Goldman Sachs: Into The Belly Of The Beast

How Goldman Sachs Became The Most Hated Bank On Earth

Into The Belly Of The Beast (Part 1: How Goldman Sachs Went From Boy Scouts to B

Goldman Sachs: A Great Vampire Squid Relentlessly Jamming Its Blood Funnel Into Anything That Smells Like Money”. Photo Credit: DonkeyHotey

Goldman Sachs is the bank everyone loves to hate. In the first of our two-part investigation into the bank, we ask why they emerged as the biggest winners in the financial crisis. We also look at how they lobbied the US Government to reduce banking regulations, how they acquired massive fortunes by selling sub-prime mortgages, and how they deceived their clients by betting against the products they sold.

Goldman Sachs was not always the investment bank everyone affects to despise. Its bankers were once dubbed “billionaire boy scouts” because of their talent for making fortunes while maintaining a guilt-free, cherubic image.

But Goldman’s bankers are now far more likely to be compared to squids than boy scouts and have become the favourite target of anti-bank protestors. A week before Christmas, 300 protesters in the Occupy Movement dressed up in squid costumes and carried a giant puppet squid on a march to Goldman Sachs’ offices in New York.

The action was inspired by a Rolling Stone article which compared Goldman Sachs to: “a great vampire squid, wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”. The protesters shouted: “We fry calamari”, and “everyone pays their tax. Everyone, but Goldman Sachs.”

Public hatred of Goldman, fuelled by modern mass media, has intensified, but it would be naive to believe the banks’ character has fundamentally changed. Although there was nothing on the same scale as its nefarious role in the 2007 Financial Crisis, Goldman has been involved in controversy ever since it was founded by the German-born Jew Marcus Goldman in 1869. In 1929 for example, Goldman sponsored a pyramid scheme disguised as a mutual fund, which collapsed causing 42,000 investors to lose US$300 million. Then, in 1970, came the Penn Central catastrophe in which a default on short-term paper marketed by Goldman produced damage claims exceeding the bank’s net worth. In the late 1980s, Goldman’s head of risk arbitrage, Robert Freeman, was sent to jail for insider trading. And during the same period, Goldman was implicated in an illegal scheme to prop up insolvent businesses operated by the corrupt Czech-born newspaper tycoon Robert Maxwell.

“The reality is that the firm has been in and out of trouble throughout its whole existence and has constantly been pushing the edge of the envelope,” said William D. Cohan, a former investment banker and the author of Money and Power: How Goldman Sachs Came to Rule The World.

Cohan marvels at the hypocrisy embedded in Goldman Sachs’ 14 Business Principles, which were codified in the 1970s and are still being drummed into brainwashed employees’ heads today.

“They make the general public think they believe in them, but the most important principle is ‘putting the client first’, whereas the reality is they are in business to make money and will do it any way they have to,” he said.

Cohan believes the 14 principles are at the heart of what he calls Goldman’s ‘holier-than-thou attitude’.

“At Merrill Lynch, we had principles scratched into the wall, but never gave them a moment’s thought. But at Goldman they write them down, distribute them and reinforce them regularly. There’s an element of ‘drinking the Kool-Aid’ when you join Goldman and most of them fall for the brainwashing. They get people young so they can mould their thinking. “

“To give an example of the Goldman mindset, I was giving a talk recently to 250 New Yorkers and a Goldman Sachs banker stood up and loudly berated me for daring to suggest they were not all saints.”

Suzanne McGee, a journalist and author of Chasing Goldman Sachs, believes there was a change in the bank’s status in the 1970s.

“For most of its 200-year history Goldman wasn’t the force it is today. It transformed itself in the 1970s, which was a turbulent period when some firms thrived and others withered on the vine.Goldman was one of the most innovative banks and by the mid-1980s it was positioned to be a power house,” she said.

What interests me historically is how Goldman changed from being the firm everyone might not like, but admires, to the firm everyone affects to despise. Up to the 1990s, their reputation was very high. In that period, if an IPO was underwritten by Goldman Sachs that was akin to Good Housekeeping’s sales approval. They were believed to have the X-factor, which meant they could outperform everyone else in every way. This reputation was so strong that in the late 1990s their bankers were banned from carrying bags with Goldman Sachs logos on when they took flights to conferences. The bosses were afraid they’d tip off rival traders.”

“But that mainly positive reputation has gone since the financial crisis. Goldman Sachs’ workers still don’t carry bags with logos, but now it’s because they might get beers poured on their heads, or someone might pick a fight with them!”

While McGee expresses a grudging admiration for the financial acumen of the Goldman elite, she is under no illusion that they follow the ‘do what’s best for the client’ principle to the letter.

“Someone at another bank said that when Goldman comes with a deal the first question you ask should not be ‘will they screw me’? It should be ‘in which way will they try to screw me’?Other banks are the same, but Goldman is far better at it than anyone else”.

Just how much better became evident in 2007, when the US housing bubble burst and the nation was plunged into its biggest financial crisis since the Great Depression. The fall-out for America’s financial sector was huge. Lehman Brothers filed for bankruptcy, IndyMac bank collapsed, Bear Stearns was acquired by JP Morgan Chase, Merrill Lynch was sold to Bank of America, and mortgage giants Fannie Mae and Freddie Mac were put under government control. Meanwhile, although Goldman helped to provoke the crisis, it made billions of dollars out of it by taking out huge bets that the mortgage market was about to crash. The firm went on to earn US$11.6 billion in 2007, more than Morgan Stanley, Lehman Brothers, Bear Stearns and Citigroup combined. Merrill Lynch lost US$7.8 billion that year.

The United States Senate’s 2011 Levin–Coburn Report found:

“The crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”

Goldman Sachs CEO Lloyd Blankfein even apologized in 2008 for his bank’s role. “We participated in things that were clearly wrong and have reason to regret,” he confessed.

But the apology was meaningless, according to William K. Black, an American lawyer, author and former bank regulator, who has testified against the banks. Black believes Goldman knew precisely what it was doing and was operating according to a well-known formula in the financial world. If he had his way, Black says he would send Goldman’s bankers into the fourth circle of Hell – which is reserved for the avaricious – in Dante’s inferno.

“Goldman, and other investment banks, behaved fraudulently in order to earn massive amounts of money,” Black said. “There were four ingredients in their foolproof fraud recipe. 1. Grow like crazy. 2. Make really crappy loans at a premium yield. 3. Have extraordinary leverage. 4. Make virtually no allowances for future losses.

“If you do those four things, you are virtually guaranteed to report record off-the-chart short-term profits. We’ve known this in economics since a 1993 paper by Akerlof and Rohmer called Looting The Economic Underworld of Bankruptcy for ProfitEven if a firm fails, the CEO and all the other folks will walk away wealthy. It’s maths; a sure thing!”

Goldman Sachs & The European Crisis

Into The Belly Of The Beast (Part II – Goldman Sachs & The European Crisis)

The secret of Goldman Sachs’ power over the global financial system can be summed up in one word: Alumni. In his book, 13 Bankers, the former International Monetary Fund economist Simon Johnson argued that the relationship between Goldman Sachs and the US Government was so close in the run-up to the 2007 crisis, that the country was effectively “an oligarchy”.

Although European nations are not bought off by the banks in the same way as in the US, Johnson says that European financiers and politicians have formed alliances to perpetuate their mutual interests. Often, today’s European politicians have backgrounds in the financial sector, and more often than not connections to Goldman Sachs. The new prime ministers of Greece and Italy, for example, as well as the president of the European Central Bank, are all former investment bankers.

“This network of Goldman’s alumni power gives rise to far-fetched conspiracy theories,” said Suzanne McGee, author of Chasing Goldman Sachs. “But we don’t need conspiracy theories to speak about conflict of interest.”

“The bankers’ mindset is determined by their time on Wall Street so they don’t see the full range of options open to governments. They cannot envisage a world in which the banks are not vital to society and the economy. They are entrusted with policy because governments believe that to understand these giant and complex institutions, you have to have lived within the belly of the beast.”

The Bush administration, for instance, was dominated by Goldman graduates. The most powerful of them was the treasury secretary, Henry Paulson, a former Goldman CEO who became the architect of the bailout in his role. Paulson did nothing to hide his close relationship with his former employees despite blatant conflicts of interest. He even admitted to wanting to bring Wall Street and market regulators closer together so they were “seeing the same issues, the same problems and working toward the same solutions”.

During the week of the bailout, according to the New York Times, Paulson spoke with the Goldman Sachs’ CEO, Lloyd Blankfein, 24 times. Thanks to his indoctrination with Goldman’s values, Paulson believed that what was good for the bank was good for the country.

As a result, Paulson’s bailout package greatly benefited his former paymasters and friends at Goldman Sachs. First, he elected not to save rival bank Lehman Brothers from collapse; second, he gave Goldman bailout money from the US government despite it coming out of the crisis better than any other bank; third, Paulson organized a massive rescue of AIG Group; all while in constant telephone contact with Goldman CEO Blankfein. AIG ultimately ended up using US$12.9 billion in taxpayers’ money to pay off all its debts to Goldman.

Saving AIG is the perfect example of a naked conflict of interest,” said former bank regulator William K. Black. “Blankfein was invited to the meeting to determine AIG’s fate and asked for his views. But the Goldman CEO should never have been allowed in the room, much less listened to. He’s obviously going to say, yes, we really want the taxpayers to be on the hook for more money.”

Other Goldman alumni also did well in the bailout. Robert Rubin, Bill Clinton’s former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup — which received a US$300 billion bailout from Paulson. And John Thain, the chief of Merrill Lynch and a former Goldman banker, also earned a multi-billion-dollar handout when Paulson used public money to fund Bank of America’s rescue. 

The democrat Barack Obama came to power with the pledge to “hold the big banks accountable”, but then he hired a team of Goldman-ites, and other former Wall Street bankers to help him run the economy. Conflicts of interest were especially apparent with Obama’s appointment of Larry Summers as National Economic Council chairman in 2009. Summers earned US$2.8 million in speaking fees from many of the major financial institutions including US$135,000 for a single speech to Goldman Sachs in 2008.

“It’s hard to understand the Democrat reasoning,” said William K. Black. “They had two choices – number one, blame the crisis on the people who caused it – my political opponents; or number two, make the crisis mine by taking the leading architects and making them my officials. They’ve just completely screwed up the world, but I will choose number two! Obama’s policy-making will go down in the history of political science.

Professor Stefano Harney, an expert in corporate governance, at Queen Mary University of London, believes that Obama’s craven capitulation to the banks’ power can partly be explained by fear.


Part 1

Part 2