Investment banking giant Goldman Sachs has become perhaps the most
prominent symbol for everything that is wrong with the U.S. financial
system, but most Americans cannot even begin to explain what they do or
how they have made tens of billions of dollars from the economic
collapse of America. The truth is that what Goldman Sachs did was
fairly simple, and there may not have even been anything "illegal"
about it (although they are now being investigated by the
SEC among others).
The following is how Goldman Sachs made tens of billions of dollars
from the economic collapse of America in four easy steps….
Step 1: Sell mortgage-related securities that are absolute junk to trusting clients at vastly overinflated prices.
Step 2: Bet against those same mortgage-related securities and make
massive bets against the U.S. housing market so that your firm will
make massive profits when the U.S. economy collapses.
Step 3: Have ex-Goldman executives in key positions of power in the
U.S. government so that bailout money can be funneled to entities such
as AIG that Goldman has made these bets with so that they can get
paid after they win their bets.
Step 4: Collect the profits – Goldman Sachs is having their "most
successful year" and will end up reporting approximately $50 billion
in revenue for 2009.
So is it right for the biggest fish on Wall Street to make tens of
billions of dollars by betting that the U.S. housing market will
collapse?
You see, when you are talking about a financial giant the size of
Goldman Sachs, the line between "betting that something will happen"
and "making something happen" gets blurred very quickly.
Not that Goldman Sachs was the only one betting against the housing market.
According to the New York Times, firms like Deutsche Bank and Morgan Stanley also created mortgage-related securities and then bet that they would fail…..
Goldman was not the only firm that peddled these complex
securities — known as synthetic collateralized debt obligations, or
C.D.O.’s — and then made financial bets against them, called selling
short in Wall Street parlance. Others that created similar securities
and then bet they would fail, according to Wall Street traders, include
Deutsche Bank and Morgan Stanley, as well as smaller firms like
Tricadia Inc.
But certainly Goldman Sachs was the most prominent financial player involved in this type of activity.
In fact, without mentioning specifics, Goldman has even admitted
publicly to wrongdoing. On November 17th, 2008 Goldman Sachs CEO Lloyd
Blankfein even issued a public apology….
"We participated in things that were clearly wrong and have reason to regret."
But complicated financial transactions are something that most
Americans simply do not understand, so the public outrage towards
Goldman Sachs and others has been somewhat limited. But that does not
change the very serious nature of the activities that Goldman was
involved in….
"The simultaneous selling of securities to customers and
shorting them because they believed they were going to default is the
most cynical use of credit information that I have ever seen," Sylvain Raynes, an expert in structured finance at R & R Consulting in New York, recently told The New York Times. "When
you buy protection against an event that you have a hand in causing,
you are buying fire insurance on someone else’s house and then
committing arson."
But the sad thing is that many Americans do not even understand what
Goldman Sachs is. Goldman Sachs was founded in 1869 and has forged a
reputation as one of the elite financial institutions in the entire
world. They only hire "the best and the brightest" and Ivy League
graduates flock to the firm. Of the five major investment banks that
dominated Wall Street before the crash, only Goldman Sachs and Morgan
Stanley have survived. Merrill Lynch and Bear Stearns were severely
damaged by the crash and ended up being purchased by retail banks and
Lehman Brothers ended up folding.
There are persistent rumors that Goldman played a major role in the
collapse of Bear Stearns and that ex-Goldman CEO Hank Paulson could
have done much more to bail out Lehman Brothers, but perhaps nobody
will ever know the full truth. All we do know is that at the end of
the crash several of Goldman's competitors were destroyed and
Goldman found itself in a more dominant position than ever.
The truth is that Goldman is a financial shark and they do not apologize for it.
An article in Rolling Stone recently put it this way….
The first thing you need to know about Goldman Sachs is that
it's everywhere. The world's most powerful investment bank is a great
vampire squid wrapped around the face of humanity, relentlessly jamming
its blood funnel into anything that smells like money.
So how did Goldman Sachs prosper so greatly in an environment that destroyed their competitors?
The following is an extended breakdown of just how Goldman Sachs was
able to reap tens of billions of dollars in profits from the collapse
of the U.S. housing market….
Step 1: Sell mortgage-related securities that are absolute junk to trusting clients at vastly overinflated prices.
In late 2006, Goldman Sachs made some fundamental changes in the way that they were approaching the U.S. housing market. According to a McClatchy report, Goldman
spokesman Michael DuVally said that the firm decided at that time to
reduce its mortgage risks by selling off subprime mortgage-related
securities and by purchasing credit-default swaps to hedge against a
serious downturn in the U.S. housing market.
The key moment came in December 2006. After "10 straight days of losses" in Goldman's mortgage business, Chief Financial Officer David Viniar called a meeting of key Goldman personnel.
Vanity Fair described the results of that meeting this way….
After a now famous meeting in David Viniar’s office on
December 14, 2006, Goldman’s traders began to protect the firm against
further declines in the market. Just as you can short the S&P 500,
the traders took short positions in an index that tracked the price of
mortgage-backed securities. They also either sold assets they owned to
others at losses or dramatically marked down the price on their own
books. In the aftermath of the crisis, criticism erupted
that Goldman had continued to sell mortgage-backed securities to its
clients while betting against those very securities for its own
account. Clearly, in the simplest terms possible, this is true: while
Goldman was never the biggest underwriter of C.D.O.’s (collateralized
debt obligations—Wall Street’s vehicle of choice for mortgage-backed
securities), the firm did remain in the top five until the summer of
2007, when the market crashed to a halt.
So Goldman Sachs proceeded to sell approxmiately $39 billion of its
own mortgage securities in 2006 and 2007 and they sold at least $17
billion more mortgage securities for others, but they never told the
buyers of those securities that Goldman was secretly betting that a
significant drop in U.S. housing prices would send the value of those
mortgage securities plummeting.
These sales and the massive clandestine wagers placed by Goldman
enabled the firm to pass most of its potential losses on to others
prior to the collapse of the U.S. housing market.
But many of the investors who got the short end of the stick were
not pleased. When they discovered that what Goldman had promoted as
triple-A rated investments were actually a bunch of garbage, many of
them were absolutely furious.
"The Securities and Exchange Commission should be very
interested in any financial company that secretly decides a financial
product is a loser and then goes out and actively markets that product
or very similar products to unsuspecting customers without disclosing
its true opinion," said Boston University economics professor Laurence Kotlikoff. "This is fraud and should be prosecuted."
One of the victims of this fraud was the state of Mississippi….
Mississippi Attorney General Jim Hood, whose state has lost
$5 million of the $6 million it invested in Goldman's subprime
mortgage-backed bonds in 2006, said the state's funds are likely to
lose "hundreds of millions of dollars" on those and similar bonds.
Another one of the victims of this fraud was California's retirement system for public employees….
California's huge public employees' retirement system, known
as CALPERS, purchased $64.4 million in subprime mortgage-backed bonds
from Goldman on March 1, 2007. While that represented a tiny percentage
of the fund's holdings, in July CALPERS listed the bonds' value at
$16.6 million, a drop of nearly 75 percent, according to documents
obtained through a state public records request.
So who is left holding the bag in cases such as these?
The taxpayers.
And that is just fine with Goldman Sachs. Just as long as they keep raking in huge profits.
Vanity Fair was even more blunt regarding this injustice….
"Goldman’s management team was almost flawless in its
execution. But how many people needed government help because of the
things Goldman sold them?"
The truth is that a lot of people needed help because of the things
Goldman sold them, but up until now Goldman has completely gotten away
with it.
Step 2: Bet against those same mortgage-related securities
and make massive bets against the U.S. housing market so that your
firm will make massive profits when the U.S. economy collapses.
Not only did Goldman sell mortgage-related securities that were
absolute junk to investors at vastly overinflated prices, they also
placed massive bets that the U.S. housing market would absolutely
collapse.
The New York Times recently described how Goldman used a new index known as the ABX to make many of these bets….
A handful of investors and Wall Street traders, however,
anticipated the crisis. In 2006, Wall Street had introduced a new
index, called the ABX, that became a way to invest in the direction of
mortgage securities. The index allowed traders to bet on or against
pools of mortgages with different risk characteristics, just as stock
indexes enable traders to bet on whether the overall stock market, or
technology stocks or bank stocks, will go up or down.
Goldman, among others on Wall Street, has said since the
collapse that it made big money by using the ABX to bet against the
housing market. Worried about a housing bubble, top Goldman executives
decided in December 2006 to change the firm’s overall stance on the
mortgage market, from positive to negative, though it did not disclose
that publicly.
These bets would only make money for Goldman Sachs if the U.S. housing market declined.
So if the biggest giant on Wall Street has a huge financial
incentive to see the U.S. housing market fail, what do you think the
odds are that they are going to do anything to support it?
Step 3: Have ex-Goldman executives in key positions of power
in the U.S. government so that bailout money can be funneled to
entities such as AIG that Goldman has made these bets with so that they
could get paid.
For years, Goldman Sachs has encouraged executives to serve in U.S.
government positions. Now they are world famous for the amount of
influence their former employees have over government policy.
For example, according to the New York Times, Treasury
Secretary Hank Paulson (also a former Goldman CEO) spoke with the
current CEO of Goldman Sachs about two dozen times during the week of
the bailout, although Paulson says that he obtained an "ethics waiver"
before doing so.
So does an "ethics waiver" make everything okay?
But the sad thing is that is not an isolated example.
It turns out that Goldman benefited greatly from a number of
decisions made by their former CEO while he was Treasury Secretary….
*Goldman greatly benefited when Paulson elected not to save rival
Lehman Brothers from collapse. Paulson certainly stepped in to help
Fannie Mae, Freddie Mac and AIG, but apparently had no problem with
letting Lehman Brothers fall apart.
*Under Paulson's direction, Goldman ended up receiving bailout money
(which they may or may not have needed) from the U.S. government and
has since paid back much of that money with interest. So why didn't
Bear Stearns or Lehman Brothers get the bailout funds that they needed?
*Goldman greatly benefitted when Paulson organized a massive rescue
of American International Group while in constant telephone contact
with Goldman CEO Blankfein. AIG ultimately ended up using $12.9
billion taxpayer dollars to pay off every single penny that it owed
to Goldman.
But it is not just Paulson who has had significant influence in Washington.
On October 16th, Adam Storch, a Goldman Sachs vice president, was
named managing executive of the SEC's enforcement division. What do
you think the odds are that he will crack down hard on Goldman?
In addition, former Goldman Sachs lobbyist Mark Patterson is the chief of staff for current Treasury Secretary Timothy Geithner.
In fact, ex-Goldman employees are seemingly everywhere. According to Vanity Fair, at
one G-7 meeting an anonymous source identified at least 24 out of 32
finance officials in attendance as ex-Goldman employees.
The influence of Goldman Sachs even reaches to the White House.
Goldman was Barack Obama's number one campaign donor, and its employees
gave $981,000 to his campaign.
If you don't think that kind of money does not buy influence then you are delusional.
Goldman used some of that powerful influence to get the U.S.
government to bail out AIG so that AIG could pay off the bets that
Goldman had made with them. In a recent article, Vanity Fair described part of what went down….
After the government bailout of A.I.G., in order to end the
collateral calls on the insurance giant, the New York Federal
Reserve—whose chairman at the time was former Goldman chairman Steve
Friedman—decided to purchase a slew of the securities that A.I.G. had
insured, including $14 billion of those on which Goldman had purchased
insurance. The government—meaning taxpayers—did so at full price,
although according to a recent Bloomberg story, there had been
negotiations with A.I.G. to do so at a 40 percent discount. Goldman
says that the New York Fed broached the topic of a discount only once.
The firm’s response: a flat no. While no one will ever know what would
have happened had A.I.G. gone under, the essence of what did happen is
perfectly clear. As a recent report by the Office of the Special
Inspector General for tarpput it, the decision to pay
full price “effectively transferred tens of billions of dollars of cash
from the Government to A.I.G.’s counterparties.” Or to put it another
way: because Goldman felt it was owed its billions by A.I.G., the firm
took it from taxpayers instead.
So what about all of the thousands of small businesses that are
failing and what about the millions of Americans that are losing their
jobs and homes?
Do they get bailouts?
Of course not.
But the U.S. government definitely made sure that AIG and Goldman were taken care of.
Step 4: Collect the profits – Goldman Sachs is having their
"most successful year" and will end up reporting approximately $50
billion in revenue for 2009.
Goldman Sachs ranks #1 in annual net income when compared with 86
peers in the investment services sector. They are on course for their
best year ever.
Yes, they are having a really good "crisis".
Goldman Sachs is on course to surpass $50 billion in revenue in 2009
and to pay its employees more than $20 billion in year-end bonuses.
20 billion just in bonuses?
That would mean that the average bonus for all Goldman employees would be over $700,000.
No wonder everyone wants to work for them.
It's good to be on the winning side.
So just how are they making so much money?
In their recent article, Vanity Fair described it this way….
But because so many of Goldman’s competitors were gone or
disabled, spreads—the difference between the price at which you sell
and buy a variety of securities—were wider than they had been in years,
meaning that Goldman could practically mint money. By acting at the
moment it did, with Lehman out and Merrill Lynch down for the count,
the government enabled this situation.
The other reason for Goldman’s profits is that the
government has flooded the system with money, not just the money it
used to rescue the financial system but hundreds of billions more in
stimulus, in support of the housing market, and in the Federal
Reserve’s purchases of securities.
But all of this success has not come without controversy. In fact,
Goldman executives are very much aware of the growing backlash against
the firm.
Senior officials at Goldman Sachs have reportedly loaded up on firearms and are now equipped to defend themselves if there is a "populist uprising" against the bank.
In addition, Goldman Sachs employees are now not allowed to gather in groups of 12 or more outside the office.
The firm very much discouraged "holiday parties" as they most
definitely did not want to be seen as celebrating the downfall of the
U.S. economy.
But the truth is that Goldman Sachs won because so many others lost.
In his very revealing article on Goldman Sachs in Rolling Stone, Matt Taibbi described how Goldman keeps making money from the bursting of these economic bubbles….
They achieve this using the same playbook over and over
again. The formula is relatively simple: Goldman positions itself in
the middle of a speculative bubble, selling investments they know are
crap. Then they hoover up vast sums from the middle and lower floors of
society with the aid of a crippled and corrupt state that allows it to
rewrite the rules in exchange for the relative pennies the bank throws
at political patronage. Finally, when it all goes bust, leaving
millions of ordinary citizens broke and starving, they begin the entire
process over again, riding in to rescue us all by lending us back our
own money at interest, selling themselves as men above greed, just a
bunch of really smart guys keeping the wheels greased. They've been
pulling this same stunt over and over since the 1920s — and now they're
preparing to do it again, creating what may be the biggest and most
audacious bubble yet.
The truth is that in this latest economic collapse there were millions of losers and just a few winners.
Goldman Sachs was one of those winners.
So will they lose next time?
Not likely.
In their recent article, Vanity Fair quoted an anonymous source in the financial industry as saying the following….
"Are they the Yankees? No, the Yankees actually lose! Goldman never loses."