation
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game.
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Beginning a pattern that would repeat itself over and over again,
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Goldman got into the investmenttrust game late, then jumped in with both
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feet and went hogwild. The first effort was the Goldman Sachs Trading
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Corporation; the bank issued a million shares at $100 apiece, bought all
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those shares with its own money and then sold 90 percent of them to the
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hungry public at $104. The trading corporation then relentlessly bought
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shares in itself, bidding the price up further and further. Eventually
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it dumped part of its holdings and sponsored a new trust, the Shenandoah
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Corporation, issuing millions more in shares in that fund — which in
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turn sponsored yet another trust called the Blue Ridge Corporation. In
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this way, each investment trust served as a front for an endless
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investment pyramid: Goldman hiding behind Goldman hiding behind Goldman.
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Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually
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owned by Shenandoah — which, of course, was in large part owned by
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Goldman Trading.
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[Taibblog: Commentary on Politics and the Economy by Matt
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Taibbi](../../../politics/blogs/taibblog)
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The end result (ask yourself if this sounds familiar) was a daisy chain
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of borrowed money, one exquisitely vulnerable to a decline in
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performance anywhere along the line. The basic idea isn't hard to
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follow. You take a dollar and borrow nine against it; then you take that
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$10 fund and borrow $90; then you take your $100 fund and, so long as
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the public is still lending, borrow and invest $900. If the last fund in
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the line starts to lose value, you no longer have the money to pay back
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your investors, and everyone gets massacred.
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In a chapter from The Great Crash, 1929 titled "In Goldman Sachs We
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Trust," the famed economist John Kenneth Galbraith held up the Blue
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Ridge and Shenandoah trusts as classic examples of the insanity of
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leveragebased investment. The trusts, he wrote, were a major cause of
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the market's historic crash; in today's dollars, the losses the bank
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suffered totaled $475 billion. "It is difficult not to marvel at the
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imagination which was implicit in this gargantuan insanity," Galbraith
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observed, sounding like Keith Olbermann in an ascot. "If there must be
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madness, something may be said for having it on a heroic scale."
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BUBBLE \#2 Tech Stocks
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Fast-forward about 65 years. Goldman not only survived the crash that
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wiped out so many of the investors it duped, it went on to become the
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chief underwriter to the country's wealthiest and most powerful
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corporations. Thanks to Sidney Weinberg, who rose from the rank of
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janitor's assistant to head the firm, Goldman became the pioneer of the
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initial public offering, one of the principal and most lucrative means
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by which companies raise money. During the 1970s and 1980s, Goldman may
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not have been the planet-eating Death Star of political influence it is
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today, but it was a top-drawer firm that had a reputation for attracting
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the very smartest talent on the Street.
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It also, oddly enough, had a reputation for relatively solid ethics and
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a patient approach to investment that shunned the fast buck; its
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executives were trained to adopt the firm's mantra, "long-term greedy."
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One former Goldman banker who left the firm in the early Nineties
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recalls seeing his superiors give up a very profitable deal on the
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grounds that it was a long-term loser. "We gave back money to 'grownup'
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corporate clients who had made bad deals with us," he says. "Everything
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we did was legal and fair — but 'long-term greedy' said we didn't want
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to make such a profit at the clients' collective expense that we spoiled
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the marketplace."
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But then, something happened. It's hard to say what it was exactly; it
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might have been the fact that Goldman's cochairman in the early
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Nineties, Robert Rubin, followed Bill Clinton to the White House, where
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he directed the National Economic Council and eventually became Treasury
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secretary. While the American media fell in love with the story line of
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a pair of baby-boomer, Sixties-child, Fleetwood Mac yuppies nesting in
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the White House, it also nursed an undisguised crush on Rubin, who was
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hyped as without a doubt the smartest person ever to walk the face of
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the Earth, with Newton, Einstein, Mozart and Kant running far behind.
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Rubin was the prototypical Goldman banker. He was probably born in a
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$4,000 suit, he had a face that seemed permanently frozen just short of
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an apology for being so much smarter than you, and he exuded a
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Spock-like, emotion-neutral exterior; the only human feeling you could
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imagine him experiencing was a nightmare about being forced to fly
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coach. It became almost a national clichè that whatever Rubin thought
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was best for the economy — a phenomenon that reached its apex in 1999,
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when Rubin appeared on the cover of Time with his Treasury deputy, Larry
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Summers, and Fed chief Alan Greenspan under the headline The Committee
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To Save The World. And "what Rubin thought," mostly, was that the
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American economy, and in particular the financial markets, were
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over-regulated and needed to be set free. During his tenure at Treasury,
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the Clinton White House made a series of moves that would have drastic
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consequences for the global economy — beginning with Rubin's complete
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and total failure to regulate his
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old firm during its first mad dash for obscene short-term profits.
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The basic scam in the Internet Age is pretty easy even for the
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financially illiterate to grasp. Companies that weren't much more than
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potfueled ideas scrawled on napkins by uptoolate bongsmokers were taken
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public via IPOs, hyped in the media and sold to the public for
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mega-millions. It was as if banks like Goldman were wrapping ribbons
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around watermelons, tossing them out 50-story windows and opening the
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phones for bids. In this game you were a winner only if you took your
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money out before the melon hit the pavement.
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It sounds obvious now, but what the average investor didn't know at the
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time was that the banks had changed the rules of the game, making the
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deals look better than they actually were. They did this by setting up
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what was, in reality, a two-tiered investment system — one for the
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insiders who knew the real numbers, and another for the lay investor who
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was invited to chase soaring prices the banks themselves knew were
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irrational. While Goldman's later pattern would be to capitalize on
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changes in the regulatory environment, its key innovation in the
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Internet years was to abandon its own industry's standards of quality
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control.
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"Since the Depression, there were strict underwriting guidelines that
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Wall Street adhered to when taking a company public," says one prominent
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hedge-fund manager. "The company had to be in business for a minimum of
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five years, and it had to show profitability for three consecutive
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years. But Wall Street took these guidelines and threw them in the
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trash." Goldman completed the snow job by pumping up the sham stocks:
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"Their analysts were out there saying Bullshit.com is worth $100 a
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share."
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The problem was, nobody told investors that the rules had changed.
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"Everyone on the inside knew," the manager says. "Bob Rubin sure as hell
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knew what the underwriting standards were. They'd been intact since the
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1930s."
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Jay Ritter, a professor of finance at the University of Florida who
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specializes in IPOs, says banks like Goldman knew full well that many of
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the public offerings they were touting would never make a dime. "In the
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early Eighties, the major underwriters insisted on three years of
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profitability. Then it was one year, then it was a quarter. By the time
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of the Internet bubble, they were not even requiring profitability in
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the foreseeable future."
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Goldman has denied that it changed its underwriting standards during the
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Internet years, but its own statistics belie the claim. Just as it did
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with the investment trust in the 1920s, Goldman started slow and
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finished crazy in the Internet years. After it took a little-known
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company with weak financials called Yahoo\! public in 1996, once the
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tech boom had already begun, Goldman quickly became the IPO king of the
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Internet era. Of the 24 companies it took public in 1997, a third were
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losing money at the time of the IPO. In 1999, at the height of the boom,
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it took 47 companies public, including stillborns like Webvan and eToys,
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investment offerings that were in many ways the modern equivalents of
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Blue Ridge and Shenandoah. The following year, it underwrote 18
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companies in the first four months, 14 of which were money losers at the
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time. As a leading underwriter of Internet stocks during the boom,
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Goldman provided profits far more volatile than those of its
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competitors: In 1999, the average Goldman IPO leapt 281 percent above
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its offering price, compared to the Wall Street average of 181 percent.
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How did Goldman achieve such extraordinary results? One answer is that
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they used a practice called "laddering," which is just a fancy way of
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saying they manipulated the share price of new offerings. Here's how it
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works: Say you're Goldman Sachs, and Bullshit.com comes to you and asks
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you to take their company public. You agree on the usual terms: You'll
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price the stock, determine how many shares should be released and take
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the Bullshit.com CEO on a "road show" to schmooze investors, all in
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exchange for a substantial fee (typically six to seven percent of the
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amount raised). You then promise your best clients the right to buy big
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chunks of the IPO at the low offering price — let's say Bullshit.com's
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starting share price is $15 — in exchange for a promise that they will
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buy more shares later on the open market. That seemingly simple demand
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gives you inside knowledge of the IPO's future, knowledge that wasn't
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disclosed to the day trader schmucks who only had the prospectus to go
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by: You know that certain of your clients who bought X amount of shares
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at $15 are also going to buy Y more shares at $20 or $25, virtually
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guaranteeing that the price is going to go to $25 and beyond. In this
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way, Goldman could artificially jack up the new company's price, which
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of course was to the bank's benefit — a six percent fee of a $500
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million IPO is serious money.
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Goldman was repeatedly sued by shareholders for engaging in laddering in
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a variety of Internet IPOs, including Webvan and NetZero. The deceptive
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practices also caught the attention of Nicholas Maier, the syndicate
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manager of Cramer & Co., the hedge fund run at the time by the
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now-famous chattering television asshole Jim Cramer, himself a Goldman
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alum. Maier told the SEC that while working for Cramer between 1996 and
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1998, he was repeatedly forced to engage in laddering practices during
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IPO deals with Goldman.
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"Goldman, from what I witnessed, they were the worst perpetrator," Maier
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said. "They totally fueled the bubble. And it's specifically that kind
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of behavior that has caused the market crash. They built these stocks
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upon an illegal foundation — manipulated up — and ultimately, it really
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was the small person who ended up buying in." In 2005, Goldman agreed to
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pay $40 million for its laddering violations — a puny penalty relative
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to the enormous profits it made. (Goldman, which has denied wrongdoing
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in all of the cases it has settled, refused to respond to questions for
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this story.)
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Another practice Goldman engaged in during the Internet boom was
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"spinning," better known as bribery. Here the investment bank would
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offer the executives of the newly public company shares at extra-low
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prices, in exchange for future underwriting business. Banks that engaged
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in spinning would then undervalue the initial offering price — ensuring
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that those "hot" opening-price shares it had handed out to insiders
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would be more likely to rise quickly, supplying bigger first-day rewards
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for the chosen few. So instead of Bullshit.com opening at $20, the bank
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would approach the Bullshit.com CEO and offer him a million shares of
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his own company at $18 in exchange for future business — effectively
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robbing all of Bullshit's new shareholders by diverting cash that should
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have gone to the company's bottom line into the private bank account of
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the company's CEO.
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In one case, Goldman allegedly gave a multimillion-dollar special
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offering to eBay CEO Meg Whitman, who later joined Goldman's board, in
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exchange for future i-banking business. According to a report by the
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House Financial Services Committee in 2002, Goldman gave special stock
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offerings to executives in 21 companies that it took public, including
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Yahoo\! cofounder Jerry Yang and two of the great slithering villains of
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the financial-scandal age — Tyco's Dennis Kozlowski and Enron's Ken Lay.
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Goldman angrily denounced the report as "an egregious distortion of the
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facts" — shortly before paying $110 million to settle an investigation
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into spinning and other manipulations launched by New York state
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regulators. "The spinning of hot IPO shares was not a harmless corporate
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perk," then-attorney general Eliot Spitzer said at the time. "Instead,
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it was an integral part of a fraudulent scheme to win new
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investment-banking business."
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Such practices conspired to turn the Internet bubble into one of the
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|
greatest financial disasters in world history: Some $5 trillion of
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|
wealth was wiped out on the NASDAQ alone. But the real problem wasn't
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the money that was lost by shareholders, it was the money gained by
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investment bankers, who received hefty bonuses for tampering with the
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market. Instead of teaching Wall Street a lesson that bubbles always
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deflate, the Internet years demonstrated to bankers that in the age of
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freely flowing capital and publicly owned financial companies, bubbles
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are incredibly easy to inflate, and individual bonuses are actually
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bigger when the mania and the irrationality are greater.
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Nowhere was this truer than at Goldman. Between 1999 and 2002, the firm
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paid out $28.5 billion in compensation and benefits — an average of
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roughly $350,000 a year per employee. Those numbers are important
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|
because the key legacy of the Internet boom is that the economy is now
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driven in large part by the pursuit of the enormous salaries and bonuses
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that such bubbles make possible. Goldman's mantra of "long-term greedy"
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vanished into thin air as the game became about getting your check
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before the melon hit the pavement.
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The market was no longer a rationally managed place to grow real,
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profitable businesses: It was a huge ocean of Someone Else's Money where
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bankers hauled in vast sums through whatever means necessary and tried
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to convert that money into bonuses and payouts as quickly as possible.
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If you laddered and spun 50 Internet IPOs that went bust within a year,
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so what? By the time the Securities and Exchange Commission got around
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to fining your firm $110 million, the yacht you bought with your IPO
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bonuses was already six years old. Besides, you were probably out of
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Goldman by then, running the U.S. Treasury or maybe the state of New
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Jersey. (One of the truly comic moments in the history of America's
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recent financial collapse came when Gov. Jon Corzine of New Jersey, who
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ran Goldman from 1994 to 1999 and left with $320 million in IPO-fattened
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stock, insisted in 2002 that "I've never even heard the term 'laddering'
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before.")
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For a bank that paid out $7 billion a year in salaries, $110 million
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fines issued half a decade late were something far less than a deterrent
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—they were a joke. Once the Internet bubble burst, Goldman had no
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incentive to reassess its new, profit-driven strategy; it just searched
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around for another bubble to inflate. As it turns out, it had one ready,
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thanks in large part to Rubin.
|
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|
BUBBLE \#3 The Housing Craze
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Goldman's role in the sweeping global disaster that was the housing
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bubble is not hard to trace. Here again, the basic trick was a decline
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in underwriting standards, although in this case the standards weren't
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in IPOs but in mortgages. By now almost everyone knows that for decades
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|
mortgage dealers insisted that home buyers be able to produce a down
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|
payment of 10 percent or more, show a steady income and good credit
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|
rating, and possess a real first and last name. Then, at the dawn of the
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|
new millennium, they suddenly threw all that shit out the window and
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|
started writing mortgages on the backs of napkins to cocktail waitresses
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|
and ex-cons carrying five bucks and a Snickers bar.
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None of that would have been possible without investment bankers like
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Goldman, who created vehicles to package those shitty mortgages and sell
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them en masse to unsuspecting insurance companies and pension funds.
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This created a mass market for toxic debt that would never have existed
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|
before; in the old days, no bank would have wanted to keep some addict
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|
ex-con's mortgage on its books, knowing how likely it was to fail. You
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can't write these mortgages, in other words, unless you can sell them to
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someone who doesn't know what they are.
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Goldman used two methods to hide the mess they were selling. First, they
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bundled hundreds of different mortgages into instruments called
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Collateralized Debt Obligations. Then they sold investors on the idea
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|
that, because a bunch of those mortgages would turn out to be OK, there
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was no reason to worry so much about the shitty ones: The CDO, as a
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|
whole, was sound. Thus, junk-rated mortgages were turned into AAA-rated
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|
investments. Second, to hedge its own bets, Goldman got companies like
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AIG to provide insurance — known as credit default swaps — on the CDOs.
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The swaps were essentially a racetrack bet between AIG and Goldman:
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Goldman is betting the ex-cons will default, AIG is betting they won't.
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There was only one problem with the deals: All of the wheeling and
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|
dealing represented exactly the kind of dangerous speculation that
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|
federal regulators are supposed to rein in. Derivatives like CDOs and
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|
|
credit swaps had already caused a series of serious financial
|
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|
|
calamities: Procter & Gamble and Gibson Greetings both lost fortunes,
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|
|
and Orange County, California, was forced to default in 1994. A report
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|
|
that year by the Government Accountability Office recommended that such
|
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|
|
financial instruments be tightly regulated — and in 1998, the head of
|
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|
|
the Commodity Futures Trading Commission, a woman named Brooksley Born,
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|
|
agreed. That May, she circulated a letter to business leaders and the
|
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|
|
Clinton administration suggesting that banks be required to provide
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|
|
greater disclosure in derivatives trades, and maintain reserves to
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|
cushion against losses.
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|
More regulation wasn’t exactly what Goldman had in mind. “The banks go
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|
crazy — they want it stopped,” says Michael Greenberger, who worked for
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|
Born as director of trading and markets at the CFTC and is now a law
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|
|
professor at the University of Maryland. “Greenspan, Summers, Rubin and
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|
\[SEC chief Arthur\] Levitt want it stopped.”
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Clinton's reigning economic foursome — “especially Rubin,” according to
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|
Greenberger — called Born in for a meeting and pleaded their case. She
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|
refused to back down, however, and continued to push for more regulation
|
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|
|
of the derivatives. Then, in June 1998, Rubin went public to denounce
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|
her move, eventually recommending that Congress strip the CFTC of its
|
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|
|
regulatory authority. In 2000, on its last day in session, Congress
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|
|
passed the now-notorious Commodity Futures Modernization Act, which had
|
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|
|
been inserted into an 11,000-page spending bill at the last minute, with
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|
|
almost no debate on the floor of the Senate. Banks were now free to
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|
trade default swaps with impunity.
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|
But the story didn't end there. AIG, a major purveyor of default swaps,
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|
|
approached the New York State Insurance Department in 2000 and asked
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|
|
whether default swaps would be regulated as insurance. At the time, the
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office was run by one Neil Levin, a former Goldman vice president, who
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|
decided against regulating the swaps. Now freed to underwrite as many
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|
housing-based securities and buy as much credit-default protection as it
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|
wanted, Goldman went berserk with lending lust. By the peak of the
|
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|
|
housing boom in 2006, Goldman was underwriting $76.5 billion worth of
|
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|
|
mortgage-backed securities — a third of which were sub-prime — much of
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|
it to institutional investors like pensions and insurance companies. And
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|
|
in these massive issues of real estate were vast swamps of crap.
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|
Take one $494 million issue that year, GSAMP Trust 2006S3. Many of the
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|
mortgages belonged to second-mortgage borrowers, and the average equity
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|
they had in their homes was 0.71 percent. Moreover, 58 percent of the
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|
loans included little or no documentation — no names of the borrowers,
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|
|
no addresses of the homes, just zip codes. Yet both of the major ratings
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|
|
agencies, Moody's and Standard & Poor's, rated 93 percent of the issue
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|
|
as investment grade. Moody's projected that less than 10 percent of the
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|
loans would default. In reality, 18 percent of the mortgages were in
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|
default within 18 months.
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Not that Goldman was personally at any risk. The bank might be taking
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|
all these hideous, completely irresponsible mortgages from
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|
beneath-gangster-status firms like Countrywide and selling them off to
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|
municipalities and pensioners — old people, for God's sake — pretending
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|
the whole time that it wasn't grade D horseshit. But even as it was
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|
|
doing so, it was taking short positions in the same market, in essence
|
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|
|
betting against the same crap it was selling. Even worse, Goldman
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|
bragged about it in public. "The mortgage sector continues to be
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|
|
challenged," David Viniar, the bank's chief financial officer, boasted
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|
|
in 2007. "As a result, we took significant markdowns on our long
|
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|
|
inventory positions … However, our risk bias in that market was to be
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|
short, and that net short position was profitable." In other words, the
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|
mortgages it was selling were for chumps. The real money was in betting
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|
against those same mortgages.
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|
"That's how audacious these assholes are," says one hedge fund manager.
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|
"At least with other banks, you could say that they were just dumb —
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|
they believed what they were selling, and it blew them up. Goldman knew
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|
what it was doing."
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I ask the manager how it could be that selling something to customers
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|
|
that you're actually betting against — particularly when you know more
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|
|
about the weaknesses of those products than the customer — doesn't
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|
|
amount to securities fraud.
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|
"It's exactly securities fraud," he says. "It's the heart of securities
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|
|
fraud."
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|
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
|
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|
|
issued. New York state regulators are suing Goldman and 25 other
|
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|
|
|
underwriters for selling bundles of crappy Countrywide mortgages to city
|
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|
|
and state pension funds, which lost as much as $100 million in the
|
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|
|
investments. Massachusetts also investigated Goldman for similar
|
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|
|
|
misdeeds, acting on behalf of 714 mortgage holders who got stuck holding
|
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|
|
predatory loans. But once again, Goldman got off virtually scot-free,
|
|
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|
|
staving off prosecution by agreeing to pay a paltry $60 million — about
|
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|
|
what the bank's CDO division made in a day and a half during the real
|
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|
|
estate boom.
|
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|
|
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
|
|
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|
|
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 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
|
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|
|
bets.
|
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|
|
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
|
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|
|
hard here."
|
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|
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|
|
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, sub-prime mortgage and other once-hot financial
|
|
|
|
|
fare were now firmly associated in the public's mind with scams; the
|
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terms credit swaps and CDOs were about to join them. The credit markets
|
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|
were in crisis, and the mantra that had sustained the fantasy economy
|
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throughout the Bush years — the notion that housing prices never go down
|
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— was now a fully exploded myth, leaving the Street clamoring for a new
|
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bullshit paradigm to sling.
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Where to go? With the public reluctant to put money in anything that
|
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felt like a paper investment, the Street quietly moved the casino to the
|
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physical-commodities market — stuff you could touch: corn, coffee,
|
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cocoa, wheat and, above all, energy commodities, especially oil. In
|
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|
conjunction with a decline in the dollar, the credit crunch and the
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|
|
housing crash caused a "flight to commodities." Oil futures in
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|
particular skyrocketed, as the price of a single barrel went from around
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$60 in the middle of 2007 to a high of $147 in the summer of 2008.
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That summer, as the presidential campaign heated up, the accepted
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explanation for why gasoline had hit $4.11 a gallon was that there was a
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|
|
problem with the world oil supply. In a classic example of how
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Republicans and Democrats respond to crises by engaging in fierce
|
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exchanges of moronic irrelevancies, John McCain insisted that ending the
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moratorium on offshore drilling would be "very helpful in the short
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term," while Barack Obama in typical liberal-arts yuppie style argued
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that federal investment in hybrid cars was the way out.
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But it was all a lie. While the global supply of oil will eventually dry
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up, the short-term flow has actually been increasing. In the six months
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|
before prices spiked, according to the U.S. Energy Information
|
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|
|
Administration, the world oil supply rose from 85.24 million barrels a
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day to 85.72 million. Over the same period, world oil demand dropped
|
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from 86.82 million barrels a day to 86.07 million. Not only was the
|
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short-term supply of oil rising, the demand for it was falling — which,
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in classic economic terms, should have brought prices at the pump down.
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So what caused the huge spike in oil prices? Take a wild guess.
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Obviously Goldman had help — there were other players in the physical
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commodities market — but the root cause had almost everything to do with
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the behavior of a few powerful actors determined to turn the once-solid
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market into a speculative casino. Goldman did it by persuading pension
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funds and other large institutional investors to invest in oil futures —
|
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agreeing to buy oil at a certain price on a fixed date. The push
|
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|
|
transformed oil from a physical commodity, rigidly subject to supply and
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|
|
demand, into something to bet on, like a stock. Between 2003 and 2008,
|
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|
|
the amount of speculative money in commodities grew from $13 billion to
|
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|
|
$317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was
|
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|
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traded 27 times, on average, before it was actually delivered and
|
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consumed.
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As is so often the case, there had been a Depression-era law in place
|
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|
designed specifically to prevent this sort of thing. The commodities
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market was designed in large part to help farmers: A grower concerned
|
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|
|
about future price drops could enter into a contract to sell his corn at
|
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a certain price for delivery later on, which made him worry less about
|
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|
building up stores of his crop. When no one was buying corn, the farmer
|
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could sell to a middleman known as a "traditional speculator," who would
|
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store the grain and sell it later, when demand returned. That way,
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|
someone was always there to buy from the farmer, even when the market
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temporarily had no need for his crops.
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In 1936, however, Congress recognized that there should never be more
|
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|
speculators in the market than real producers and consumers. If that
|
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|
happened, prices would be affected by something other than supply and
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|
|
demand, and price manipulations would ensue. A new law empowered the
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|
|
Commodity Futures Trading Commission — the very same body that would
|
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|
|
later try and fail to regulate credit swaps — to place limits on
|
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|
|
speculative trades in commodities. As a result of the CFTC's oversight,
|
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|
|
peace and harmony reigned in the commodities markets for more than 50
|
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|
|
years.
|
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All that changed in 1991 when, unbeknownst to almost everyone in the
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|
|
world, a Goldman-owned commodities-trading subsidiary called J. Aron
|
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|
|
wrote to the CFTC and made an unusual argument. Farmers with big stores
|
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|
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of corn, Goldman argued, weren't the only ones who needed to hedge their
|
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|
|
risk against future price drops — Wall Street dealers who made big bets
|
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|
|
on oil prices also needed to hedge their risk, because, well, they stood
|
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to lose a lot too.
|
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This was complete and utter crap — the 1936 law, remember, was
|
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|
|
specifically designed to maintain distinctions between people who were
|
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|
|
buying and selling real tangible stuff and people who were trading in
|
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|
|
paper alone. But the CFTC, amazingly, bought Goldman's argument. It
|
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|
|
issued the bank a free pass, called the "Bona Fide Hedging" exemption,
|
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|
|
allowing Goldman's subsidiary to call itself a physical hedger and
|
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|
|
escape virtually all limits placed on speculators. In the years that
|
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|
followed, the commission would quietly issue 14 similar exemptions to
|
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|
|
other companies.
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Now Goldman and other banks were free to drive more investors into the
|
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|
|
commodities markets, enabling speculators to place increasingly big
|
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|
|
|
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.
|
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|
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|
|
What is even more amazing is that the letter to Goldman, along with most
|
|
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|
|
of the other trading exemptions, was handed out more or less in secret.
|
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|
|
"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.
|
|
|
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|
|
"I 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?'"
|
|
|
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|
|
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 of 2008, 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 green-lighted 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 bank holding 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
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bailout.
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Even more amazing, Goldman did it all right before the government
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announced the results of its new "stress test" for banks seeking to
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repay TARP money — suggesting that Goldman knew exactly what was coming.
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The government was trying to carefully orchestrate the repayments in an
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effort to prevent further trouble at banks that couldn't pay back the
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money right away. But Goldman blew off those concerns, brazenly
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flaunting its insider status. "They seemed to know everything that they
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needed to do before the stress test came out, unlike everyone else, who
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had to wait until after," says Michael Hecht, a managing director of JMP
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Securities. "The government came out and said, 'To pay back TARP, you
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have to issue debt of at least five years that is not insured by FDIC —
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which Goldman Sachs had already done, a week or two before."
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And here's the real punch line. After playing an intimate role in four
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historic bubble catastrophes, after helping $5 trillion in wealth
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disappear from the NASDAQ, after pawning off thousands of toxic
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mortgages on pensioners and cities, after helping to drive the price of
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gas up to $4 a gallon and to push 100 million people around the world
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into hunger, after securing tens of billions of taxpayer dollars through
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a series of bailouts overseen by its former CEO, what did Goldman Sachs
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give back to the people of the United States in 2008?
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Fourteen million dollars.
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That is what the firm paid in taxes in 2008, an effective tax rate of
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exactly one, read it, one percent. The bank paid out $10 billion in
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compensation and benefits that same year and made a profit of more than
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$2 billion — yet it paid the Treasury less than a third of what it
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forked over to CEO Lloyd Blankfein, who made $42.9 million last year.
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How is this possible? According to Goldman's annual report, the low
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taxes are due in large part to changes in the bank's "geographic
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earnings mix." In other words, the bank moved its money around so that
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most of its earnings took place in foreign countries with low tax rates.
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Thanks to our completely fucked corporate tax system, companies like
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Goldman can ship their revenues offshore and defer taxes on those
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revenues indefinitely, even while they claim deductions upfront on that
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same untaxed income. This is why any corporation with an at least
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occasionally sober accountant can usually find a way to zero out its
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taxes. A GAO report, in fact, found that between 1998 and 2005, roughly
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two-thirds of all corporations operating in the U.S. paid no taxes at
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all.
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This should be a pitchfork-level outrage — but somehow, when Goldman
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released its post-bailout tax profile, hardly anyone said a word. One of
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the few to remark on the obscenity was Rep. Lloyd Doggett, a Democrat
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from Texas who serves on the House Ways and Means Committee. "With the
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right hand out begging for bailout money," he said, "the left is hiding
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it offshore."
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BUBBLE \#6 Global Warming
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Fast-forward to today. It's early June in Washington, D.C. Barack Obama,
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a popular young politician whose leading private campaign donor was an
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investment bank called Goldman Sachs — its employees paid some $981,000
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to his campaign — sits in the White House. Having seamlessly navigated
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the political minefield of the bailout era, Goldman is once again back
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to its old business, scouting out loopholes in a new government-created
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market with the aid of a new set of alumni occupying key government
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jobs.
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Gone are Hank Paulson and Neel Kashkari; in their place are Treasury
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chief of staff Mark Patterson and CFTC chief Gary Gensler, both former
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Goldmanites. (Gensler was the firm's co-head of finance.) And instead of
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credit derivatives or oil futures or mortgage-backed CDOs, the new game
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in town, the next bubble, is in carbon credits — a booming trillion
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dollar market that barely even exists yet, but will if the Democratic
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Party that it gave $4,452,585 to in the last election manages to push
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into existence a groundbreaking new commodities bubble, disguised as an
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"environmental plan," called cap-and-trade.
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The new carbon credit market is a virtual repeat of the
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commodities-market casino that's been kind to Goldman, except it has one
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delicious new wrinkle: If the plan goes forward as expected, the rise in
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prices will be government-mandated. Goldman won't even have to rig the
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game. It will be rigged in advance.
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Here's how it works: If the bill passes, there will be limits for coal
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plants, utilities, natural-gas distributors and numerous other
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industries on the amount of carbon emissions (a.k.a. greenhouse gases)
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they can produce per year. If the companies go over their allotment,
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they will be able to buy "allocations" or credits from other companies
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that have managed to produce fewer emissions. President Obama
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conservatively estimates that about $646 billion worth of carbon credits
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will be auctioned in the first seven years; one of his top economic
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aides speculates that the real number might be twice or even three times
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that amount.
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The feature of this plan that has special appeal to speculators is that
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the "cap" on carbon will be continually lowered by the government, which
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means that carbon credits will become more and more scarce with each
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passing year. Which means that this is a brand new commodities market
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where the main commodity to be traded is guaranteed to rise in price
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over time. The volume of this new market will be upwards of a trillion
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dollars annually; for comparison's sake, the annual combined revenues of
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all electricity suppliers in the U.S. total $320 billion.
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Goldman wants this bill. The plan is (1) to get in on the ground floor
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of paradigm-shifting legislation, (2) make sure that they're the
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profit-making slice of that paradigm and (3) make sure the slice is a
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big slice. Goldman started pushing hard for cap-and-trade long ago, but
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things really ramped up last year when the firm spent $3.5 million to
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lobby climate issues. (One of their lobbyists at the time was none other
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than Patterson, now Treasury chief of staff.) Back in 2005, when Hank
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Paulson was chief of Goldman, he personally helped author the bank's
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environmental policy, a document that contains some surprising elements
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for a firm that in all other areas has been consistently opposed to any
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sort of government regulation. Paulson's report argued that "voluntary
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action alone cannot solve the climate change problem." A few years
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later, the bank's carbon chief, Ken Newcombe, insisted that
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cap-and-trade alone won't be enough to fix the climate problem and
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called for further public investments in research and development. Which
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is convenient, considering that Goldman made early investments in wind
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power (it bought a subsidiary called Horizon Wind Energy), renewable
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diesel (it is an investor in a firm called Changing World Technologies)
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and solar power (it partnered with BP Solar), exactly the kind of deals
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that will prosper if the government forces energy producers to use
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cleaner energy. As Paulson said at the time, "We're not making those
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investments to lose money."
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The bank owns a 10 percent stake in the Chicago Climate Exchange, where
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the carbon credits will be traded. Moreover, Goldman owns a minority
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stake in Blue Source LLC, a Utah-based firm that sells carbon credits of
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the type that will be in great demand if the bill passes. Nobel Prize
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winner Al Gore, who is intimately involved with the planning of
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cap-and-trade, started up a company called Generation Investment
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Management with three former bigwigs from Goldman Sachs Asset
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Management, David Blood, Mark Ferguson and Peter Harris. Their business?
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Investing in carbon offsets. There's also a $500 million Green Growth
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Fund set up by a Goldmanite to invest in green-tech … the list goes on
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and on. Goldman is ahead of the headlines again, just waiting for
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someone to make it rain in the right spot. Will this market be bigger
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than the energy futures market?
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"Oh, it'll dwarf it," says a former staffer on the House energy
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committee.
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Well, you might say, who cares? If cap-and-trade succeeds, won't we all
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be saved from the catastrophe of global warming? Maybe — but
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cap-and-trade, as envisioned by Goldman, is really just a carbon tax
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structured so that private interests collect the revenues. Instead of
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simply imposing a fixed government levy on carbon pollution and forcing
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unclean energy producers to pay for the mess they make, cap-and-trade
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will allow a small tribe of greedy-as-hell Wall Street swine to turn yet
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another commodities market into a private tax collection scheme. This is
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worse than the bailout: It allows the bank to seize taxpayer money
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before it's even collected.
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"If it's going to be a tax, I would prefer that Washington set the tax
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and collect it," says Michael Masters, the hedge fund director who spoke
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out against oil futures speculation. "But we're saying that Wall Street
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can set the tax, and Wall Street can collect the tax. That's the last
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thing in the world I want. It's just asinine."
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Cap-and-trade is going to happen. Or, if it doesn't, something like it
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will. The moral is the same as for all the other bubbles that Goldman
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helped create, from 1929 to 2009. In almost every case, the very same
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bank that behaved recklessly for years, weighing down the system with
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toxic loans and predatory debt, and accomplishing nothing but massive
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bonuses for a few bosses, has been rewarded with mountains of virtually
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free money and government guarantees — while the actual victims in this
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mess, ordinary taxpayers, are the ones paying for it.
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It's not always easy to accept the reality of what we now routinely
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allow these people to get away with; there's a kind of collective denial
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that kicks in when a country goes through what America has gone through
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lately, when a people lose as much prestige and status as we have in the
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past few years. You can't really register the fact that you're no longer
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a citizen of a thriving first-world democracy, that you're no longer
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above getting robbed in broad daylight, because like an amputee, you can
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still sort of feel things that are no longer there.
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But this is it. This is the world we live in now. And in this world,
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some of us have to play by the rules, while others get a note from the
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principal excusing them from homework till the end of time, plus 10
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billion free dollars in a paper bag to buy lunch. It's a gangster state,
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running on gangster economics, and even prices can't be trusted anymore;
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there are hidden taxes in every buck you pay. And maybe we can't stop
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it, but we should at least know where it's all going.
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This article originally appeared in the July 9-23, 2009 of Rolling
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Stone.
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