The Great American Bubble Machine

By Matt Taibbi
Rolling Stone, April 5, 2010

Edited by Andy Ross

Goldman Sachs is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. If America is circling the drain, Goldman Sachs has found a way to be that drain. 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. Goldman Sachs is a huge engine for converting the wealth of society into profit for rich individuals. Goldman has already gotten away with five bubbles.

Bubble 1. The Great Depression

Goldman was founded in 1869 by Marcus Goldman and Samuel Sachs. The first 100 years: plucky investment bank beats the odds and makes shitloads of money.

Goldman got into the investment-trust game late, then jumped in with both feet and went hog-wild. Each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman.

Bubble 2. Tech Stocks

Goldman went on to become the chief underwriter to the country's wealthiest and most powerful corporations. Goldman became the pioneer of the initial public offering. Goldman had a reputation for attracting the very smartest talent on the Street.

Goldman's former co-chairman Robert Rubin followed Bill Clinton to the White House, where he became Treasury secretary. Rubin was the prototypical Goldman banker. In 1999, Rubin appeared on the cover of Time with Larry Summers and Alan Greenspan under the headline The Committee To Save The World.

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. Goldman quickly became the IPO king of the Internet era.

Goldman used a practice called "laddering," which is a way of saying they manipulated the share price of new offerings. Goldman was repeatedly sued by shareholders for engaging in laddering. In 2005, Goldman agreed to pay $40 million for its laddering violations.

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, supplying bigger first-day rewards for the chosen few.

Such practices conspired to turn the Internet bubble into one of the greatest financial disasters in world history. Between 1999 and 2002, Goldman paid out $28.5 billion in compensation and benefits an average of roughly $350,000 a year per employee. For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a decade late were a joke.

Bubble 3. The Housing Craze

For decades, mortgage dealers insisted that home buyers be able to produce a down payment of 10 percent or more, show a steady income and good credit rating, and possess a real first and last name. Then, at the dawn of the new millennium, they suddenly threw all that shit out the window.

Goldman created vehicles to package those shitty 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. You can't write these mortgages 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 shitty ones. Thus, junk-rated mortgages were turned into AAA-rated investments. Second, to hedge its own bets, Goldman got companies like AIG to provide credit default swaps on the CDOs.

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.

Goldman was taking all these hideous, completely irresponsible mortgages and selling them off to municipalities and pensioners, 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.

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. But Goldman got off by agreeing to pay $60 million.

Bubble 4. $4 a Gallon

By the beginning of 2008, the financial world was in turmoil. Wall Street had produced one scandal after another, which didn't leave much to sell that wasn't tainted. The credit markets were in crisis, leaving the Street clamoring for a new bullshit paradigm to sling.

The Street moved the casino to the physical-commodities market. Oil futures 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.

The accepted explanation for why gasoline had hit $4.11 a gallon was that there was a problem with the world oil supply. But not only was the short-term supply of oil rising, the demand for it was falling, which should have brought prices at the pump down.

Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures. 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.

In 1936, the Commodity Futures Trading Commission placed limits on speculative trades in commodities.Peace and harmony reigned in the commodities markets for more than 50 years.

All that changed in 1991 when a Goldman-owned subsidiary argued that Wall Street dealers who made big bets on oil prices also needed to hedge their risk. The CFTC bought Goldman's argument, allowing Goldman's subsidiary to escape virtually all limits placed on speculators.

Now Goldman and other banks were free to drive more investors into the commodities markets, enabling speculators to place increasingly big bets. That led to the oil bubble in 2008, when at least three quarters of the activity on the commodity exchanges was speculative.

Goldman had become the chief designer of a giant commodities betting parlor. Its Goldman Sachs Commodities Index became the place where pension funds and insurance companies and other institutional investors could make massive long-term bets on commodity prices.

By the summer of 2008, commodities speculators had bought and stockpiled enough oil futures to fill 1.1 billion barrels of crude. 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.

The oil-commodities melon hit the pavement hard in the summer of 2008. Crude prices plunged from $147 to $33. Once again the big losers were ordinary people.

Bubble 5. Rigging the Bailout

After the oil bubble collapsed last fall, there was no new bubble to keep things humming. So the financial safari has moved to taxpayer money. Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its muscle.

In September 2008, then-Treasury secretary Paulson elected to let Lehman Brothers collapse without intervention. The very next day, Paulson green-lighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. The bank ended up getting paid in full for its bad bets.

Immediately after the AIG bailout, Paulson announced his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program. Goldman announced that it would convert from an investment bank to a bank holding company, a move that allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding.

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 was to quietly push forward the calendar it uses to report its earnings. The bank announced a $1.8 billion profit for the first quarter of 2009, paid out $4.7 billion in bonuses and compensation, and raised $5 billion by issuing new shares. 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.

Goldman did it all right before the government announced the results of its new "stress test" for banks seeking to repay TARP money. The government was trying to orchestrate the repayments in an effort to prevent further trouble at banks. But Goldman blew off those concerns.

Goldman paid $14 million in taxes in 2008. The bank paid out $10 billion in compensation and benefits that same year and made a profit of more than $2 billion.

Bubble 6. Global Warming

The next bubble is 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 that Goldman won't even have to rig the game. It will be rigged in advance.

If the bill passes, there will be limits for coal plants and numerous other industries on the amount of carbon emissions 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.

The "cap" on carbon will be continually lowered by the government. 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.

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.

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.

It's not always easy to accept the reality. A collective denial kicks in when a country goes through what America has gone through lately.

AR  This is brilliant journalism. Karl Marx couldn't have done it better. Respect to Rolling Stone.

Goldman Sachs

By Greg Smith
The New York Times, March 14, 2012

Edited by Andy Ross

Culture was always a vital part of Goldman Sachs' success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients.

The current CEO, Lloyd Blankfein, and the president, Gary Cohn, lost hold of the firm's culture on their watch. The firm changed the way it thought about leadership.

Today, you will be promoted into a position of influence if you:
1 Persuade your clients to invest in the stocks or other products that we are trying to get rid of.
2 Get your clients to trade whatever will bring the biggest profit to Goldman.
3 Trade any illiquid, opaque product with a three-letter acronym.

Goldman Sachs today has become too much about shortcuts and not enough about achievement.

The Vampire Squid

By William Cohan
Financial Times, March 15, 2012

Edited by Andy Ross

Greg Smith called out Lloyd Blankfein and Gary Cohn for ruining the firm's vaunted culture. Goldman had long ago reneged on its claim that it puts its clients interests before its own. Smith has shown just how low the vampire squid has sunk.