Corruption by Any Other Name: Goldman Sachs

“We do God’s work.”  Lloyd Blankfein, CEO of Goldman Sachs, seen above center at a business awards event after helping engineer the financial crash of 2007.

In the leadup to The Great Depression Goldman Sachs had found out a highly unethical, if still legal way to increase their stock price. After issuing a large series of shares at $100 a pop they bought back 90% of those shares. This allowed them to resell the bought back shares at an inflated price. No value was created, no new products were released, they had rigged the system. They repeated this process over and over, and even created new companies like the Shenandoah Trust so they could continue to provide nothing and reap tremendous rewards in the process. Eventually the Great Depression hit. The Shenandoah Trust exploded and Goldman took a serious hit. In the process of fleecing their customers and helping create a stock bubble of absolutely no value whatsoever the bank nearly ruined itself. Goldman would never make the same mistake again, they developed a new strategy. That isn’t to say that they stopped creating bubbles or stopped duping their customers, they’re still the masters at that. Goldman’s new strategy was to bet against the very stocks they sold, and to bet against their own customers portfolios. This strategy is the financial equivalent of Gerber deliberately selling poisoned baby food then taking out life insurance policies on other people’s children. Thanks to this exceedingly corrupt strategy and a vast and intricate web of Washington insiders, Goldman Sachs became the most powerful investment bank in the world. If this sounds terrifying to you, it’s probably because it should.

Corruption is an omni-present fear in the America, but it’s something that’s poorly understood and ineffectualy discussed by major news platforms. Often corruption is only mentioned by major outlets as a means to smear political or financial rivals rather than deal with corruption at its sources, a corrupt behavior in and of itself. Rather than tackling corruption as this vast and mysterious entity the we’re going to focus on understanding the people, laws, practices, ideas, and institutions that have made corruption an omnipresent feature of our modern politics. Goldman Sachs is the perfect case study with which to explore corruption, and it’s going to be the jumping off point for the Mediocracy series, Corruption by Any Other Name.

The tale begins

Goldman Sachs wasn’t always the rapacious financial monolith it is today. It has humble origins. In 1869 it was started by humble immigrants with a twinkle in their eye, it was the very manifestation of the American Dream. It has a uniquely meritocratic hierarchy, so much so that a janitor’s assistant once rose to the top of the bank and became its CEO. Their motto is “long term greedy” a philosophy that has, during the best of times, led them to make ethically and intellectually sound investments, even eschewing big money opportunities when they could tell they were dangerous short term grabs. Throughout its storied history Goldman has shown a unique and acute awareness of the power and shape of market trends, but that acuity has also been the source of its darkest dealings. When Goldman sees a means by which it can externalize the damage and havoc wrought by financial collapse it huffs a bag of bath salts and runs shrieking through the marketplace in a frenzied search for face meat. In the 90s Goldman figured out how to create the conditions for their rampages, and it fell from one of the most ethically sound investment banks in the world to the most relentlessly corrupt, back to the Shenandoah days, but this time the bank wouldn’t suffer for its insanity and greed.

In the 2016 election Hillary Clinton was lambasted (and in my mind rightly so) as the personification of the corrupt politician. After the Clinton Server email scandal, the DNC collusion email scandal, and the Clinton Foundation scandal Hillary gave a speech at Goldman Sachs. Tn that speech she reassured the bank that the Democrats were on their side, that the Dems were the banker’s party. She was paid upwards of $600,000 dollars as a one time speaking fee. For Hillary, this was the last nail in the corruption coffin. While people complained about Hillary’s Goldman ties something went bizarrely unreported, Trump’s lead financial adviser, and now the president elect’s choice for Secretary of the Treasury is Steve Mnuchin, a former partner at Goldman. Trump’s chief strategist Steve Bannon was also a former Goldman executive. It didn’t matter who you voted for Goldman got them both, but the web of influence is much greater still.

Goldman’s reentry into the cannibalize America game likely began with Robert Rubin. Rubin was a former Goldman exec and Bill Clinton’s Treasury Secretary. Rubin, along with Larry Summers and Fed Chairman Alan Greenspan pushed for sweeping deregulation. Regulations for underwriting requirements, the protection of bank depositor accounts, commodities markets, and limitations on other financial weapons of mass destruction were torn to shreds. When Brooksley Born, a federal regulator and head of the head of the Commodity Futures Trading Commission, released a report that showed instruments like CDOs posed a systemic risk to the economy and needed to be tightly regulated Rubin, Summers, and Greenspan publicly attacked her and had her outed. CDOs by the way, were the financial tool at the center of the center of the 2007 financial meltdown and a favorite tool of Goldman for defrauding their customers. Born was right, unregulated markets were dangerous, but she was standing in the way of Goldman’s profits. She along with anything else that protected the American people had to go.

Bubble trouble

The result of this wave of deregulation were three exceedingly painful bubbles. The first was the dot com bubble. During the dot com bubble Goldman used a technique called laddering to guarantee share value. This laddering technique was so successful that the average Goldman offering had a stock price that grew nearly 100% more than the industry average. Goldman would trade early access to their client’s stock when the price was low for guarantees that whomever made the early purchases would buy more shares in the company later and at a higher price. This rebuy technique to artificially inflate stock price should sound familiar, they had resurrected the Shenandoah Gambit. They knew this practice would create financial destruction, but they were smarter than they were during the Great Depression. Rather than using their own stock for illicit insider gains they would blow up the balance sheets of their clients and of the market as a whole. History didn’t quite repeat itself, but it sure as hell rhymed.

The next bubble they created was the oil speculation bubble of the Bush years. Despite oil supplies growing, and consumer demand falling, Goldman managed to use speculative markets to nearly double the price of a barrel of oil.

Their most recent bubble was the housing bubble. The instigating financial instrument was the collateralized mortgage security. A mortgage should in theory be a safe investment. People want to have roofs to live under, and banks want to make sure that the money they front for a home purchase gets repaid. Because both parties were on the hook both parties played the game fair and square. That’s a safe system, and between the great depression and 1977 a mortgage title was about as sure a stream of income as a U.S. treasury. In 77 a man named Lewis Ranieri changed that dynamic, he found a way to get the banks off the hook for failure, without losing their ability to make a buck. He had, much like Goldman’s laddering technique in the dot com bubble, found a way to offload risk onto someone else’s portfolio. The mortgage backed security was tool that allowed a bank to pool the income streams from mortgages and then sell that income stream to another financial player for quick cash. Now the bank had all the mortgage money, and the end buyer had the income stream, and the risk.

This mortgage backed security was a type of CDO (that thing Brooksley Born warned the government about), and in the 2000s banks got creative about how they put those CDOs together. Since banks were no longer on the hook if the mortgages defaulted their incentive to play it safe evaporated. Eventually banks started issuing mortgages in which they didn’t even check the income streams of the home buyers. Who cared if they couldn’t pay it back, whomever held the CDO was going to get ruined instead of the bank. These CDOs quickly became full of the most dangerous mortgages on the planet, and no sane investor would buy something that risky unless they were lied to. To eliminate the appearance of risk banks started bribing ratings agencies. All of a sudden those crap CDOs were rated AAA and banks couldn’t get enough of them. Enter Goldman,

At the time Goldman was selling stocks like Timberwolf to their clients. Internal emails from Goldman said that they knew Timberwolf was crap, but they made sure to sell the product as hard as possible. They were betting against their clients again, but the mortgage backed security was a glorious opportunity to dwarf the conflict of interest posed by the Timberwolf deals. Goldman got out their bag of bath salts and got to the face munching. Goldman became one of the preeminent buyers of credit default swaps (CDS). A CDS is essentially an insurance policy on someone else’s investment. If you think a stock price will collapse, you buy a CDS. This is problematic, because if you’re holding a CDS you now have an incentive to make sure the market crashes and burns. As we’ve seen, Goldman Sachs is a bit of a serial arsonist in regards to markets, and now the arsonist was quite literally allowed to buy insurance on other people’s houses. It should be of no surprise that the housing market collapsed under the weight of bribery, market manipulation, and the unrepentant greed of banks like Goldman.

The Goldman connection

But those bubbles happened in the 2000s. Rubin had left to become the CEO of Citigroup, and Summers had departed to become a Goldman executive. The bad guys were out, who was running the ship? George Bush’s fed chairman during the crisis was Hank Paulson, a Goldman Executive. After serving as a Goldman Executive and architect of the financial meltdown Summers came back to work under the Obama administration. The regulations that protected the commodities markets were done away with thanks to a letter from a Goldman executive. The whole show, regardless of who was in power was written and directed by Goldman Executives. Trump’s appointment of Mnuchin, a Goldman Executive, to Treasury Secretary should start ringing loud alarm bells.

According to goodjobsfirst, since 2010 Goldman has paid out $9,191,300,000 in fines. This sum is a drop in the hat of Goldman’s profits over that course of time, but it gets much more offensive than that. This sum is more than 61,000 times the max fine associated with felony theft. One would expect a company that committed the equivalent of 61,000 acts of felony theft to have at least one executive put in jail. Not one Goldman exec has been jailed for any of this, those fines they paid were of the no fault variety, something we’ll see again in the future, and as Billy Mayes used to say, “But wait! There’s More!” The government paid them for their wrongdoings. Remember Hank Paulson, the Goldman executive who worked as the fed chairman under Bush. Under his direction Goldman received $10 billion in tarp dollars, more than $2 billion of AIG’s bailout went to paying Goldman on those CDSs Goldman bought, and Goldman received $34 billion in federal loans. After adjusting for the fines, the federal government used $37 billion your tax dollars to pay Goldman Sachs to rob you.

What now?

At this point it’s important to remember, that for more than 30 years Goldman were the good guys. They weren’t just the good guys, they were greedy good guys, and stinking rich good guys too. Money wasn’t the root of evil, but unlimited access to power, and the unlimited ability to offload the consequences of their actions led to Goldman’s fall from grace. This is the essence of corruption especially so in the modern world. Regulations that limit economic actors ability to manipulate prices and outcomes are essential. Public office holders without ties to the entities they regulate need to be supported and celebrated. Institutions and especially the people who run those institutions need to be held accountable for their wrongdoings. It is for these reasons I am especially concerned Mnuchin as the head of the Treasury Department amid promises of deregulation, serving under a president who just got off the hook for defrauding students with a no fault admitted $25 million dollar civil payout. People like Brooksley Born are out there, and we need to find and elevate those people if we are to avoid abusive governments, so next time you get the chance, write your elected officials, and let them know you care about conflict of interest laws, the revolving door in Washington, and no fault fines. As bleak as it seems, we still live in a democratic republic, so let’s do something about it.

Next time on Corruption by Any Other Name, the TPP. We take a look at globalization, how it helps, how it hurts, and the dangers presented by fake free trade agreements like the TPP.  As a possible antidote to the dour nature of the corrutpion series I’m going to start working on a series dedicated to people doing rad stuff, expect an article about Larry Wilkerson or Bill Black coming up soon.

For an even more in depth look at Goldman check out Matt Taibbi’s classic The Great American Bubble Machine.

Photo freely distributed by the Financial Times  with the specific caveat that “(but not in any way that suggests that they endorse you or your use of the work).”  They do not endorse me or my work.  Help, I’m lonely.