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Thread: The Great American Bubble Machine - Rolling Stone banking corruption exposé

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    Exclamation The Great American Bubble Machine - Rolling Stone banking corruption exposé

    It's a long, long read, but extremely interesting and informative. Don't let the length discourage you--"they" expect us not to have the attention span to care about these things! As one person from the article notes: "You can't explain it in 30 seconds, so politicians ignore it."

    Link to Rolling Stone article: The Great American Bubble Machine : Rolling Stone

    Full text:
    THE GREAT AMERICAN BUBBLE MACHINE

    From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again

    By MATT TAIBBI


    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. In fact, 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 rear end in a top hat 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 - not to mention ...

    But then, 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.

    The bank's unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere - high gas prices, rising consumer-credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. 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.

    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.

    If you want to understand how we got into this financial crisis, you have to first understand where all the money went - and in order to understand that, you need to understand what Goldman has already gotten away with. It is a history exactly five bubbles long - including last year's strange and seemingly inexplicable spike in the price of oil. There were a lot of losers in each of those bubbles, and in the bailout that followed. But Goldman wasn't one of them.

    IF AMERICA IS NOW CIRCLING THE DRAIN, GOLDMAN SACHS HAS FOUND A WAY TO BE THAT DRAIN.

    BUBBLE #1 - THE GREAT DEPRESSION
    Goldman wasn't always a too-big-to-fail Wall Street behemoth, the ruthless face of kill-or-be-killed capitalism on steroids - just almost always. The bank was actually founded in 1869 by a German immigrant named Marcus Goldman, who built it up with his son-in-law Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out short-term IOUs to small-time vendors in downtown Manhattan.

    You can probably guess the basic plotline of Goldman's first 100 years in business: plucky, immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes shitloads of money. In that ancient history there's really only one episode that bears scrutiny now, in light of more recent events: Goldman's disastrous foray into the speculative mania of pre-crash Wall Street in the late 1920s.

    This great Hindenburg of financial history has a few features that might sound familiar. Back then, the main financial tool used to bilk investors was called an "investment trust." Similar to modern mutual funds, the trusts took the cash of investors large and small and (theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the securities and amounts were often kept hidden from the public. So a regular guy could invest $10 or $100 in a trust and feel like he was a big player. Much as in the 1990s, when new vehicles like day trading and e-trading attracted reams of new suckers from the sticks who wanted to feel like big shots, investment trusts roped a new generation of regular-guy investors into the speculation game.

    Beginning a pattern that would repeat itself over and over again, Goldman got into the investment-trust game late, then jumped in with both feet and went hog-wild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund - which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah - which, of course, was in large part owned by Goldman Trading.

    The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line; 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.

    In a chapter from The Great Crash, 1929 titled "In Goldman Sachs We Trust," the famed economist John Kenneth Galbraith held up the Blue Ridge and Shenandoah trusts as classic examples of the insanity of leverage-based investment. The trusts, he wrote, were a major cause of the market's historic crash; in today's dollars, the losses the bank suffered totaled $475 billion. "It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity," Galbraith observed, sounding like Keith Olbermann in an ascot. "If there must be madness, something may be said for having it on a heroic scale."

    BUBBLE #2 - TECH STOCKS
    Fast-Forward about 65 years. Goldman not only survived the crash that wiped out so many of the investors it duped, it went on to become the chief underwriter to the country's wealthiest and most powerful corporations. Thanks to Sidney Weinberg, who rose from the rank of janitor's assistant to head the firm, Goldman became the pioneer of the initial public offering, one of the principal and most lucrative means by which companies raise money. During the 1970s and 1980s, Goldman may not have been the planet-eating Death Star of political influence it is today, but it was a top-drawer firm that had a reputation for attracting the very smartest talent on the Street.

    It also, oddly enough, had a reputation for relatively solid ethics and a patient approach to investment that shunned the fast buck; its executives were trained to adopt the firm's mantra, "long-term greedy." One former Goldman banker who left the firm in the early Nineties recalls seeing his superiors give up a very profitable deal on the grounds that it was a long-term loser. "We gave back money to 'grownup' corporate clients who had made bad deals with us," he says. "Everything we did was legal and fair - but 'long-term greedy' said we didn't want to make such a profit at the clients' collective expense that we spoiled the marketplace."

    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 cliche 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.

    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.

    "Since the Depression, there were strict underwriting guidelines that Wall Street adhered to when taking a company public," says one prominent hedge-fund manager. "The company had to be in business for a minimum of five years, and it had to show profitability for three consecutive years. But Wall Street took these guidelines and threw them in the trash." Goldman completed the snow job by pumping up the sham stocks: "Their analysts were out there saying Bullshit.com is worth $100 a share."

    The problem was, nobody told investors that the rules had changed. "Everyone on the inside knew," the manager says. "Bob Rubin sure as hell knew what the underwriting standards were. They'd been intact since the 1930s."

    Jay Ritter, a professor of finance at the University of Florida who specializes in IPOs, says banks like Goldman knew full well that many of the public offerings they were touting would never make a dime. "In the early Eighties, the major underwriters insisted on three years of profitability. Then it was one year, then it was a quarter. By the time of the Internet bubble, they were not even requiring profitability in the foreseeable future."

    Goldman has denied that it changed its underwriting standards during the Internet years, but its own statistics belie the claim. Just as it did with the investment trust in the 1920s, Goldman started slow and finished crazy in the Internet years. After it took a little-known company with weak financials called Yahoo! public in 1996, once the tech boom had already begun, Goldman quickly became the IPO king of the Internet era. Of the 24 companies it took public in 1997, a third were losing money at the time of the IPO. In 1999, at the height of the boom, it took 47 companies public, including stillborns like Webvan and eToys, investment offerings that were in many ways the modern equivalents of Blue Ridge and Shenandoah. The following year, it underwrote 18 companies in the first four months, 14 of which were money losers at the time. As a leading underwriter of Internet stocks during the boom, Goldman provided profits far more volatile than those of its competitors: In 1999, the average Goldman IPO leapt 281 percent above its offering price, compared to the Wall Street average of 181 percent.

    How did Goldman achieve such extraordinary results? One answer is that they used a practice called "laddering," which is just a fancy way of saying they manipulated the share price of new offerings. Here's how it works: Say you're Goldman Sachs, and Bullshit.com comes to you and asks you to take their company public. You agree on the usual terms: You'll price the stock, determine how many shares should be released and take the Bullshit.com CEO on a "road show" to schmooze investors, all in exchange for a substantial fee (typically six to seven percent of
    the amount raised). You then promise your best clients the right to buy big chunks of the IPO at the low offering price - let's say Bullshit.com's starting share price is $15 - in exchange for a promise that they will buy more shares later on the open market. That seemingly simple demand gives you inside knowledge of the IPO's future, knowledge that wasn't disclosed to the day-trader schmucks who only had the prospectus to go by: You know that certain of your clients who bought X amount of shares at $15 are also going to buy Y more shares at $20 or $25, virtually guaranteeing that the price is going to go to $25 and beyond. In this way, Goldman could artificially jack up the new company's price, which of course was to the bank's benefit - a six percent fee of a $500 million IPO is serious money.

    Goldman was repeatedly sued by shareholders for engaging in laddering in a variety of Internet IPOs, including Webvan and NetZero. The deceptive practices also caught the attention of Nichol as Maier, the syndicate manager of Cramer & Co., the hedge fund run at the time by the now-famous chattering television rear end in a top hat Jim Cramer, himself a Goldman alum. Maier told the SEC that while working for Cramer between 1996 and 1998, he was repeatedly forced to engage in laddering practices during IPO deals with Goldman.

    "Goldman, from what I witnessed, they were the worst perpetrator," Maier said. "They totally fueled the bubble. And it's specifically that kind of behavior that has caused the market crash. They built these stocks upon an illegal foundation - manipulated up - and ultimately, it really was the small person who ended up buying in." In 2005, Goldman agreed to pay $40 million for its laddering violations - a puny penalty relative to the enormous profits it made. (Goldman, which has denied wrongdoing in all of the cases it has settled, refused to respond to questions for this story.)

    Another practice Goldman engaged in during the Internet boom was "spinning," better known as bribery. Here the investment bank would offer the executives of the newly public company shares at extra-low prices, in exchange for future underwriting business. Banks that engaged in spinning would then undervalue the initial offering price - ensuring that those "hot" opening price shares it had handed out to insiders would be more likely to rise quickly, supplying bigger first-day rewards for the chosen few. So instead of Bullshit.com opening at $20, the bank would approach the Bullshit.com CEO and offer him a million shares of his own company at $18 in exchange for future business - effectively robbing all of Bullshit's new shareholders by diverting cash that should have gone to the company's bottom line into the private bank account of the company's CEO.

    In one case, Goldman allegedly gave a multimillion-dollar special offering to eBay CEO Meg Whitman, who later joined Goldman's board, in exchange for future i-banking business. According to a report by the House Financial Services Committee in 2002, Goldman gave special stock offerings to executives in 21 companies that it took public, including Yahoo! co-founder Jerry Yang and two of the great slithering villains of the financial-scandal age - Tyco's Dennis Kozlowski and Enron's Ken Lay. Goldman angrily denounced the report as "an egregious distortion of the facts" - shortly before paying $110 million to settle an investigation into spinning and other manipulations launched by New York state regulators. "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."

    Such practices conspired to turn the Internet bubble into one of the greatest financial disasters in world history: Some $5 trillion of wealth was wiped out on the NASDAQ alone. But the real problem wasn't the money that was lost by shareholders, it was the money gained by investment bankers, who received hefty bonuses for tampering with the market. Instead of teaching Wall Street a lesson that bubbles always deflate, the Internet years demonstrated to bankers that in the age of freely flowing capital and publicly owned financial companies, bubbles are incredibly easy to inflate, and individual bonuses are actually bigger when the mania and the irrationality are greater.

    GOLDMAN SCAMMED HOUSING INVESTORS BY BETTING AGAINST ITS OWN CRAPPY MORTGAGES.

    Nowhere was this truer than at Goldman. Between 1999 and 2002, the firm paid out $28.5 billion in compensation and benefits - an average of roughly $350,000 a year per employee. Those numbers are important because the key legacy of the Internet boom is that the economy is now driven in large part by the pursuit of the enormous salaries and bonuses that such bubbles make possible. Goldman's mantra of "long-term greedy" vanished into thin air as the game became about getting your check before the melon hit the pavement.

    The market was no longer a rationally managed place to grow real, profitable businesses: It was a huge ocean of Someone Else's Money where bankers hauled in vast sums through whatever means necessary and tried to convert that money into bonuses and payouts as quickly as possible. If you laddered and spun 50 Internet IPOs that went bust within a year, so what? By the time the Securities and Exchange Commission got around to fining your firm $110 million, the yacht you bought with your IPO bonuses was already six years old. Besides, you were probably out of Goldman by then, running the U.S. Treasury or maybe the state of New Jersey. (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.")

    For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a decade late were something far less than a deterrent - they were a joke. Once the Internet bubble burst, Goldman had no incentive to reassess its new, profit-driven strategy; it just searched around for another bubble to inflate. As it turns out, it had one ready, thanks in large part to Rubin.

    BUBBLE #3 - THE HOUSING CRAZE
    Goldman's role in the sweeping 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 poo poo 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.

    None of that would have been possible without investment bankers like Goldman, who created vehicles to package those lovely mortgages and sell them en masse to unsuspecting insurance companies and pension funds. This created a mass market for toxic debt that would never have existed before; in the old days, no bank would have wanted to keep some addict ex-con's mortgage on its books, knowing how likely it was to fail. You can't write these mortgages, in other words, unless you can sell them to someone who doesn't know what they are.

    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 lovely 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.

    There was only one problem with the deals: All of the wheeling and dealing represented exactly the kind of dangerous speculation that federal regulators are supposed to rein in. Derivatives like CDOs and credit swaps had already caused a series of serious financial calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange County, California, was forced to default in 1994. A report that year by the Government Accountability Office recommended that such financial instruments be tightly regulated - and in 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, agreed. That May, she circulated a letter to business leaders and the Clinton administration suggesting that banks be required to provide greater disclosure in derivatives trades, and maintain reserves to cushion against losses.

    More regulation wasn't exactly what Goldman had in mind. "The banks go crazy - they want it stopped," says Michael Greenberger, who worked for Born as director of trading and markets at the CFTC and is now a law professor at the University of Maryland. "Greenspan, Summers, Rubin and [SEC chief Arthur] Levitt want it stopped."

    Clinton's reigning economic foursome - "especially Rubin," according to Greenberger - called Born in for a meeting and pleaded their case. She refused to back down, however, and continued to push for more regulation of the derivatives. Then, 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 1l,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.

    But the story didn't end there. AIG, a major purveyor of default swaps, approached the New York State Insurance Department in 2000 and asked whether default swaps would be regulated as insurance. At the time, the office was run by one Neil Levin, a former Goldman vice president, who decided against regulating the swaps. Now freed to underwrite as many housing-based securities and buy as much credit-default protection as it wanted, Goldman went berserk with lending lust. By the peak of the housing boom in 2006, Goldman was underwriting $76.5 billion worth of mortgage-backed securities - a third of which were subprime - much of it to institutional investors like pensions and insurance companies. And in these massive issues of real estate were vast swamps of crap.

    Take one $494 million issue that year, GSAMP Trust 2006-S3. Many of the mortgages belonged to second-mortgage borrowers, and the average equity they had in their homes was 0.71 percent. Moreover, 58 percent of the loans included little or no documentation - no names of the borrowers, no addresses of the homes, just zip codes. Yet both of the major ratings agencies, Moody's and Standard & Poor's, rated 93 percent of the issue as investment grade. Moody's projected that less than 10 percent of the loans would default. In reality, 18 percent of the mortgages were in default within 18 months.

    Not that Goldman was personally at any risk. The bank might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners - old people, for God's sake - pretending the whole time that it wasn't grade-D horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. "The mortgage sector continues to be challenged," David Viniar, the bank's chief financial officer, boasted in 2007. "As a result, we took significant markdowns on our long inventory positions .... However, our risk bias in that market was to be short, and that net short position was profitable." In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages.

    "That's how audacious these assholes are," says one hedge-fund manager. "At least with other banks, you could say that they were just dumb - they believed what they were selling, and it blew them up. Goldman knew what it was doing." I ask the manager how it could be that selling something to customers that you're actually betting against - particularly when you know more about the weaknesses of those products than the customer - doesn't amount to securities fraud.

    "It's exactly securities fraud," he says. "It's the heart of securities fraud."

    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 issued. New York state regulators are suing Goldman and 25 other underwriters for selling bundles of crappy Countrywide mortgages to city and state pension funds, which lost as much as $100 million in the investments. Massachusetts also investigated Goldman for similar misdeeds, acting on behalf of 714 mortgage holders who got stuck ho1ding predatory loans. But once again, Goldman got off virtually scot-free, staving 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.

    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 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 hosed the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and hosed the taxpayer by making him payoff those same bets.

    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 hard here."

    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, subprime mortgage and other once-hot financial fare were now firmly associated in the public's mind with scams; the terms credit swaps and CDOs were about to join them. The credit markets were in crisis, and the mantra that had sustained the fantasy economy throughout the Bush years - the notion that housing prices never go down - was now a fully exploded myth, leaving the Street clamoring for a new bullshit paradigm to sling.

    Where to go? With the public reluctant to put money in anything that felt like a paper investment, the Street quietly moved the casino to the physical-commodities market - stuff you could touch: corn, coffee, cocoa, wheat and, above all, energy commodities, especially oil. In conjunction with a decline in the dollar, the credit crunch and the housing crash caused a "flight to commodities." Oil futures in particular skyrocketed, as the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008.

    That summer, as the presidential campaign heated up, the accepted explanation for why gasoline had hit $4.11 a gallon was that there was a problem with the world oil supply. In a classic example of how Republicans and Democrats respond to crises by engaging in fierce exchanges of moronic irrelevancies, John McCain insisted that ending the moratorium on offshore drilling would be "very helpful in the short term," while Barack Obama in typical liberal-arts yuppie style argued that federal investment in hybrid cars was the way out.

    GOLDMAN TURNED A SLEEPY OIL MARKET INTO A GIANT BETTING PARLOR - SPIKING PRICES AT THE PUMP.

    But it was all a lie. While the global supply of oil will eventually dry up, the short-term flow has actually been increasing. In the six months before prices spiked, according to the U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million. Not only was the short-term supply of oil rising, the demand for it was falling - which, in classic economic terms, should have brought prices at the pump down.

    So 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.

    As is so often the case, there had been a Depression-era law in place designed specifically to prevent this sort of thing. The commodities market was designed in large part to help farmers: A grower concerned about future price drops could enter into a contract to sell his corn at a certain price for delivery later on, which made him worry less about building up stores of his crop. When no one was buying corn, the farmer could sell to a middleman known as a "traditional speculator," who would store the grain and sell it later, when demand returned. That way, someone was always there to buy from the farmer, even when the market temporarily had no need for his crops.

    In 1936, however, Congress recognized that there should never be more speculators in the market than real producers and consumers. If that happened, prices would be affected by something other than supply and demand, and price manipulations would ensue. 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.

    Now Goldman and other banks were free to drive more investors into the commodities markets, enabling speculators to place increasingly big 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.

    What is even more amazing is that the letter to Goldman, along with most of the other trading exemptions, was handed out more or less in secret. "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.

    "1 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?'"

    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 of2008, 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 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 bankholding 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 bailout.

    Even more amazing, Goldman did it all right before the government announced the results of its new "stress test" for banks seeking to repay TARP money - suggesting that Goldman knew exactly what was coming. The government was trying to carefully orchestrate the repayments in an effort to prevent further trouble at banks that couldn't pay back the money right away. But Goldman blew off those concerns, brazenly flaunting its insider status. "They seemed to know everything that they needed to do before the stress test came out, unlike everyone else, who had to wait until after," says Michael Hecht, a managing director of JMP Securities. "The government came out and said, 'To pay back TARP, you have to issue debt of at least five years that is not insured by FDIC - which Goldman Sachs had already done, a week or two before."

    And here's the real punch line. After playing an intimate role in four historic bubble catastrophes, after helping $5 trillion in wealth disappear from the NASDAQ, after pawning off thousands of toxic mortgages on pensioners and cities, after helping to drive the price of gas up to $4 a gallon and to push 100 million people around the world into hunger, after securing tens of billions of taxpayer dollars through a series of bailouts overseen by its former CEO, what did Goldman Sachs give back to the people of the United States in 2008?

    Fourteen million dollars.


    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.

    How is this possible? According to Goldman's annual report, the low taxes are due in large part to changes in the bank's "geographic earnings mix." In other words, the bank moved its money around so that most of its earnings took place in foreign countries with low tax rates. Thanks to our completely hosed corporate tax system, companies like Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely, even while they claim deductions upfront on that same untaxed income. This is why any corporation with an at least occasionally sober accountant can usually find a way to zero out its taxes. A GAO report, in fact, found that between 1998 and 2005, roughly two-thirds of all corporations operating in the U.S. paid no taxes at all.

    This should be a pitchfork-level outrage - but somehow, when Goldman released its post-bailout tax profile, hardly anyone said a word. One of the few to remark on the obscenity was Rep. Lloyd Doggett, a Democrat from Texas who serves on the House Ways and Means Committee. "With the right hand out begging for bailout money," he said, "the left is hiding it offshore."

    BUBBLE #6 - GLOBAL WARMING
    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.

    AS ENVISIONED BY GOLDMAN, THE FIGHT TO STOP GLOBAL WARMING WILL BECOME A "CARBON MARKET" WORTH $1 TRILLION A YEAR.

    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.

    Here's how it works: If the bill passes; there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy "allocations" or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimates that about $646 billions worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.

    The feature of this plan that has special appeal to speculators is that the "cap" on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand-new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison's sake, the annual combined revenues of an electricity suppliers in the U.S. total $320 billion.

    Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigm-shifting legislation, (2) make sure that they're the profit-making slice of that paradigm and (3) make sure the slice is a big slice. Goldman started pushing hard for cap-and-trade long ago, but things really ramped up last year when the firm spent $3.5 million to lobby climate issues. (One of their lobbyists at the time was none other than Patterson, now Treasury chief of staff.) Back in 2005, when Hank Paulson was chief of Goldman, he personally helped author the bank's environmental policy, a document that contains some surprising elements for a firm that in all other areas has been consistently opposed to any sort of government regulation. Paulson's report argued that "voluntary action alone cannot solve the climate-change problem." A few years later, the bank's carbon chief, Ken Newcombe, insisted that cap-and-trade alone won't be enough to fix the climate problem and called for further public investments in research and development. Which is convenient, considering that 'Goldman made early investments in wind power (it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is an investor in a firm called Changing World Technologies) and solar power (it partnered with BP Solar), exactly the kind of deals that will prosper if the government forces energy producers to use cleaner energy. As Paulson said at the time, "We're not making those investments to lose money."

    The bank owns a 10 percent stake in the Chicago Climate Exchange, where the carbon credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a Utah-based firm that sells carbon credits of the type that will be in great demand if the bill passes. Nobel Prize winner Al Gore, who is intimately involved with the planning of cap-and-trade, started up a company called Generation Investment Management with three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter Harris. Their business? Investing in carbon offsets. There's also a $500 million Green Growth Fund set up by a Goldmanite to invest in green-tech ... the list goes on and on. Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energy-futures market?

    "Oh, it'll dwarf it," says a former staffer on the House energy committee.

    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.

    "If it's going to be a tax, I would prefer that Washington set the tax and collect it," says Michael Masters, the hedge fund director who spoke out against oil-futures speculation. "But we're saying that Wall Street can set the tax, and Wall Street can collect the tax. That's the last thing in the world I want. It's just asinine."

    Cap-and-trade is going to happen. Or, if it doesn't, something like it will. The moral is the same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In almost every case, the very same bank that behaved recklessly for years, weighing down the system with toxic loans and predatory debt, and accomplishing nothing but massive bonuses for a few bosses, has been rewarded with mountains of virtually free money and government guarantees - while the actual victims in this mess, ordinary taxpayers, are the ones paying for it.

    It's not always easy to accept the reality of what we now routinely allow these people to get away with; there's a kind of collective denial that kicks in when a country goes through what America has gone through lately, when a people lose as much prestige and status as we have in the past few years. 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 of 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.

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    Thanks for posting this article. It makes my blood boil. It took me 5 sittings to finish it, because I'd have to leave it, go outside and mutter curses at the sheer fucked-up lunacy of my motherland while having a smoke to calm down.
    CHILLY FREE!
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    Quote Originally Posted by olivia View Post
    Thanks for posting this article. It makes my blood boil. It took me 5 sittings to finish it, because I'd have to leave it, go outside and mutter curses at the sheer fucked-up lunacy of my motherland while having a smoke to calm down.
    I did the same thing!

    What really drives me nuts is that they are all in each others back pockets & there ain't shit we can do about it. I wish every American were forced to read this. The last line of the article says it all.
    I'm not quite drunk enough to really care, but is this her violation of her violation of her violation of her violation of probation or her violation of her violation of her violation of her probation????? ~MontanaMama on LL's latest arrest.

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    A rebuttal:
    ul 10 2009, 3:14 pm by Megan McArdle
    Matt Taibbi Gets His Sarah Palin On


    This Eric Martin post reminds me that a number of you have asked me what I thought of Matt Taibbi's Rolling Stone piece on Goldman Sachs. What I think, sadly, is that Matt Taibbi is becoming the Sarah Palin of journalism. He seems to deliberately eschew understanding his subjects, because only corrupt, pointy-headed financial journalists who have been co-opted by the system do that. And Matt Taibbi is here to save you from those pointy headed elites.

    Taibbi is a gifted narrative journalist, whose verbal talents I greatly admire. But financial meltdowns don't offer villains, for the simple reason that no one person or even one group is powerful enough to take down a whole system. Confronted with this, Taibbi doesn't back away from the narrative form, or apply it to smaller questions where it is more appropriate, as William Cohan did in House of Cards. Instead, he grabs whoever's nearest to hand and builds them up into a gigantic straw villian, which he proceeds to bash with a handful of recently acquired technical terms that he clearly doesn't quite understand. It's not that everything he says is wrong, but the bits that are true aren't interesting, and the bits that are interesting aren't true. The whole thing dissolves into the kind of conspiracy theory he so ably lampooned in The Great Derangement. The result is something that's not even wrong. It's just incoherent.

    To give you a flavor of what I mean, Taibbi rants about how we knew derivatives were bad bad BAD! because they'd gone so badly wrong before:
    There was only one problem with the deals: All of the wheeling and dealing represented exactly the kind of dangerous speculation that federal regulators are supposed to rein in. Derivatives like CDOs and credit swaps had already caused a series of serious financial calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange County, California, was forced to default in 1994. A report that year by the Government Accountability Office recommended that such financial instruments be tightly regulated - and in 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, agreed. That May, she circulated a letter to business leaders and the Clinton administration suggesting that banks be required to provide greater disclosure in derivatives trades, and maintain reserves to cushion against losses.
    But it's not clear how much derivatives regulation would have helped any of these three companies. Gibson was defrauded by its bankers. P&G wasn't; they spent a great deal of money unwinding their positions when the Treasurer realized they had a lot of exposure on a bad bet on falling interest rates. Orange County, too, was making a massive, levered bet on a steep yield curve (roughly, a large difference between short and long term interest rates) that came undone when the yield curve flattened and interest rates rose. Moderately complex derivatives allowed its idiot financial manager to take somewhat larger bets, but you can take massive, money losing bets without them. At any rate, none of these derivatives have much to do with CDOs or CDSs; you might as well conflate stocks and bonds because they're both "securities". No one, as far as I know, is now proposing that we need to curtail the use of interest rate swaps.

    Or take Taibbi's complaints about Goldman and its nefarious role in the Great Depression:
    Beginning a pattern that would repeat itself over and over again, Goldman got into the investment-trust game late, then jumped in with both feet and went hog-wild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund - which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah - which, of course, was in large part owned by Goldman Trading.

    The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line; 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.

    In a chapter from The Great Crash, 1929 titled "In Goldman Sachs We Trust," the famed economist John Kenneth Galbraith held up the Blue Ridge and Shenandoah trusts as classic examples of the insanity of leverage-based investment. The trusts, he wrote, were a major cause of the market's historic crash; in today's dollars, the losses the bank suffered totaled $475 billion. "It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity," Galbraith observed, sounding like Keith Olbermann in an ascot. "If there must be madness, something may be said for having it on a heroic scale."
    This is all technically true, and collectively nonsense. Investment trusts--aka mutual funds, now heavily regulated--were not the cause of the Great Depression. They were not even the cause of the stock market crash. They were an interesting sideshow that Galbraith included in his book because they were a vivid example of the froth. And Goldman was not the center of investment trust activity. They were one player among many whom Galbraith picked as an example, presumably because they happened to be still around and had a recognizeable name. In other words, because their activity had been less extreme, and hadn't taken the bank down with it. Yet Taibbi turns this into a central example in the exhibit against them. Then there's a 65-year gap in the indictment, presumably because no one has written an engaging popular book about the stock market convulsions of the 1970s.

    Then the reserve of popular investment post-mortems fattens, and suddenly there's a lengthy litany of new complaints about Goldman: pumping, laddering, spinning. Eric Martin defends Taibbi on the grounds that it's all true. I myself firmly believe that these things are true (she said, looking demurely over her shoulder at the nice man from Legal). But it's all old, old news. It's not even a particularly well-written or thoughfully analyzed summary of the exhaustive treatments of the subject by the fuzzy headed moderate business journalists Taibbi disdains. Investment banks treated their clients disgracefully during the internet bubble, and a lot of the clients were managers who did the same to their shareholders. But what does this have to do with the current financial crisis? Perhaps more to the point, how is it a special indictment of Goldman, the ostensible topic of his piece? Other banks did more and worse.

    Even as an indictment of the system this thing is lacking, and showcases Taibbi's lack of fundamental conceptual understanding. He complains about CDO's on the grounds that Goldman hid the atrocious risks inside a fancy dan derivative package that no one could understand. But in fact, everyone was aware that CDO's were repackaging crap mortgages--that was the point. The idea was pure portfolio theory, broadly agreed upon by everyone involved. Everyone knew a lot of the mortgages might go bad, either by defaulting or prepaying. (This is a risk for bankers, who don't like the idea that if interest rates drop, their 7% mortgage might suddenly turn into a pile of non-interest-bearing cash which can only be invested at 5%.) But if you pool the risk, only some of the bonds will go bad, while others pay off. The result is a less risky, less volatile investment than any individual junk mortgage bond. And it would have worked, too, if it hadn't been for those crazy kids a collapse in the housing market of a scale not seen since the Great Depression.

    Did individual portfolio managers take on too much risk? Yes. Did some morons get sold these bonds without understanding what was going on? Undoubtedly. But Goldman's customers for CDOs are not little grannies who think a bond coupon is what you use to buy denture glue. They're institutions who could reasonably be expected to understand the risks. Which is why it is not, as Taibbi absurdly claims, "securities fraud" for Goldman to sell people mortgage-backed CDOs when they themselves were moderately short the overall housing market.
    "That's how audacious these assholes are," says one hedge-fund manager. "At least with other banks, you could say that they were just dumb - they believed what they were selling, and it blew them up. Goldman knew what it was doing." I ask the manager how it could be that selling something to customers that you're actually betting against - particularly when you know more about the weaknesses of those products than the customer - doesn't amount to securities fraud.

    "It's exactly securities fraud," he says. "It's the heart of securities fraud."
    First of all, of course banks sell people positions they aren't themselves taking. Sometimes the bank is right, and sometimes the customers are; differences of opinion are what make marriages and horse races. Second of all, the banks that went down, the ones that arguably caused the financial crisis, were long their own toxic waste (and that of others). Third of all, Goldman itself might argue that its mortgages were not as toxic as others, and for all I or Matt Taibbi know, they might be telling the truth. Fourth of all, the disconnect between the underwriting and the customer side of the investment houses was not only legal, but in some cases, mandatory. Excessive entanglement between the two is why Henry Blodget, whom Taibbi references elsewhere, has been banned from the securities industry for life. That Taibbi could even ask how this was not securities fraud is really troubling.

    This would not be complete, of course, without a detour into the dastardly CDSs, in which Taibbi illustrates that he either does not understand the concept of "hedging", or doesn't care. Memo to Taibbi: we want banks to lay off some of their risk exposure. That's what makes them more stable. Now, maybe Goldman Sachs was doing something wrong. But the fact that they insured some part of their portfolio against default is not proof of it. To know that, we'd need some sense of the size of the portfolio, the size of the insurance, the structure of the deals. Those are details Taibbi either doesn't have, or doesn't provide us.

    I won't even go into Taibbi's silly and naive discussion of Goldman's alleged oil market speculation, except to note:
    • He again does not succeed in pinning it all on Goldman
    • He fails to explain how a 1991 rule change caused a 2008 price spike and decline
    • He fails to note that price spikes and declines in the oil market were common pre-1991
    Does this matter? Aren't I, as people love to claim when you get into details, "missing the big picture?" After all, okay, maybe Goldman wasn't really all at fault but the important thing is that it shows how we were all duped over the last 25 years by insiders.

    No, for several reasons.

    First of all, Taibbi doesn't say that Goldman Sachs is just a sort of Everyman; he claims they helped engineer crises so that they could profit from them. Second of all, ignorance leads Taibbi to ask the wrong questions, and provide no useful answers. The problem isn't that pointy-headed bankers were rooking us--that may have been an individual problem for individual investors, but a crisis this big cannot be explained by any sort of fraud. To make these charges stick, Taibbi needs to posit a ludicrous level of naivite among institutional investors. Being satisfied with sloppy answers, he doesn't talk about, say, Goldman's role in the AIG collapse, or how you build a banking system without putting bankers in charge of it. He doesn't prove anything except that Matt Taibbi knows little about how the financial system works.

    A lot of laymen, and not a few financial writers, like Taibbi because he's willing to take the piss out of self-important bankers. But you can learn about how the banking system works without being coopted by the bankers--look at Michael Lewis, whose Liar's Poker remains a classic twenty years on. What you can't do is build cartoon villains. Felix Salmon isn't overly friendly to Wall Street. But he doesn't write rubbish.

    The more dangerous thing is that Taibbi makes a lot of people feel like they finally understand how they were conned. Taibbi's facile use of technical terms, his lengthy explanation of little-known secrets that have been endlessly rehashed on every financial page for going on a decade, gives people the illusion that they have acquired valuable information about the financial crisis. They haven't. They've acquired a bunch of disconnected vignettes.

    Which is not to say that I disagree with Taibbi's project. Wall Street is an arrogant beast that more than held up its half of the devil's bargain which drove us into our current ugly straits. Bankers who thought they were geniuses were deceived by models that assumed away the possibility of a second great depression. They made a terrifying amount of money doing it. And now that the taxpayers have bailed them out at considerable expense, we don't even get a goddamn fruit basket. Instead they merrily go along paying themselves gigantic bonuses for the singular feat of not driving our economy entirely back to the stone age. I think some populist rage is more than warranted.

    But just because Taibbi, or Sarah Palin, has a legitimate grievance, it does not follow that everything they say is thereby legitimate. How you press that grievance matters. And the right way to do it is carefully, honestly, and with a deep respect for the value of knowledge, even if you disagree with those who are purveying it.
    Matt Taibbi Gets His Sarah Palin On - The Atlantic Business Channel

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    ^ Yup. Have to agree with the rebuttal. This sentence pretty much sums it up:
    He doesn't prove anything except that Matt Taibbi knows little about how the financial system works.
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    Quote Originally Posted by Little Wombat View Post
    ^ Yup. Have to agree with the rebuttal. This sentence pretty much sums it up:

    Maybe. The rebuttal does little to clear the air, though. If she is claiming that Goldman did bad things, but other banks are worse, how does that refute the original article?

    We are dealing with 2 sets of rules here - ethics and finance. Any bank that insures itself against a known, constructed, failure with my tax dollars pisses me off. That should be considered fraud. It isn't, of course, cuz banks give big bucks to politicians.

    Goldman (and other banks) created money with bad loans that WE are now expected to bail out. That makes loads of financial sense, but is ethically black-hearted and ruinous.

    The rebuttal author may understand the world of insider finance which is allowed to make profits out of misery, calamity and political strife. That's the Milton Friedman way! In fact, creating calamity is good financial policy.

    But demanding and stealing my money to mitigate their risk? Is that supposed to be Capitalism? Wasn't this the big criticism of Communism for so many decades - that it supported corrupt old inefficient industries so the State wouldn't collapse?

    This rebuttal stands on the same old economic pedestal. "Don't worry, you couldn't possibly understand it all. We understand it. You don't. Now move along." What's the ivory tower here?

    Well, I do understand greed. I do understand making profits off misery. I do understand a Ponzi scheme dressed in fancy finance terms. We all lost, as the lowest level on the pyramid.

    Fortunately for them, the banks are operating in the USA which has the collective attention span of a gnat. As long as they have cable at the weekly stay motels, everyone is happy.
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    Quote Originally Posted by olivia View Post
    Well, I do understand greed. I do understand making profits off misery. I do understand a Ponzi scheme dressed in fancy finance terms. We all lost, as the lowest level on the pyramid.
    The bankers weren't alone in their greed. All those morons following crackpots like Suze Orman had to be paid, too. Hell, people were enabling this behavior and continue to do so. It's not like they lined their pockets with Monopoly money. If we want to stop it, we have to stop giving them the money to fuck us. Everybody gets pissed about the bailouts yet fail to see how they helped make this shit happen. The Great Depression, the Dot Com bubble, the recent crash all have something in common: ordinary people who give these people the capital to fuck up the markets.

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    Columbia Journalism Review on the effects of Matt Taibbi's Rolling Stone piece on Goldman Sachs. (Yes, it's long.)
    The Audit
    — August 06, 2009 12:58 PM


    Don’t Dismiss Taibbi

    What the mainstream press can learn from a Goldman takedown

    By Dean Starkman

    Mainstream financial journalism is doing its level, eye-rolling, heavy-sighing best to stuff Matt Taibbi back into the alt-press hole he came from, but he’s not going along with it, and the mainstreamers in any case are making a big mistake.

    The Rolling Stone writer cemented his status as the enfant terrible of the business press with “The Great American Bubble Machine,” a 10,000-word excoriation of Goldman Sachs, a muckraker’s-eye view of Goldman history, exploring the bank’s and Wall Street’s contributions to various financial disasters, starting with the Great Depression, skipping to the Tech Wreck, the Mortgage Wreck, the oil bubble of 2008, the bailout, and the looming cap-and-trade plan. Salted with “fuck”s, “shit”s and written with brio and hyperbole in the New Journalism tradition, it caught the financial community, which very much includes the financial media, utterly off-guard, unused as it is to hearing its flagship described as a “giant vampire squid wrapped around the face of humanity.”

    Financial cognoscenti quickly sought to dismiss the piece as so much conspiracy-mongering perpetrated by a financial illiterate. Funny, but that illiterate’s piece ran more than a month ago, and people can’t stop talking about it. Perhaps not coincidentally, it feels like the general financial news has been all-Goldman, all-the-time ever since.

    Ex-Deal and Wall Street Journal staffer Heidi Moore stepped into a buzzsaw last week week when she wrote one of the biggest non-sequiturs of the financial crisis, a column in Slate’s Big Money arguing that Goldman’s success comes from the fact it’s better at what it does than everyone else, therefore, apparently, criticism is unwarranted.
    Will Everyone Please Shut Up About Goldman Sachs? The bank has a culture that works. So what?
    As Taibbi (who needs no help defending himself) pointed out on his own blog, Moore addresses precisely none of the substantive criticisms that have been leveled at the bank, including big ones, like (1) buying predatory loans, (2) selling defective mortgage-backed securities while (3) shorting them at the same time, and (4) buying defective insurance from American International Group, then having those bad bets redeemed in full by government programs ratified by ex-Goldman executives. This is to say nothing of the role ex-Goldman alums played in laying the groundwork for the decade’s financial recklessness—Robert Rubin’s contribution to deconstructing financial regulation and Henry Paulson’s lobbying to loosen capital restrictions in 2004, to name just two.

    Or, as Taibbi put it:
    And the winner of this month’s Most Retarded Horseshit Written In Defense of Goldman Sachs award goes to… Heidi Moore at Big Money! Come on down, Heidi!
    CNBC’s Charlie Gasparino pulled out all the bizpress cliches—Taibbi is not just “dead wrong” but “pretty naive” believed by “half-literate bloggers” (you can add your own eye rolls), but had to misread Taibbi in order to dismiss him. He says Taibbi says “Goldman either single-handedly or with very little help, was responsible for the financial crisis.” But that’s not what Taibbi actually says, as we’ll see below.

    RealClearMarkets’s eyes rolled back in its head practically in this attempted takedown (many things are “laughable,” “laugh-inducing,” etc.—yuck, yuck), pointlessly pointing out, among other things, that other parties were on the other side of Goldman trades, therefore, apparently, everything’s okay. Nothing to see here, folks.

    (And yeah, Goldman is an Audit funder, having given us $25,000, or about 10 percent of this year’s budget. What can you do? Deal columnist Yvette Kantrow weakly accused The Audit a few weeks ago of being in the tank for Goldman. Our response to that irresponsible cry for attention is here and here.)

    A better use of all this expertise, I’d say, would be to probe what the right Goldman story might be, rather than dwelling on what they think is the wrong one. We’ll be keeping an eye out for those.

    The more general reaction to Taibbi’s piece was all over the place and ranged from rapid and complete dismissal by mainstream-media types leveling their usual charge—”simplistic”—as well as others who found the idea of trying to put any one institution, even Goldman, at the center of a century-long scheme to inflate and profit from bubbles, preposterous on its face. Another camp could express nothing but gratitude that someone had taken on directly an important actor with a sense of fury proportionate to the scope of the financial crisis—“finally!” And then there was the largest camp, people who just said: “Wow, look at that.”


    For all the clamor, criticism of what Taibbi’s actually written has been surprisingly weak. The best critics could offer was that Taibbi exaggerated Goldman’s particular role in this or that crisis and that financial crises are far too complex for this frame (or for them, I suspect, any frame at all) —that and make disparaging remarks about Taibbi’s alleged self-righteousness, amateurism, ignorance, etc. While the attacks on Taibbi aren’t couched as defenses of Goldman, the net effect is the same.

    Moore, who with Gasparino, seems intent on playing the role of eye-rolling professional business writer to the hilt, made this comment, which found its way into a New York Times round-up of the reaction to Taibbi—one I suspect is widely shared in the MSM:
    For the record, I don’t think any article that contains the line ‘vampire squid sucking the face of humanity’ is real journalism. That’s self-righteous editorializing. If Taibbi wanted to make his point, he would have done great to dig up some, like, “facts.”
    The Atlantic’s Megan McArdle, who doesn’t lay a glove on Taibbi in this attack, is unintentionally revealing of a certain strain of financial journalism thinking:
    Taibbi is a gifted narrative journalist, whose verbal talents I greatly admire. But financial meltdowns don’t offer villains, for the simple reason that no one person or even one group is powerful enough to take down a whole system.
    “Financial meltdowns don’t offer villains?” Does anyone believe that?

    And wait a minute: Are we really so sure that “one group,” Wall Street, was not central to this crisis and that its increasing influence over government at all levels—what gives, for instance, with ex-Goldmanite Neil Levin deciding as New York State banking commissioner in 2000 not to regulate credit default swaps as insurance?—was not decisive? And isn’t Goldman Wall Street’s leading firm?

    Rather than dismiss Taibbi, the mainstream business press would do well first to read him, learn from him, and above all, refrain from all attempts to outwrite him, because that seems to be a losing game.

    So here are a few things to think about.

    First, it’s worth noting that the debate about “Bubble” hasn’t been about the accuracy of the facts in the piece (though it’s not, I’m sorry to say, problem-free, as we’ll see below). Instead, the discussion is about the arrangement of the facts and the conclusions drawn from them. Now, manipulation in bad faith of true facts is probably as bad a journalism sin as any other. Still, the facts here are really not the issue. So one question to think about is, when does being “technically right” become simply being “right,” at least in the sense that a piece makes valid points by marshaling true facts?

    Indeed, subsequent reporting and events have only provided support for Taibbi’s basic argument—that Goldman and Wall Street have played important roles in a series of harmful events over the years (come to think of it, is this even controversial?). His idea that Goldman gamed the bailout, for instance, got backing from Joe Hagan’s recent piece in New York, which makes a strong case that the AIG bailout saved Goldman from disaster and was not, as some defenders weakly maintain, a matter of indifference to the bank:
    Not a single Wall Street executive I spoke with, including several Goldman Sachs alumni, believe those hedges would have survived an overall collapse of the financial system. A large loss would have been inevitable as lending evaporated, and Goldman Sachs would have struggled to shrink the company to a fraction of its size overnight.
    Hagan also argues that other government programs saved the firm’s bacon:
    Salvation came on November 25, a few days after Goldman’s stock price plunged to $52 a share, down from the year’s high of $200 and the lowest price the company had seen since it went public. Again, the white knight was the government. It turned out that Goldman’s conversion to a garden-variety bank-holding company offered an amazing advantage: Goldman now had access to incredibly cheap money. Exploiting its new status, Goldman became the first financial institution to sell $5 billion in government-backed bonds through the Federal Deposit Insurance Corporation, which allowed Goldman to start doing deals when the markets were at a near standstill.”Goldman was desperate for it,” says a prominent Goldman alumnus.” Everybody knows it. Those FDIC notes they got were lifesaving because they couldn’t issue any debt. If it had gone on another week or two, Goldman would have failed, they would have gone the way of Lehman, and you’d be talking about Lloyd the way you talk about [Lehman CEO] Dick Fuld.”
    It should be noted that Goldman disputes, in no uncertain terms, the notion that it was ever in serious trouble and that it has benefited in particular, directly, from any government help. In this, though, Goldman argues not just against Taibbi but against the whole world.

    And Taibbi’s wild-eyed idea that Goldman (he actually uses Goldman as a proxy for Wall Street) played a role in the oil-price bubble of last summer has now received support from the Commodity Futures Trading Commission, which The Wall Street Journal reported, is set to blame speculators (Goldman isn’t named, but the point is made), not supply and demand.

    Second, while some in conventional business journalism may wish to dismiss Taibbi, it’s worth remembering that he is only filling a vacuum left by mainstream outlets themselves. One reason “Bubble” was so shocking, I believe, is that it looks with well-deserved skepticism (okay, red-faced, foaming outrage) on the core business practices of an individual financial institution, by name, and a powerful one at that. Conventional business-press investigations focus too often on marginal infractions, rulebreaking within the game, and too rarely on the game itself. One upside of Taibbi’s approach is its rejection of the false notion peddled by Wall Street and its defenders that crises are like natural disasters, unpreventable and uninfluenced by important actors, political and financial. Just because crises are complicated doesn’t mean individual and institutions didn’t play important roles, and complexity does not give the financial press a pass from its job of calling those actors to account on readers’ behalf. Just the opposite is the case: institutions are decisive, and investigating them is Job One.

    As we demonstrated in CJR’s May/June issue, the mainstream media failed in the basic task of singling out out-of-control actors when it might have counted in the years prior to the blow up, particularly during 2004-2006.
    And, as we also noted, when the press did perform this basic function in the early part of the decade (in probes of Lehman and its ties to notorious predator First Alliance Mortgage Co., of Citigroup and its acquisition of the rogue Associates First Capital, of Household International, Ameriquest and others) the practices were brought to heel. This was not a coincidence.

    Third, like it or not, “Bubble Machine” is an important breakthrough for muckraking alt-media—the non-experts, the anti-business press—in the financial space. Other alts have done good work, which we’ve noted. But this wasn’t a bleat from the left. It was a sonic boom. Look for increased prominence of new players in the financial media, those not steeped in conventional business press culture, for worse and mostly for better, not hamstrung by the need to manage long-term relationships with financial institutions, and freer, indeed, incentivized to burn bridges or not to build them at all. Banks, Fed, Treasury, SEC—you are on notice.

    Fourth, Taibbi is subtler than critics give him credit for. The charge is that he pins catastrophes on Goldman alone. But the piece often uses Goldman as a proxy for Wall Street as a whole, and he offers readers plenty of guideposts when he does so.

    Fifth, in judging whether a piece is fair journalism or beyond the pale, all benefit of the doubt must go to the reader, who, while not as bright certainly as those sophisticates at CNBC, must be assumed to have enough flickering brain power to understand that just as Goldman Sachs is not literally a “giant vampire squid,” neither is it solely responsible for the Great Depression or anything else. Taibbi is offering polemic—we know this when from phrases like, “It fucked the investors who bought their horseshit CDOs.” It is an argument, a frame through which we are invited to view an event. Readers can figure this out.

    Sixth, as noted, some of “Bubble Machine” ‘s most damaging facts—about the tech and mortgage wrecks, in particular—are not only true, they aren’t even particularly controversial anymore. For instance, he reminds readers that Wall Street/Goldman threw underwriting standards out the window in both disasters. In the old days, Wall Street required three years’ profitability before bringing a company public. But then:
    Of the 24 companies [Goldman] took public in 1997, a third were losing money at the time of the IPO. In 1999, at the height of the boom, it took 47 companies public, including stillborns like Webvan and eToys, investment offerings that were in many ways the modern equivalents of Blue Ridge and Shenandoah [early Goldman vehicles that blew up]. The following year, it underwrote 18 companies in the first four months, 14 of which were money losers at the time.
    Which part of this is wrong, naive, or a conspiracy theory? Taibbi here is holding Goldman and Wall Street to its own past standards. That’s just journalism. And he is not out of bounds to suggest that these practices are problematic since we already know full well that they were. The history of the Tech Wreck is in the books. Its outlines are no longer a matter of serious dispute.

    What’s the complaint then? That this is old news? That Morgan Stanley, Citigroup and CSFB were worse? So what?

    Or take this passage about the current crisis and the Goldman role in issuing junk mortgage-backed debt:
    By the peak of the housing boom in 2006, Goldman was underwriting $76.5 billion worth of mortgage-backed securities — a third of which were subprime — much of it to institutional investors like pensions and insurance companies. And in these massive issues of real estate were vast swamps of crap.
    What is the argument here? That these securities were chicken salad?
    Take one $494 million issue that year, GSAMP Trust 2006S3. Many of the mortgages belonged to second mortgage borrowers, and the average equity they had in their homes was 0.71 percent. Moreover, 58 percent of the loans included little or no documentation — no names of the borrowers, no addresses of the homes, just zip codes. Yet both of the major ratings agencies, Moody’s and Standard & Poor’s, rated 93 percent of the issue as investment grade. Moody’s projected that less than 10 percent of the loans would default. In reality, 18 percent of the mortgages were in default within 18 months. [Taibbi’s emphasis.]
    Where are the errors in that passage? Is it wrong to suggest that this is problematic? If others were worse—this is an excuse?

    Bloomberg’s Mark Pittman back in 2007 explored Goldman’s contribution to the mortgage mess while Hank Paulson ran it; The New York Times’s Gretchen Morgenson was first to reveal Goldman’s stake in the AIG bailout; and Kate Kelly of the WSJ probed whether Goldman favored its shareholders over its clients in mortgage trading, But no one can argue with a straight face that the mainstream business press, which purports to cover Goldman 24/7, has mustered its considerable resources to directly address this institution’s role in the current crisis.

    (For more, read this account by The Audit’s Elinore Longobardi of business press hagiography of Paulson last fall. The photos alone are worth a click.)

    Taibbi’s critics make the same argument that Wall Street makes—that investors/borrowers/insurance policyholders etc. are responsible for what they buy. True, but is that really the end of the argument? If we were talking about cars or heart stents, would we say the same thing? If the argument is that pension funds and other CDO buyers are sophisticated players, that is true, but again, is that the end of the argument? What about the consequences for the rest of us?

    And is it out-of-bounds to point out, as Taibbi does, that Goldman was selling securities that would explode at the same time it was betting against them? Many in the business press think so. I don’t.

    That all said, “Bubble Machine” poses all sorts of problems from a journalism standpoint, and they aren’t small. Here’s how I see them:

    One, the piece pushes language past the breaking point, as, for example, in the subhed:
    From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they’re about to do it again.
    “Contributed to,” “participated in, “profited from,” “been around at,” “—All these are words that could have been used in place of “engineered.” Rolling Stone didn’t go that way.

    American Heritage Dictionary
    defines “engineer” as, “To plan, manage, and put through by skillful acts or contrivance; maneuver.” If that’s true of Goldman, or even Wall Street as whole, and these bubbles, it’s only in the broadest, most cosmic sense. The hyperbole hurts rather than helps.

    As for “manipulation,” are bubbles the result of manipulations? And does exacerbating a bubble constitute manipulation? I don’t know, but the language is rough. Of course, Wall Street-backed predatory lending is rough, but this is where Taibbi leaves conventional investigative reporting behind.

    But there’s something else to consider. As Taibbi’s piece forcefully reminds us, Goldman alumni, notably Rubin, Paulson, Ed Liddy (who is leaving AIG, mission accomplished), Goldman-influenced Tim Geithner, and others, have been all over the government’s policy and regulatory apparatus. Even assuming all acted in good faith as public servants, all are certainly fair game for robust attack for policy choices that either cost the country, benefited Goldman, or both. If decisions made by officials with whom you have a relationship that is less than arms-length end up benefiting you, someone’s going to take issue.

    That all said, stretchers undermine argument.

    Two, as others have too eagerly noted, the piece kills itself to put Goldman at the center of things, including the tech and mortgage wrecks, when it really means “Wall Street.”
    Other actors were much worse in various crises, as many have pointed out. To which, Taibbi has responded, So What? Still, there it is. The contortions create dissonance that harms the piece.

    Three, it was a mistake to go back to the Great Depression.
    Taibbi is trying to establish a pattern of selling leveraged investments that eventually crashed, but there’s a limit. That was a different world. By collapsing the timeline into the last 10 years, the piece would have been stronger.

    Fourth, Taibbi plays pretty rough, even with true facts.
    He says Goldman’s 2008 tax bill was just $14 million. But it was higher in the years before and will be higher in the future. Again, Taibbi might say, so what? But again, there you are.

    More of a problem: he also attributes the low bill to Goldman off-shoring its income. The absolute bill was low mostly because of U.S. credit losses. And while, it is true that its effective rate that year was 1 percent, due, as he accurately quotes Goldman’s annual report, to “changes in geographic earnings mix,” Goldman spokesman Lucas van Praag points out in an email that the “geography” here was the U.S., where the losses lowered both the tax rate and the tax bill itself.

    So, Taibbi was free to use the hilariously low tax bill as an indictment of the U.S. tax system, but off-shoring doesn’t seem to have been the problem he makes it out to be here:
    In other words, the bank moved its money around so that most of its earnings took place in foreign countries with low tax rates. Thanks to our completely fucked corporate tax system, companies like Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely, even while they claim deductions upfront on that same untaxed income. This is why any corporation with an at least occasionally sober accountant can usually find a way to zero out its taxes. A GAO report, in fact, found that between 1998 and 2005, roughly two thirds of all corporations operating in the U.S. paid no taxes at all.
    In fact, foreign earnings weren’t the issue. While Goldman could have helped itself by cooperating with Taibbi, it declined to talk to him. Still, it’s a slip.

    Reached on the phone, Taibbi acknowledges that the low bill may not have come from offshoring after all. He notes that Congressman Lloyd Doggett was among those in the story attributing the tax bill to offshoring and that the tax question was one of those asked and unanswered by Goldman.

    Taibbi’s critics might say that it’s ridiculous to point to a small factual error if the entire thesis of the story is preposterous.

    But if you believe as I do that the argument is defensible—namely that Goldman/Wall Street contributions can be found in major crackups, and that Goldman is fairly singled out as Wall Street’s leader—it strikes me that there’s a difference between using facts selectively in a polemical piece (e.g. Goldman paid a tiny tax in 2008 without mentioning it might have paid a lot in other years) and mistakenly attributing a true outrage to the wrong cause.

    There are other arguable nits—one fact-crammed passage seems to imply Goldman become a bank holding company to qualify for TARP when it would have qualified anyway. But the fact is, anyone who thinks these quibbles sink this 10,000-word piece is wrong.

    The main and misunderstood strength of “Bubble Machine” is that Taibbi is taking a backward look at events that we already know were problems and/or catastrophes for millions of Americans, the financial system and the economy—the Tech Wreck, the Mortgage Wreck, last summer’s oil bubble, etc.—and looks at whether and how Goldman and Wall Street fit in. In each case, he finds that Goldman and Wall Street are there and seeks to explain how they contributed. To argue that their roles might be exaggerated is one thing. To argue that these events aren’t problems or these actors played no role is not credible.

    The outrage that fuels the piece is not only welcome but strangely missing from the conventional business press, which, with few exceptions, has been numb to the moral dimension of the crisis.

    The weakness of the piece is where others might find strength, its polemical nature and its hyperbole.
    When you call Goldman a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money,” you’re in a sense offering a big fat disclaimer—this piece is not to be taken literally and perhaps not even seriously. You make it easy for the Gasparinos of the world. When you say Goldman engineered various crises when you mean something perhaps more nuanced, that’s a problem. It’s not that you lose cognoscenti—that’s fine—but readers then are left to figure out where the case against Goldman ends and license begins. It doesn‘t seem fair to them.

    In the end, like the grandmother who worries whether something is “good for the Jews,” I worry about whether Taibbi-ism is good for accountability-oriented journalism in the financial space.

    I think it most certainly will be. But in any case, mainstreamers dismiss him at their peril. Taibbi represents a challenge to the conventional business press’s increasingly narrow focus, its incrementalism, its concern with petty scoops at the expense of asking the big questions of the big institutions on its beat.

    The lesson of Taibbi is that if conventional business journalism is unwilling or unable to step back and take in the sweep of this crisis, and the systemic distortions that underlie it, somebody else will.
    Don't Dismiss Taibbi : CJR

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    Thanks for digging up this article Fluffy. It's exactly right.

    If the financial reporters in the mainstream media want to ignore this story, and fall back on their esoteric knowledge defense ("you little people can't possibly comprehend this!"), then outrage and some distortion will step in.
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    Taibbi's article is complete crap. I keep thinking of writing a post to point out all that's wrong with it, but I've decided it's not even worth the effort. It's 98% hyperbole and 2% facts, of which most are just there and don't really prove that Goldman Sachs is a big, evil financial bubble-making machine.

    So, Goldman Sachs has survived a number of bubbles over the years. And?? If anything, that doesn't prove it's evil; it proves that it's well-managed. To an extent, I'm sure its size helped it over the years.

    Dean Starkman's article isn't much better. He doesn't really ascertain Taibbi's article on its financial or economic merits. And I can only conclude that he doesn't because he doesn't know the subject matter. And my evidence for saying so is this:
    As Taibbi (who needs no help defending himself) pointed out on his own blog, Moore addresses precisely none of the substantive criticisms that have been leveled at the bank, including big ones, like ... (2) selling defective mortgage-backed securities while (3) shorting them at the same time....
    Um, hello? Anyone heard of financial risk management? This is precisely what you're SUPPOSED to do with risky investments. And if you aren't familiar with financial risk management, just drop the "financial" and you get the idea - you have to prepare for things to go wrong and have contingencies to protect the company (and, hence, your investors), etc. You buy car insurance to cover your ass in case you get in an accident. Financial risk management isn't much difference.
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    Quote Originally Posted by Little Wombat View Post
    Anyone heard of financial risk management? This is precisely what you're SUPPOSED to do with risky investments. And if you aren't familiar with financial risk management, just drop the "financial" and you get the idea - you have to prepare for things to go wrong and have contingencies to protect the company (and, hence, your investors), etc. You buy car insurance to cover your ass in case you get in an accident. Financial risk management isn't much difference.
    It wasn't just risk management. It was risk manipulation that left everyone holding the bag...except the banks who made profits (since they assumed no risk personally and saddled us with their bad debt) who are now using our tax dollars to pay their execs even more.

    I could insure myself from risk by destroying the flood plain behind my house and turning it into a canal. Then I could pass on all that flood water to my neighbors. Seem right to you? Is the avoidance of risk so sacred in finance that anything goes?
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    Quote Originally Posted by olivia View Post
    It wasn't just risk management. It was risk manipulation that left everyone holding the bag...except the banks who made profits (since they assumed no risk personally and saddled us with their bad debt) who are now using our tax dollars to pay their execs even more.
    Goldman Sachs suffered losses. Honestly, I don't get what you're saying. "Risk manipulation"?? If you could manipulate risk, it wouldn't be risk at all.
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    Quote Originally Posted by Little Wombat View Post
    Goldman Sachs suffered losses. Honestly, I don't get what you're saying. "Risk manipulation"?? If you could manipulate risk, it wouldn't be risk at all.
    Exactly. The only ones taking the risk are you and I, and not willingly nor are we fully informed. The economic theory is (roughly) that banks no longer have to take risks - they can force people too.

    Look up the history of Montana Power and Light. It was one of the most efficient, cheapest sources of energy in the country until the bankers with their investors convinced the state gov't to make it public and deregulated. Now it's a disaster. Power costs as much as 10X what it used to. The company stock is worth shit so the casual investors lost money...except those first investors and bankers who were on to the scheme.

    Yep, they hedged their risk, those bankers, through the over-valuing, selling short, then crashing a good company.

    You find that acceptable?





    Quote Originally Posted by Sasha View Post
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    Quote Originally Posted by olivia View Post
    Exactly. The only ones taking the risk are you and I, and not willingly nor are we fully informed. The economic theory is (roughly) that banks no longer have to take risks - they can force people too.
    It appears to me that you are either misunderstanding financial risk and how to manage it in banking, or you are simply misconstruing the facts to make them fit your own hypothesis. If Goldman Sachs could control risk, then there would be no reason for them to try to manage it. There would be no reason for them to hedge against the loans going bad - they would just know which way the market was going and could put it all in that direction.

    There is an amount of risk in everything. No matter what the investment or act in life, there is potential risk, and everyone (including banks) must manage the risk according to their risk profile (how much risk they're willing to take).

    There's risk in skydiving and driving a car. You're more likely to get in a car accident than a skydiving accident, but most people choose not to skydive because potential failure almost certainly results in death where as a car accident might not.

    Whatever risk involved in life, financial or otherwise, there is a certain amount of rolling the dice. Playing with probabilities. Would you rather a bank simply gambled away without contingency plans and preparation (i.e., hedging against potential loan losses), or would you rather they just place all their money on one number, cross their fingers, and hope that they're right?

    Quote Originally Posted by olivia View Post
    Look up the history of Montana Power and Light. It was one of the most efficient, cheapest sources of energy in the country until the bankers with their investors convinced the state gov't to make it public and deregulated. Now it's a disaster. Power costs as much as 10X what it used to. The company stock is worth shit so the casual investors lost money...except those first investors and bankers who were on to the scheme.

    Yep, they hedged their risk, those bankers, through the over-valuing, selling short, then crashing a good company.
    How is this hedging risk? You're comparing apples and oranges. I looked up Montana Power and Light briefly and came across this: Who Killed Montana Power? - 60 Minutes - CBS News

    Apparently, the CEO wanted to get out of the power business and into telecom and basically sold off the assets of the company to do so:
    The company's plan was to take the $2.7 billion dollars raided in the sale of Montana Power's assets, and literally bury the profits in the ground.

    The new company, Touch America, was going to lay a 26,000-mile fiber optic network that would carry voice video and data transmission across a dozen western states. It was the brainchild of Montana Power/Touch America CEO Bob Gannon, who was born and bred in Montana.

    Why does Morrison thinks that Gannon and Goldman Sachs decided to get out of the energy business and into telecom?

    “He was tired of what he thought was a stodgy utility stock. He owned an awful lot of shares. And I think he wanted to be the Bill Gates of Montana,” says Morrison. “I think he wanted to get into a high flier situation where he could go to a $100 a share instead of sit there at $30. With Sachs, Goldman Sachs, it was simply money.”
    Yeah, sure the investment bankers will advise you in how to reach your goal. And sure, state regulated energy prices are "one of the most efficient, cheapest sources of energy" in one of the sparsest populated states with excellent mountains and rivers for water power.

    And how is this supposed to be analogous to Goldman Sachs and financial risk management? This is simply a story of everyone catering to the CEO's dreams and his dreams cratering.
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