an excerpt from the
The Great American Bubble Machine
How Goldman Sachs has engineered
every major market manipulation since the Great Depression
by Matt Taibbi
www.rollingstone.com/, July 2,
2009
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.
Any attempt to construct a narrative around
all the former Goldmanites in influential positions quickly becomes
an absurd and pointless exercise, like trying to make a list of
everything. What you need to know is the big picture: If America
is circling the drain, Goldman Sachs has found a way to be that
drain - an extremely unfortunate loophole in the system of Western
democratic capitalism, which never foresaw that in a society governed
passively by free markets and free elections, organized greed
always defeats disorganized democracy.
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 basic scam in the Internet Age is
pretty easy even for the financially illiterate to grasp. Companies
that weren't much more than pot-fueled ideas scrawled on napkins
by up-too-late bong-smokers were taken public via IPOs, hyped
in the media and sold to the public for megamillions. It was as
if banks like Goldman were wrapping ribbons around watermelons,
tossing them out 50-story windows and opening the phones for bids.
In this game you were a winner only if you took your money out
before the melon hit the pavement.
It sounds obvious now, but what the average
investor didn't know at the time was that the banks had changed
the rules of the game, making the deals look better than they
actually were. They did this by setting up what was, in reality,
a two-tiered investment system - one for the insiders who knew
the real numbers, and another for the lay investor who was invited
to chase soaring prices the banks themselves knew were irrational.
While Goldman's later pattern would be to capitalize on changes
in the regulatory environment, its key innovation in the Internet
years was to abandon its own industry's standards of quality control.
Goldman's role in the sweeping global
disaster that was the housing bubble is not hard to trace. Here
again, the basic trick was a decline in underwriting standards,
although in this case the standards weren't in IPOs but in mortgages.
By now almost everyone knows that for decades mortgage dealers
insisted that home buyers be able to produce a down payment of
10 percent or more, show a steady income and good credit rating,
and possess a real first and last name. Then, at the dawn of the
new millennium, they suddenly threw all that shit out the window
and started writing mortgages on the backs of napkins to cocktail
waitresses and ex-cons carrying five bucks and a Snickers bar.
And what caused the huge spike in oil
prices? Take a wild guess. Obviously Goldman had help - there
were other players in the physical-commodities market - but the
root cause had almost everything to do with the behavior of a
few powerful actors determined to turn the once-solid market into
a speculative casino. Goldman did it by persuading pension funds
and other large institutional investors to invest in oil futures
- agreeing to buy oil at a certain price on a fixed date. The
push transformed oil from a physical commodity, rigidly subject
to supply and demand, into something to bet on, like a stock.
Between 2003 and 2008, the amount of speculative money in commodities
grew from $13 billion to $317 billion, an increase of 2,300 percent.
By 2008, a barrel of oil was traded 27 times, on average, before
it was actually delivered and consumed.
The history of the recent financial crisis,
which doubles as a history of the rapid decline and fall of the
suddenly swindled-dry American empire, reads like a Who's Who
of Goldman Sachs graduates. By now, most of us know the major
players. As George Bush's last Treasury secretary, former Goldman
CEO Henry Paulson was the architect of the bailout, a suspiciously
self-serving plan to funnel trillions of Your Dollars to a handful
of his old friends on Wall Street. Robert Rubin, Bill Clinton's
former Treasury secretary, spent 26 years at Goldman before becoming
chairman of Citigroup - which in turn got a $300 billion taxpayer
bailout from Paulson. There's John Thain, the asshole chief of
Merrill Lynch who bought an $87,000 area rug for his office as
his company was imploding; a former Goldman banker, Thain enjoyed
a multibillion-dollar handout from Paulson, who used billions
in taxpayer funds to help Bank of America rescue Thain's sorry
company. And Robert Steel, the former Goldmanite head of Wachovia,
scored himself and his fellow executives $225 million in golden-parachute
payments as his bank was self-destructing. There's Joshua Bolten,
Bush's chief of staff during the bailout, and Mark Patterson,
the current Treasury chief of staff, who was a Goldman lobbyist
just a year ago, and Ed Liddy, the former Goldman director whom
Paulson put in charge of bailed-out insurance giant AIG, which
forked over $13 billion to Goldman after Liddy came on board.
The heads of the Canadian and Italian national banks are Goldman
alums, as is the head of the World Bank, the head of the New York
Stock Exchange, the last two heads of the Federal Reserve Bank
of New York - which, incidentally, is now in charge of overseeing
Goldman.
But then, something happened. It's hard
to say what it was exactly; it might have been the fact that Goldman's
co-chairman in the early Nineties, Robert Rubin, followed Bill
Clinton to the White House, where he directed the National Economic
Council and eventually became Treasury secretary. While the American
media fell in love with the story line of a pair of baby-boomer,
Sixties-child, Fleetwood Mac yuppies nesting in the White House,
it also nursed an undisguised crush on Rubin, who was hyped as
without a doubt the smartest person ever to walk the face of the
Earth, with Newton, Einstein, Mozart and Kant running far behind.
Rubin was the prototypical Goldman banker.
He was probably born in a $4,000 suit, he had a face that seemed
permanently frozen just short of an apology for being so much
smarter than you, and he exuded a Spock-like, emotion-neutral
exterior; the only human feeling you could imagine him experiencing
was a nightmare about being forced to fly coach. It became almost
a national cliché that whatever Rubin thought was best
for the economy - a phenomenon that reached its apex in 1999,
when Rubin appeared on the cover of Time with his Treasury deputy,
Larry Summers, and Fed chief Alan Greenspan under the headline
the committee to save the world. And "what Rubin thought,"
mostly, was that the American economy, and in particular the financial
markets, were over-regulated and needed to be set free. During
his tenure at Treasury, the Clinton White House made a series
of moves that would have drastic consequences for the global economy
- beginning with Rubin's complete and total failure to regulate
his old firm during its first mad dash for obscene short-term
profits.
After the oil bubble collapsed last fall,
there was no new bubble to keep things humming - this time, the
money seems to be really gone, like worldwide-depression gone.
So the financial safari has moved elsewhere, and the big game
in the hunt has become the only remaining pool of dumb, unguarded
capital left to feed upon: taxpayer money. Here, in the biggest
bailout in history, is where Goldman Sachs really started to flex
its muscle.
It began in September of last year, when
then-Treasury secretary Paulson made a momentous series of decisions.
Although he had already engineered a rescue of Bear Stearns a
few months before and helped bail out quasi-private lenders Fannie
Mae and Freddie Mac, Paulson elected to let Lehman Brothers -
one of Goldman's last real competitors - collapse without intervention.
("Goldman's superhero status was left intact," says
market analyst Eric Salzman, "and an investment-banking competitor,
Lehman, goes away.") The very next day, Paulson greenlighted
a massive, $85 billion bailout of AIG, which promptly turned around
and repaid $13 billion it owed to Goldman. Thanks to the rescue
effort, the bank ended up getting paid in full for its bad bets:
By contrast, retired auto workers awaiting the Chrysler bailout
will be lucky to receive 50 cents for every dollar they are owed.
Immediately after the AIG bailout, Paulson
announced his federal bailout for the financial industry, a $700
billion plan called the Troubled Asset Relief Program, and put
a heretofore unknown 35-year-old Goldman banker named Neel Kashkari
in charge of administering the funds. In order to qualify for
bailout monies, Goldman announced that it would convert from an
investment bank to a 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 of 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."
Fast-forward to today. It's early June
in Washington, D.C. Barack Obama, a popular young politician whose
leading private campaign donor was an investment bank called Goldman
Sachs - its employees paid some $981,000 to his campaign - sits
in the White House. Having seamlessly navigated the political
minefield of the bailout era, Goldman is once again back to its
old business, scouting out loopholes in a new government-created
market with the aid of a new set of alumni occupying key government
jobs.
Gone are Hank Paulson and Neel Kashkari;
in their place are Treasury chief of staff Mark Patterson and
CFTC chief Gary Gensler, both former Goldmanites. (Gensler was
the firm's co-head of finance.) And instead of credit derivatives
or oil futures or mortgage-backed CDOs, the new game in town,
the next bubble, is in carbon credits - a booming trillion- dollar
market that barely even exists yet, but will if the Democratic
Party that it gave $4,452,585 to in the last election manages
to push into existence a groundbreaking new commodities bubble,
disguised as an "environmental plan," called cap-and-trade.
The new carbon-credit market is a virtual repeat of the commodities-market
casino that's been kind to Goldman, except it has one delicious
new wrinkle: If the plan goes forward as expected, the rise in
prices will be government-mandated. Goldman won't even have to
rig the game. It will be rigged in advance.
Banks watch
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