Saturday, April 24, 2010

Goldman Sachs

I've been wondering for several years how Goldman Sachs got to be so influential in Washington.  Marcus Baram documented this at HuffPo in 2009:  Goldman alumni are all over the capital, especially on the financial side.  It's the money, of course; politicians love people with lots of money, because politicians need lots of money, all the time (which is another post, about campaign finance reform; but I digress).  And there's the general assumption that if you have a lot of money, you must be really smart.  You'd think the case of Bernie Madoff would alert people to the alternative explanation that, if you have a lot of money, you may actually be really crooked.

Goldman Sachs pissed off a lot of people during the bailout; here they are, the richest firm on Wall Street, and we the U.S. taxpayers, who are losing our jobs by the gross, have to come up with billions of dollars to bail out the banks so Goldman can keep paying its people multi-million dollar bonuses.  They paid the money back to the government; but it's the principle of the thing.  As far as I'm concerned, no man is worth the kind of money Goldman pays out in bonuses, I don't care if he's spinning straw into gold.

You've probably seen the latest development in this, but if not, here's a nice analysis from the Washington Post:  "Goldman executives cheered housing market's decline."   When the subprime mortgage security crash was taking down the economy, Goldman Sachs was betting both sides of the table.  They were selling tottering CDOs based on subprime mortgages with one hand, and shorting the housing market (that is, betting that it would fall) with the other.  The 9-year-old version of this is, "Heads I win, tails you lose."  And Goldman won, really big.  They're about to appear before the SEC, to discuss how closely they really did work with the hedge fund manager who was cherry picking mortgage pools he was sure would fail, so he could bet against them after Goldman sold them to their institutional customers - like, your pension fund.

Goldman Sachs used to be a private partnership.  They went public in 1999, which allowed them to raise big money by selling shares in the stock market, without losing very much control over the firm.  This also did two things for the men who ran the firm:  it made them a barge-load of money, and it made them employees instead of partners.  Partners are personally liable if a partnership fails.  Employees just take the money and run.  I wonder if any of the old-line Goldman partners are regretting that IPO now.

I worked in the financial industry (not for Goldman, ever) most of my professional life.  It's a very strange world, and it's gotten much stranger over the last 20 years, as the lobbyists and the Republicans colluded to remove the restraints on financial firms that FDR put in, for damn good reasons, in the '30s.  I want that financial regulatory bill to pass, but it isn't good enough.  I want the Glass-Steagall Act back.


  1. The unfortunate fact is that betting against things is the other side of the legitimate coin of investing.

    That's what shorts and puts are. That's also why vultures wait in the wings for banks to foreclose so they can snap up empty houses at auction for 1/5th of their highest market value.

    Is this evil? Not from a purely market driven point of view. But as far as disclosure goes, any brokerage house which sells securities with nothing but rosy recommendations, when they know this is false (and very dangerous) should be prosecuted for failure to inform. Ditto for real estate brokerages and lenders which knowingly sold people properties who could clearly not afford their mortgages.

    I believe that the executives--say, the top 50 people--at Goldman, and/or any other house which knowingly defrauded potential customers about bad investments like the swaps--should be taxed at 95 percentile for a period of at least five years. That would be like putting them in low-security confinement for that period. What worse punishment could there be for these cash hogs? Same for the mortgage brokers--tax'em at 95% for five years.

    Capitalism says that people share the risks with the rewards. That's an equation which has been forgotten, or side-stepped in recent times. Some of the biggest corporate failures have been accompanied by huge buy-outs and platinum parachutes in which executives of dying firms walked away with hundreds of millions of investors' and employees' money. This is not capitalism; it's theft, plain and simple.

    That's the world of Bush and Cheney--fat cats feasting and giggling in the back rooms about hoodwinking the electorate. It's nasty, and the people who do it are nasty.

    Unfortunately, I don't think we have the brains to bring'em in. And it may lead to our ultimate downfall as a nation.

  2. We don't always agree, Curtis, but we do this time. And you're right that it's not the fact that they bet the market both ways - it's that they didn't tell their clients what they were doing. Disclosure is the issue.

    And yes, I'm beginning to think we should have let more than just Lehman "go down." I'm afraid that's sour grapes because, with a very few exceptions, none of the top people at any of the big institutions have "paid" for what they did in any real way. 95% tax sounds about right.