The Great American Bubble Machine
Matt
Taibbi on how Goldman Sachs has engineered every major market manipulation
since the Great Depression
MATT TAIBBIPosted Jul 02, 2009
8:38 AM
In Rolling Stone Issue
1082-83, Matt Taibbi takes on "the Wall Street Bubble Mafia" —
investment bank Goldman Sachs. The piece has generated controversy, with
Goldman Sachs firing back that Taibbi's piece is "an hysterical
compilation of conspiracy theories" and a spokesman adding, "We reject
the assertion that we are inflators of bubbles and profiteers in busts, and we
are painfully conscious of the importance in being a force for good."
Taibbi shot back: "Goldman has its alumni pushing its views from the=0
Apulpit of the U.S. Treasury, the NYSE, the World Bank, and numerous other
important posts; it also has former players fronting major TV shows. They have
the ear of the president if they want it." Here, now, are excerpts from
Matt Taibbi's piece and video of Taibbi exploring the key issues.
The first thing you need to know about
Goldman Sachs is that it's everywhere. The world's most powerful investment
bank is a great vampire squid wrapped around the face of humanity, relentlessly
jamming its blood funnel into anything that smells like money.
Any attempt to construct a narrative around all the former Goldmanites in
influential positions quickly becomes an absurd and pointless exercise, like
trying to make a list of everything. What you need to know is the big picture:
If America is circling the drain, Goldman Sachs has found a way to be that
drain — an extremely unfortunate loophole in the system of Western democratic
capitalism, which never foresaw that in a society governed passively by free
markets and free elections, organized greed always defeats disorganized democracy.
They achieve this using the same playbook over and over again. The formula
is relatively simple: Goldman positions itself in the middle of a speculative
bubble, selling investments they know are crap. Then they hoover up vast sums
from the middle and lower floors of society with the aid of a crippled and
corrupt state that allows it to r
ewrite the rules in exchange for the relative
pennies the bank throws at political patronage. Finally, when it all goes bust,
leaving millions of ordinary citizens broke and starving, they begin the entire
process over again, riding in to rescue us all by lending us back our own money
at interest, selling themselves as men above greed, just a bunch of really
smart guys keeping the wheels greased. They've been pulling this same stunt
over and over since the 1920s — and now they're preparing to do it again,
creating what may be the biggest and most audacious bubble yet.
The basic scam in the Internet Age is
pretty easy even for the financially illiterate to grasp. Companies that
weren't much more than pot-fueled ideas scrawled on napkins by up-too-late
bong-smokers were taken public via IPOs, hyped in the media and sold to the
public for megamillions. It was as if banks like Goldman were wrapping ribbons
around watermelons, tossing them out 50-story windows and opening the phones
for bids. In this game you were a winner only if you took your money out before
the melon hit the pavement.
It sounds obvious now, but what the average investor didn't know at the time
was that the banks had changed the rules of the game, making the deals look
better than they=2
0actually were. They did this by setting up what was, in
reality, a two-tiered investment system — one for the insiders who knew the
real numbers, and another for the lay investor who was invited to chase soaring
prices the banks themselves knew were irrational. While Goldman's later pattern
would be to capitalize on changes in the regulatory environment, its key innovation
in the Internet years was to abandon its own industry's standards of quality
control.
Goldman's role in the sweeping global disaster that was the housing bubble
is not hard to trace. Here again, the basic trick was a decline in underwriting
standards, although in this case the standards weren't in IPOs but in
mortgages. By now almost everyone knows that for decades mortgage dealers
insisted that home buyers be able to produce a down payment of 10 percent or
more, show a steady income and good credit rating, and possess a real first and
last name. Then, at the dawn of the new millennium, they suddenly threw all
that shit out the window and started writing mortgages on the backs of napkins
to cocktail waitresses and ex-cons carrying five bucks and a Snickers bar.
And what caused the huge spike in oil prices? Take a wild guess. Obviously
Goldman had help — there were other players in the physical-commodities market
— but the root cause had almost everything to do with the behavior of a few
powerful actors determined to turn the once-solid market into a speculative
casino. Goldman did it=2
0by persuading pension funds and other large
institutional investors to invest in oil futures — agreeing to buy oil at a
certain price on a fixed date. The push transformed oil from a physical
commodity, rigidly subject to supply and demand, into something to bet on, like
a stock. Between 2003 and 2008, the amount of speculative money in commodities
grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a
barrel of oil was traded 27 times, on average, before it was actually delivered
and consumed.
The history of the recent financial
crisis, which doubles as a history of the rapid decline and fall of the
suddenly swindled-dry American empire, reads like a Who's Who of Goldman Sachs
graduates. By now, most of us know the major players. As George Bush's last Treasury
secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a
suspiciously self-serving plan to funnel trillions of Your Dollars to a handful
of his old friends on Wall Street. Robert Rubin, Bill Clinton's former Treasury
secretary, spent 26 years at Goldman before becoming chairman of Citigroup —
which in turn got a $300 billion taxpayer bailout from Paulson. There's John
Thain, the asshole chief of Merrill Lynch who bought an $87,000 area rug for
his office as his company was imp
loding; a former Goldman banker, Thain enjoyed
a multibillion-dollar handout from Paulson, who used billions in taxpayer funds
to help Bank of America rescue Thain's sorry company. And Robert Steel, the
former Goldmanite head of Wachovia, scored himself and his fellow executives
$225 million in golden-parachute payments as his bank was self-destructing.
There's Joshua Bolten, Bush's chief of staff during the bailout, and Mark
Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just
a year ago, and Ed Liddy, the former Goldman director whom Paulson put in
charge of bailed-out insurance giant AIG, which forked over $13 billion to
Goldman after Liddy came on board. The heads of the Canadian and Italian
national banks are Goldman alums, as is the head of the World Bank, the head of
the New York Stock Exchange, the last two heads of the Federal Reserve Bank of
New York — which, incidentally, is now in charge of overseeing Goldman.
But then, something happened. It's hard to say what it was exactly; it might
have been the fact that Goldman's co-chairman in the early Nineties, Robert
Rubin, followed Bill Clinton to the White House, where he directed the National
Economic Council and eventually became Treasury secretary. While the American
media fell in love with the story line of a pair of baby-boomer, Sixties-child,
Fleetwood Mac yuppies nesting in the White House, it also nursed an undisguised
crush on Rubin, who was hyped as without a doubt the smartest person ever to
walk t
he face of the Earth, with Newton, Einstein, Mozart and Kant running far
behind.
Rubin was the prototypical Goldman banker. He was probably born in a $4,000
suit, he had a face that seemed permanently frozen just short of an apology for
being so much smarter than you, and he exuded a Spock-like, emotion-neutral
exterior; the only human feeling you could imagine him experiencing was a
nightmare about being forced to fly coach. It became almost a national cliché
that whatever Rubin thought was best for the economy — a phenomenon that
reached its apex in 1999, when Rubin appeared on the cover of Time with his
Treasury deputy, Larry Summers, and Fed chief Alan Greenspan under the headline
the committee to save the world. And "what Rubin thought," mostly,
was that the American economy, and in particular the financial markets, were
over-regulated and needed to be set free. During his tenure at Treasury, the
Clinton White House made a series of moves that would have drastic consequences
for the global economy — beginning with Rubin's complete and total failure to
regulate his old firm during its first mad dash for obscene short-term profits.
After the oil bubble collapsed last
fall, there was no new bubble to keep things humming — this time, the money
seems to be really g
one, 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, Goldm
an announced that it would convert from an investment bank to a
bank-holding company, a move that allows it access not only to $10 billion in
TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding
— most notably, lending from the discount window of the Federal Reserve. By the
end of March, the Fed will have lent or guaranteed at least $8.7 trillion under
a series of new bailout programs — and thanks to an obscure law allowing the
Fed to block most congressional audits, both the amounts and the recipients of
the monies remain almost entirely secret.
Converting to a bank-holding company has other benefits as well: Goldman's
primary supervisor is now the New York Fed, whose chairman at the time of its
announcement was Stephen Friedman, a former co-chairman of Goldman Sachs.
Friedman was technically in violation of Federal Reserve policy by remaining on
the board of Goldman even as he was supposedly regulating the bank; in order to
rectify the problem, he applied for, and got, a conflict-of-interest waiver
from the government. Friedman was also supposed to divest himself of his
Goldman stock after Goldman became a bank-holding company, but thanks to the
waiver, he was allowed to go out and buy 52,000 additional shares in his old
bank, leaving him $3 million richer. Friedman stepped down in May, but the man
now in charge of supervising Goldman — New York Fed president William Dudley —
is yet another former Goldmanite.
The collective=2
0message of all of this — the AIG bailout, the swift approval
for its bank-holding conversion, the TARP funds — is that when it comes to
Goldman Sachs, there isn't a free market at all. The government might let other
players on the market die, but it simply will not allow Goldman to fail under
any circumstances. Its edge in the market has suddenly become an open
declaration of supreme privilege. "In the past it was an implicit
advantage," says Simon Johnson, an economics professor at MIT and former
official at the International Monetary Fund, who compares the bailout to the
crony capitalism he has seen in Third World countries. "Now it's more of
an explicit advantage."
Fast-forward to today. It's early June
in Washington, D.C. Barack Obama, a popular young politician whose leading
private campaign donor was an investment bank called Goldman Sachs — its
employees paid some $981,000 to his campaign — sits in the White House. Having
seamlessly navigated the political minefield of the bailout era, Goldman is
once again back to its old business, scouting out loopholes in a new
government-created market with the aid of a new set of alumni occupying key
government jobs.
Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief
of staff Mark Patterson and CFTC chief
Gary Gensler, both former Goldmanites.
(Gensler was the firm's co-head of finance.) And instead of credit derivatives
or oil futures or mortgage-backed CDOs, the new game in town, the next bubble,
is in carbon credits — a booming trillion- dollar market that barely even
exists yet, but will if the Democratic Party that it gave $4,452,585 to in the
last election manages to push into existence a groundbreaking new commodities
bubble, disguised as an "environmental plan," called cap-and-trade.
The new carbon-credit market is a virtual repeat of the commodities-market casino
that's been kind to Goldman, except it has one delicious new wrinkle: If the
plan goes forward as expected, the rise in prices will be government-mandated.
Goldman won't even have to rig the game. It will be rigged in advance.
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