What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain - an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.
The bank's unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam... All that money that you're losing, it's going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it's going. The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth - pure profit for rich individuals.
According to Taibbi, much of the money nearly everyone has lost from stock bubbles to inflated gasoline prices have landed in the coffers of Goldman Sachs bankers.
To make their schemes work, the bank follows a "relatively simple" plan.
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.
In describing Goldman Sachs' involvement in their first bubble, the Great Depression, Taibbi briefly explains how the firm used leverage-based "investment trusts" -- the Shenandoah and Blue Ridge Corporations -- to rope in "regular-guy investors into the speculation game" and were a " major cause of the market's historic crash".
The basic idea isn't hard to follow. You take a dollar and borrow nine against it; then you take that $10 fund and borrow $90; then you take your $100 fund and, so long as the public is still lending, borrow and invest $900. If the last fund in the line starts to lose value, you no longer have the money to pay back your investors, and everyone gets massacred.
Then he goes on to quote John Kenneth Galbraith, of whom Taibbi describes as "sounding like Keith Olbermann in an ascot". Galbraith wrote in his book The Great Crash, 1929 in a chapter titled "In Goldman Sachs We Trust": "It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity... if there must be madness, something may be said for having it on a heroic scale."
The next Goldman Sachs' bubble was the dot.com stock bubble of the 1990s. For about 65 years, the firm "had a reputation for relatively solid ethics and a patient approach to investment that shunned the fast buck... but then, something happened."
Taibbi suggests the change happened when Bill Clinton created by Executive Order the National Economic Council in 1993 and then-co-chairman of Goldman Sach, Robert Rubin, became its first director and then, later, went on to become the Secretary of the Treasury in 1995. "It became almost a national cliché," he writes, "whatever Rubin thought was best for the economy".
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.
What happened in the 1990s was Wall Street banks abandoned "strict underwriting guidelines" for Initial Public Offerings (IPOs) that had been followed since the 1930s. Instead of offering only profitable companies for IPOs, "Goldman completed the snow job by pumping up the sham stocks" and nobody told the regular-guy investors.
"Goldman quickly became the IPO king ofthe Internet era. Of the 240 companies it took public in 1997, a third were losing money at the time of the IPO." The bank "changed its underwriting standards" and was ushering to market dubious tech companies that could never be profitable.
"In 1999, the average Goldman IPO leapt 281 percent above its offering price, compared to the Wall Street average of 181 percent." And they achieved this amazing rate of return by "laddering", which, explains Taibbi "is just a fancy way of saying they manipulated the share price of new offerings." By laddering, "Goldman could artificially jack up the new company's price, which of course was to the bank's benefit".
As a sideswipe, Taibbi offers, "One of the truly comic moments in the history of America's recent financial collapse came when Gov. Jon Corzine of New Jersey, who ran Goldman from 1994 to 1999 and left with $320 million in IPO-fattened stock, insisted in 2002 that 'I've never even heard the term 'laddering' before.'"
"Another practice Goldman engaged in during the Internet boom was 'spinning,' better known as bribery," he adds. In exchange for future promise of business, Goldman Sachs would offer corporate executives shares at "extra-low prices". This was "effectively robbing all" new IPO shareholders "by diverting cash that should have gone to the company's bottom line into the private bank account of the company's CEO."
Goldman Sachs got their cut too. "The spinning of hot IPO shares was not a harmless corporate perk," then-attorney general Eliot Spitzer said at the time. "Instead, it was an integral part of a fraudulent scheme to win new investment-banking business."
The third Goldman Sachs' bubble was the housing craze of the Naughties. "Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren't in IPOs but in mortgages," Taibbi writes. Goldman Sachs and other investment bankers enabled mortgage lenders to make mortgages for people who could not afford them by helping them conceal these soon-to-be-defaulted mortgages by bundling them with a few good mortgages.
Goldman used two methods to hide the mess they were selling. First, they bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK, there was no reason to worry so much about the shitty ones. The CDO, as a whole, was sound. Thus, junk-rated mortgages were turned into AAA-rated investments. Second, to hedge its own bets, Goldman got companies like AIG to provide insurance - known as credit-default swaps - on the CDOs. The swaps were essentially a racetrack bet between AIG and Goldman: Goldman is betting the ex-cons will default. AIG is betting they won't.
If there is a lone hero looking out for the regular-guy investors in Taibbi's article, it would be Brooksley Born, the head of the Commodity Futures Trading Commission from August 25, 1996 to June 1, 1999. She tried to regulate "derivatives like CDOs and credit swaps".
But, Goldman Sachs connected people in the government stopped her attempts to regulate them dead stone cold. After privately trying to persuade Born to abandon her push for derivative regulation, but she refused. So, "in June 1998, Rubin went public to denounce her move, eventually recommending that Congress strip the CFTC of its regulatory authority. In 2000, on its last day in session. Congress passed the now-notorious Commodity Futures Modernization Act, which had been inserted into an 11,000-page spending bill at the last minute, with almost no debate on the floor of the Senate. Banks were now free to trade default swaps with impunity."
Goldman then sold "grade-D horseshit" mortgages to "municipalities and pensioners" while at the same time, taking "short positions" in the mortage market, "in essence betting against the same crap it was selling... In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages." Not only that, but Goldman Sachs "bragged about it in public."
For their "securities fraud", Goldman Sachs staved "off prosecution by agreeing to pay a paltry $60 million - about what the bank's CDO division made in a day and a half during the real estate boom."
Even as toxic fallout was still landing from the explosion of the housing bubble in 2008, Goldman Sachs was working on inflating the next bubble: commodities -- specifically oil. According to Taibbi, the "root cause" of the spike of $147 a barrel oil last summer was caused by "the behavior of a few powerful actors", including Goldman Sachs, "determined to turn the once-solid market into a speculative casino."
"As is so often the case, there had been a Depression-era law in place designed specifically to prevent this sort of thing," Taibbi notes. In 1936, "a new law empowered the Commodity Futures Trading Commission - the very same body that would later try and fail to regulate credit swaps - to place limits on speculative trades in commodities. As a result of the CFTC's oversight, peace and harmony reigned in the commodities markets for more than 50 years."
All that changed in 1991 when, unbeknownst to almost everyone in the world, a Goldman-owned commodities-trading subsidiary called J. Aron wrote to the CFTC and made an unusual argument. Farmers with big stores of corn, Goldman argued, weren't the only ones who needed to hedge their risk against future price drops - Wall Street dealers who made big bets on oil prices also needed to hedge their risk, because, well, they stood to lose a lot too.
This was complete and utter crap - the 1936 law, remember, was specifically designed to maintain distinctions between people who were buying and selling real tangible stuff and people who were trading in paper alone. But the CFTC, amazingly, bought Goldman's argument. It issued the bank a free pass, called the "Bona Fide Hedging" exemption, allowing Goldman's subsidiary to call itself a physical hedger and escape virtually all limits placed on speculators. In the years that followed, the commission would quietly issue 14 similar exemptions to other companies.
With their special exemption, Goldman Sachs created a "giant commodities betting parlor" which is "overwhelmingly weighted toward oil". The Goldman Sachs Commodities Index "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."
Not only would commodity prices only go with the type of
investor gambler betting in Goldman Sach's casino, but "Goldman itself was cheerleading with all its might for an increase in oil prices."
Arjun Murti, the Goldman Sachs analyst dubbed by The New York Times as the "oracle of oil" said, in early 2008, oil would spike to $200 a barrel. "Even though the supply of oil was keeping pace with demand, Murti continually warned of disruptions to the world oil supply".
And when the oil bubble burst, "once again the big losers were ordinary people. The pensioners whose funds invested in this crap got massacred... 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."
Taibbi explains the fifth bubble Goldman Sachs rigged is 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.
Last September, then-Treasury secretary Henry Paulson decided to let "one of Goldman's last real competitors", Lehman Brothers, fail. "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."
Paulson then announced the $700 billion bailout for Wall Street and put 35-year-old, Neel Kashkari, a former Goldman Sachs banker with only 6 years of experience, in charge of dolling out dollars. To claim bailout booty, "Goldman announced that it would convert from an investment bank to a bankholding company". Not only would Goldman Sachs be able to scoop up Troubled Asset Relief Program (TARP) money, but also be able to borrow from 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," Taibbi writes. "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."
The collective message of all this - the AlG 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."
Taibbi believes Goldman Sachs cooked its books to show a $1.8 billion profit for the first quarter of 2009 so it could raise $5 billion in new shares. In turn, it "paid out an astonishing $4.7 billion in bonuses and compensation in the first three months of this year".
And to add insult to America's collective injury, Goldman Sachs paid only $14 million in taxes in 2008. "That is what the firm paid in taxes in 2008, an effective tax rate of exactly one, read it, one percent. The bank paid out $10 billion in compensation and benefits that same year and made a profit of more than $2 billion - yet it paid the Treasury less than a third of what it forked over to CEO Lloyd Blankfein, who made $42.9 million last year."
"This should be a pitchfork-level outrage - but somehow, when Goldman released its post-bailout tax profile, hardly anyone said a word," Taibbi writes.
The Penultimate Bubble?
The current bubble Goldman Sachs is inflating is, according to Taibbi, the cap-and-trade greenhouse gas emissions climate change legislation the House of Representatives is likely going to pass today.
"Goldman wants this bill," he states, noting Goldman Sachs was the "leading private campaign donor" to Barack Obama's presidential campaign. I think Taibbi is unfairly implying that the some $981,000 Goldman Sachs employees contributed to his campaign has influenced the president. He also notes that they also contributed $4,452,585 to the Democratic Party in the last election.
But his suggestion seems to be for a mere rough $6 million dollars, the Democrats are creating conservatively estimated as a $646 billion market in carbon credits, that Goldman Sachs is hellbent on exploiting.
Well, you might say, who cares? If cap-and-trade succeeds, won't we all be saved from the catastrophe of global warming? Maybe but cap-and-trade, as envisioned by Goldman, is really just a carbon tax structured so that private interests collect the revenues. Instead of simply imposing a fixed government levy on carbon pollution and forcing unclean energy producers to pay for the mess they make, cap-and-trade will allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities market into a private tax-collection scheme. This is worse than the bailout: It allows the bank to seize taxpayer money before it's even collected.
Taibbi's assessment of the legislation coincides with the Republicans who claim the bill amounts to a hidden energy tax. I agree with Taibbi that the cap-and-trade scheme is a bad idea. I have been in favor of direct carbon taxes and tariffs, but repeatedly very serious people have explained how a carbon tax is a nonstarter. Instead, if Taibbi is right, Congress is about to give Wall Street the power to tax directly in the form of an ever-lessening carbon cap which guarantees to rise the price over time.
So, what may be hidden in the 1,200 page leviathan the climate bill has grown up to be, is who is the tax collector. Taibbi thinks the taxman will be Goldman Sachs. But then, why would not the Republicans support another wealth extraction scheme for America's elite?
Taibbi thinks we Americans, as a nation, are in denial. Perhaps, then we're doomed to be slaves of Goldman Sachs? He concludes:
You can't really register the fact that you're no longer a citizen of a thriving first-world democracy, that you're no longer above getting robbed in broad daylight, because like an amputee, you can still sort of feel things that are no longer there.
But this is it. This is the world we live in now. And in this world, some us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It's a gangster state, running on gangster economics, and even prices can't be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can't stop it, but we should at least know where it's all going.
And if Taibbi is right, the money has been going and will continue to be going to the greedy bankers at Goldman Sachs.
Cross-posted from Daily Kos.