Sunday, August 9, 2009

United States of America™, Property of Goldman Sachs

In 1873, Mark Twain co-authored a book called The Gilded Age: A Tale of Today, and thereby gave a name to era between Reconstruction and the Progressive Era. Were Twain alive today, he would likely name our present era “The Second Gilded Age.” And nothing illustrates this more than the many-tentacled creature known as Goldman Sachs.

The Gilded Age

Events today read like a repeat of the Gilded Age.

The Gilded Age is generally considered to have begun under the Grant administration. It was an era noted for massive corruption, dramatic social and economic upheaval, and a shocking incestuousness between big business and government. These two became so intertwined that the public came to see government action as nothing more than favoritism, bribery, kickbacks, inefficiency, waste, and corruption. Smart people.

The Gilded Age was the age of robber barons, like Andrew Carnegie, John Rockefeller, Cornelius Vanderbilt, and John Pierpont Morgan -- names that continue to mark our most powerful corporations today. It was the time of Tammany Hall and Boss Tweed, of corrupt local politics and election fraud, of Republican Mugwumps calling for an end to the spoils system in the civil service, of Bourbon Democrats calling for free market reforms, and of national parties ignoring all the cries for reform. And in 1889, this Age gave us the Billion Dollar Congress, an outrage that seems quaint compared to this year’s trillion dollar deficit.

The Gilded Age also gave us waves of immigrants to keep factory costs down, Chinese labor to build the nation’s railroads, and the birth of labor unions. The media too was changing, with the introduction of yellow press journalism, and the abandonment of factual news for sensationalism and sentimental stories. And the economy endured two depressions, the Panic of 1873, caused by the manipulation of the gold market by Jay Gould and James Fisk (“Black Friday”), and the Panic of 1893, a deep depression that ushered in the Progressive Era.

Sound familiar? Try substituting Goldman Sachs, ACORN, Tea Party, Mexicans, infrastructure, Madoff, Stafford, and reading this again.

By the 1890s, the Gilded Age was ending. Spurred on by reformers, the government imposed new regulations in response to corporate excesses, dangerous workplace and consumer conditions, exploitive labor practices, and anti-competitive behaviors. Many of those regulations remain with us today.

Goldman Sachs: The Corruption of the Revolving Door

It seems we are doomed to repeat the Gilded Age. And as history loves irony, the company at the center of this Second Gilded Age is a company formed at the tail end of the first Gilded Age: Goldman Sachs.

Goldman Sachs was founded as Marcus Goldman & Co. in 1869. It was renamed Goldman Sachs in 1882. The company made a name for itself in its pioneering use of commercial paper and it joined the New York Stock Exchange in 1896. Over the next 100+ years, it would grow to become one of the most influential companies in the world.

Now before I continue, let me be clear, I do not believe in conspiracies. There is no small group of illuminati that meet regularly to decide our fates and control the world. That said, I am not fool enough to believe that our government acts in the best interests of its citizens. It should be painfully clear to all of us that the government responds to those who have the most access to it. Thus, where we find access, and we find favored treatment for those with access, we must wonder whether the system is working or not. That is the point to this article.

Nor, is this article an attack on Goldman Sachs per se. Goldman is simply one of dozens of groups with too much influence. I have picked Goldman from the crowd only because they’ve made it very easy lately to see how they use their influence to help themselves at our expense.

How Much Influence Does Goldman Have?

How powerful is Goldman? Said one recent commenter: “It’s Goldman’s world, folks. We just live in it (at Goldman's discretion, of course).” Consider these facts. In October of last year, the New York Times reported that thirteen Goldman employees worked in senior positions with the George W. Bush administration. This included Treasury Secretary Hank Paulson, White House Chief of Staff Joshua Bolten, and the man who would oversee the TARP, Neel Kashkari. The Times called this “Government Sachs.”

The Clinton administration too was staffed with Goldman employees, including Treasure Secretary Robert Rubin. Obama, who received $918,000 from Goldman employees for his campaign, also has hired his share of Goldman alumni. Indeed, in a rather controversial move, Timothy Geithner hired former Goldman employee Mark Patterson to be the Treasury Department Chief of Staff, in direct violation of Obama’s “no lobbyists” policy.

But Goldman employees aren't just in the administration. Goldman employee Robert Zoellick is president of the World Bank. Mario Drahi is the governor of the Bank of Italy. Romano Prodi is the former Prime Minister of Italy. Mark Carney is the governor of the Bank of Canada. Michael Cohrs is the Head of Global Banking at Deutsche Bank. Malcolm Turnbull is the leader of Australia’s Liberal Party. Jim Cramer spends his days talking up Goldman Sachs on his show on CNBC, along with former Goldman alum Erin Burnett. Edward Lampert bought K-Mart in 2003. Ashwin Navin is President of BitTorrent. John Corzine, the former head of Goldman Sachs became a United States Senator and then governor of New Jersey. And there are many more.

Some are in key positions that regulate Goldman itself. Goldman alumnus Stephen Friedman and current Goldman board member, became an economic advisor to President Bush and Chairman of the Foreign Intelligence Advisory Board, before leaving the administration to become Chairman of the New York Federal Reserve Bank’s Board of Directors. . . the agency that regulates Goldman Sachs and which has a significant role in setting interest rates, which affect Goldman directly. Even worse, Friedman received a waiver, allowing him to remain on Goldman’s board during his time on the New York Fed. However, when it was learned in May 2009 that he purchased 52,000 shares of Goldman Sachs in January, he resigned from the Fed “to avoid the appearance of a conflict of interest.” Wouldn’t want that.

William Dudley, a former Goldman economist, was appointed as president of the New York Fed to replace Tim Geithner, who was mentored by former Goldman CEO and Treasury Secretary Robert Rubin. Rubin has been an economic advisor to President Obama.

Goldman executive Gary Gensler became the head of the Commodity Futures Trading Commission, replacing Brooksely Born, who was criticized for failing to regulate the derivatives market. Gensler himself stated that Born, “should have done more to reign in exotic financial instruments that have battered global markets.” What went unmentioned, however, was that Born’s efforts to regulate derivatives were blocked by Goldman alum Robert Rubin, who recommended to Congress in 1999 that the Congress strip the CFTC of its regulatory authority over derivatives. More on Goldman’s role in the derivative issue in a moment.

Goldman's Influence Equals Power

So what has Goldman gotten from all this influence? Remember cap and trade? Goldman Sachs, which gave $4,452,585 to the Democratic Party, has been pushing cap and trade because Goldman dominates the new carbon-credit market. Matt Tabbi of Rolling Stone notes that this
“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.”
In an interview in July 2009, former Assistant Secretary of Treasury Paul Craig Roberts was asked “Does the US Secretary of the Treasury work for the people or does he work for the banking system on Wall Street?” He replied: “He works for Goldman Sachs.”

Do you remember the bailout? The bailout was designed by former Goldman leader Hank Paulson. Here’s what you might not know:
• Paulson let Goldman competitor Lehman Brothers go bankrupt. The very next day, Paulson established the bailout program.

• Paulson put Goldman employee Neel Kashkari in charge of administering the bailout (TARP) funds.

• Paulson gave $300 billion in taxpayer money to Citigroup, which was run by ex-Goldman head Robert Rubin.

• Paulson gave $138 billion to help Bank of America buy, and thus bailout, Merrill Lynch, then run by former Goldman employee John Thain. According to recent testimony by Bank of American president Ken Lucas, Paulson threatened Lucas to go through with the deal and to pay off bonuses to Thain and others. Thain, by the way, was rumored to be John McCain’s choice for Treasury Secretary had he won the election.

• Goldman/Treasury employee Robert Steel was put in charge of Wachovia, which he turned around and sold to Wells Fargo after a few months, triggering $225 million in golden parachutes that went to a handful of Wachovia executives, including Steel.
Now consider the AIG shell game. As we noted above, Goldman alumnus Robert Rubin stood in the way of the CFTC regulating derivatives. A derivative is basically insurance against a bond defaulting. When the derivatives market took off, AIG became heavily involved. Goldman was the first group to realize that AIG had underestimated the risks in issuing these derivatives and it bought lustily from AIG.

When the market turned and it became clear that AIG had over extended itself and likely could not pay off these derivatives (in fact, the company appeared ready to fail), Paulson stepped in. He not only agreed to bail out AIG to the tune of $85 billion, but he put former Goldman employee Ed Liddy in charge of AIG. Liddy paid $13 billion of these moneys over to Goldman, paying off 100% of AIG’s debt to Goldman. No other institution received 100 cents on the dollar from AIG.

But this is nothing new for Goldman. According to Matt Tabbi, Goldman has been heavily involved in inflating every bubble and then profiting from the bailouts that follow the busting of those bubbles.

Nor is Goldman’s influence limited to the national level. Do you remember Goldman head John Corzine? He’s now the governor of New Jersey. Guess what company floats bonds for New Jersey? More interestingly, in November 2008, it was revealed that at the same time that Goldman was selling bonds for New Jersey, it was telling its wealthiest customers that they should short those bonds. This advice would make those bonds appear riskier than they actually were and would increase the interest rates the state needed to pay on future bonds (and Goldman profits).

At the same time, the Los Angeles Times accused Goldman of doing the same thing in California.


This is not an issue of Republicans or Democrats. Both sides are equally guilty. Nor is this an issue of Goldman Sachs being evil or running the world. Goldman is simply taking advantage of a system that lets people move between government and industry with amazing easy, that lets people profit from conflicts of interest, and that converts our government from a referee into a cash machine. It is time for serious ethics reform to prevent the types of arrangements that make the above possible.


Tennessee Jed said...

excellent post, Andrew. Yes, they have far too much influence and yes they use it to their own advantage.

LawHawkSF said...

Andrew: I've decided to put myself up as a nominee for the next opening for Secretary of the Treasury. Apparently you and I and a few of our readers are the only people in the United States who are not either on welfare or working for Goldman Sachs. As a student of late 19th Century American history, I thought the major trusts were bad (US Steel, Standard Oil and the railroads among the top corporations with interlocking directorates). This is the first time I realized that Goldman Sachs makes them look like amateurs. Thanks for all the info.

AndrewPrice said...

Jed, thanks. As I said, I don't see this just as a Goldman problem. I think that too many groups have far too much influence over our government and they use that influence to their own benefit, often with horrible consequences to the rest of us.

I would like to see genuine reform in Washington to stop the revolving door that lets people shift back and forth, remain in contact with their former associates, deal with matters that are relevant to those associates, and then leave government to be rewarded by those same associates.

AndrewPrice said...

Lawhawk, The level of complexity on these things is much higher than the simple interlocking directories and trusts of the 1890s.

One thing I thought was particularly shocking was the idea that a regulator could remain on the board of a company that they regulate.

StanH said...

You may not believe in conspiracy theories Andrew, but like the good lawyer …you’ve laid out the case de-facto. The relationship between K-Street and Wall Street are disturbing and like it or not they have a great deal of influence on one another. This to me is a damn good explanation for the continuity between the two parties. Both parties are for Immigration Reform (unregulated invasion,) TARP, NAFTA. When the two parties join hands look closely at what they are doing, and invariably money’s at the bottom. I believe in the Free Market system, but change we need a real refreshing of the system. Gotta go start the grill.

AndrewPrice said...

Stan, I believe that people act in their own best interests. And where they have the opportunity to take advantage of a loophole or to conspire for their own benefit, they are likely to do it.

What I don't believe, because human experience tells me it's not possible, is that some small group of people gather together to plot out our destinies. There is no common brain guiding our history, it unfolds as a result of the actions of millions of people (some more relevant than others) making decisions as issues arise.

In any event, I think that we need to look at ways to reduce the power of interest groups to use our government for their own purposes.

Tennessee Jed said...

Andrew, I love to see the reform as well. As the saying goes, we probably should not hold our breath.

MegaTroll said...

I had no idea. I knew that access got you power, but this is ridiculous. They need to reform this.

AndrewPrice said...

Mega, this is one of those stories that people don't realize because it's not easy to digest. Plus, there is an old legal trick, where you either (1) overwhelm people with too much information or (2) you break it down into individual parts, none of which seems all the important on their own.

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