Goldman may have made a fatal mistake. Fatal not to the existence of the firm, but to its standing, reputation, legitimacy, and ultimately, to the thing it covets most, its profits.
Power is most effective when it is used as sparingly as possible. Niall Ferguson, in book The Cash Nexus, stressed the importance of financing to military success (he argues that England was able to punch above its economic weight due to its superior tax collection apparatus and more highly developed bond markets). The Rothschilds, which among other things financed governments at war, went to some lengths to underplay their influence so as not to threaten their state patrons/clients.
The problem is that the behaviors that contributed to Goldman’s commercial success have over time become unbalanced, and are putting it at odds with governments. It is one thing to abuse the likes of a Jefferson County, as JP Morgan has. As deplorable as that behavior is, they cannot retaliate. It is quite another to mess with bodies that really are, ultimately, bigger than you are.
When I was young and worked briefly at Goldman, the firm was a pig and let even the very junior staffers understand precisely how its pigginess worked so that they would improve upon it when they grew up. For instance, on the deals it lead managed Goldman managed its stock and bond syndicates so as to extract as much as possible, to the disadvantage of other members of the syndicate, who shared the underwriting risk. I was told that Goldman was far more aggressive than other firms in hogging the deal revenues than any other firm on the Street, but could get away with it as a major lead manager. Similarly, on another deal, I walked into the Syndicate department when one of the most powerful partners at Sullivan & Cromwell was on a conference call, instructing the younger members of the department what the right answers to questions would be when the SEC came in asking questions on what they were about to do on this particular transaction, an underwritten call (note: what made Goldman savvier than most firm was that everyone got the official rationale for technically legal but questionable behavior BEFORE they did it, which made it much easier to maintain party line, rather than after the fact, when some conversations and communiques might contain remarks that were decidedly unhelpful. Note that this practice was well established over two decades before e-mails became pervasive).
Anyone who has read Roger Lowenstein’s account of the LTCM crisis, When Genius Failed, will recall how Goldman’s lawyer is assigned to a key negotiating role, and proceeds to cut the transaction in ways that favor Goldman over the other rescue group members. It is almost an uncontrollable reflex, the sort you see a predator take when someone makes the mistake of standing between it and its kill.
Now this aggressiveness was tempered (somewhat) by the posture Goldman called “long term greedy”, which basically meant not bleeding customers too much. One of the corporate accounts I worked on was a very reliable fee generator, and the M&A bankers were desperate to talk it out of a deal (on which they would have earned a fee) because they were convinced it was a turkey.
But the Goldman of the new millennium has kept the same relentless focus on the firm’s financial interest, and has become utterly, hopelessly sociopathic, incapable of understanding right versus wrong. The firm’s defense strategies vary among priggish and legalists reports (a Lucas van Pragg speciality), insincere, non-specific apologies (Blankfein), or stony silence. But the truth of how the members of the firm see things comes out again and again, through the many ways the Goldmanites keep maintaining that they really deserve what they make (starting with the heinous Blankfein “God’s work” comment), revealing again and again their inability to see how sharp practices and numerous forms of government support are an integral part of their recent “success”.
Every generation seems to have at least one financial firm that abuses its priviledges and power to the point when their pathological behavior brings about their downfall: Drexel, Salomon, Bankers Trust, Enron (Frank Partnoy argues that Enron was a “highly profitable derivatives bank”). It is too early to say for sure, but Goldman looks to be at risk of joining their ranks.
Although the Fed is far from an aggressive investigator, the fact that is has taken interest in Goldman’s role in Greece is significant. And the FCIC is also probing Goldman’s too clever by half strategy of using collateralized debt obligations to tee up short bets, since the buyers of the CDO would assume that they were purchasing a legitimate investment, not something that Goldman would have an incentive to design to fail.
From the Financial Times:
The US central bank is looking into Goldman Sachs’s role in arranging contentious derivatives trades for Greece, which helped the country to massage its public finances, Ben Bernanke, chairman of the Federal Reserve, revealed on Thursday.
“We are looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece,” Mr Bernanke said, apparently referring to Greek currency transactions structured by Goldman….
Mr Bernanke said default swaps are “properly used as hedging instruments” and that “using these instruments in a way that intentionally destabilises a company or a country is counterproductive”.
The Securities and Exchange Commission is “examining potential abuses and destabilising effects related to the use of credit default swaps and other opaque financial products and practices”, said a spokesman.
Separately, Phil Angelides, chairman of the US Financial Crisis Inquiry Commission, told the Financial Times he was concerned about the practice of creating securities and “fully betting against them” – and about Goldman’s role in particular. Goldman declined to comment.
The US comments came as an official in German chancellor Angela Merkel’s ruling Christian Democratic Union party said the G20 nations were discussing whether a ban on the speculative use of CDS was workable.
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Thanks for this.
However, Goldman will survive. It is inside the government. It drives our economically disassociated equity “markets”. It will do what it pleases. Maybe a small fine or stern talking to by Hope and Change. But, that’s all.
Stick a fork in us. We’re done.
:(
I agree. Goldman has been doing sociopathy since the Twenties. This post is extreme wishful thinking but will no doubt be picked up by timid reformers as a hope to cling to in our more robustly regulated financial future.
Meanwhile, it is the simple existence of CDS and OTC derivatives that enable Goldman’s endless chicanery. It is these toxic financial products unleashed as innovation that explode on the unsuspecting and produce all the profits of all the banks and corrupt all the toothless enablers and their flunkies in the regulatory agencies and the Congress and the White House too.
Running after Goldman in search of instances of unethical conduct in the derivatives business is a supreme waste of time. It is the business itself which must be dismantled while those outside the financial sector still have anything left of which to be robbed by these financial innovations.
Jake,
“Running after Goldman in search of instances of unethical conduct in the derivatives business is a supreme waste of time.”
No, identifying the uses OTC derivatives have been put to is precisely the point.
OTC Derivatives are not one product. OTC Derivatives use a template (ISDA forms) to transform just about any kind of financial transaction into a ‘derivative’. CDS are a particular kind of OTC derivative.
Derivatives are not ‘bad’, abuses of the derivative template are bad. That conflict is the issue.
The extensive public relations blitz of the past year building up Diamond Jim Jamie Dimon at JP Morgan now makes more sense given that Goldman is the Squid du Jour of the Federales, especially when singled out in public by the Fountainhead of Liquidity Helioptrix Bernankex. Flippant remarks to be sure by me but the bus seems to have acquired a Toyota braking system and the preening arrogance of Blankfein will make a suitable speed bump. Also can you expand on the criminogenic term and elaborate on the possibility that the people of the elite create their environment as much or more than they exploit one created for them. Cheers. May we all enjoy some calamari soon.
I mused today over the possibility that Goldman has positioned itself over the past several years to facilitate the collapse of the Euro, and — if the stars so aligned — benefit from the resultant disaster as the last bank standing in the West through its bipartisan presence in the White House.
I hate these thoughts I have.
Perhaps further examination of Mayan hieroglyphs will reveal a Goldman Sachs bonus structure for 2012 Euro-collapse-CDS mayhem–cephalopod supremacy. Cheers and vaya con Dios.
It really can’t be good that quite normal, non-financial types like my parents know of Goldman and its CEO by name, and loathe them.
I’m also amazed by the public’s familiarity with Goldmans’ executive ranks. But I think its a good thing.
Who knows anything about Goldman’s sub-senior executives? According to Kate Kelly’s “Street Fighters”, Gary Kohn brought along David Solomon & Don Mullen, two members of Goldman’s management committee & former Bear employees, to examine Bear Stearns’ ledgers before that firm collapsed.
Mssrs. Solomon & Mullen worked at Drexel, Salomon Brothers, Bear Stearns, (are there others?) and now Goldman Sachs.
What role have execs like these two played played at Goldman in recent years?
Lloyd may be playing Dutch Schultz to Jamie’s Lucky Luciano.
If a Tom Dewey ever shows, I think the G card will be dealt on cue.
How do you want those chops cooked, Lloyd?
Monsieur Jesse, why do you not have an accessible comments section at your more-than-middling blog ?
music to my ears, hearing jamie’s name included, might be taking to singing some blues.
The world situation is very precarious, and if there is a crash, Goldman will be crushed in the aftermath. This is the ending of a long financial cycle as described by Hyman Minsky and Irving Fisher, and I doubt that the climax has yet been reached. The only thing preventing it vary aggressive government intervention, and it remains to be seen if it will work. I have great doubts with players like Goldman afoot. But Bernanke seems to be figuring this out.
Goldman owns this country, don’t hold your breath. Geithner, Summers, Rubin and the rest will make sure that we all lose this bet.
Wait, aren’t we just envious?
I think of Microsoft. It never seems to have recovered from its run ins with the European bureaucrats. I have zero belief that our government will do anything but run interference for Goldman, but if German and French politicians don’t get in the way of the Eurocrats, GS could be slowly inexorable chewed up by them. This process could be accelerated if the French and the Germans decide to sign off on a ban. The kicker is would Obama, Geithner, and Bernanke threaten retaliation in defense of GS. How likely is this? All I can say is that I have found it impossible to overestimate how bought our government is by GS.
Yves, if you don’t mind clarifying a few things:
1. I assume the short term greedy Vs long-term greedy came about because Goldman went public–is that your take?
2. Do you think the Fed is doing this for anything other than politically generating headlines? Is it really interested in investigating? Will anything come out of this?
I can’t read this very well–Goldman was not the only bank to make such deals with Greece; why did Bernanke single out Goldman, but not mention the other banks by name? Is it to placate Americans, or Europeans (or to placate the Europeans in the future if the US pays Goldman out on their Greek bets via AIG)? Or is it to warn the banks to fall into line?
Sorry, I’m just really lost on how to interpret Bernanke’s comments, and your comments about hitting GS in their profits–Bernanke said nothing to suggest this, so what are you getting between the lines?
Same thing for the SEC–if they didn’t want to be aggressive with BofA for something blatantly illegal that occurred within the borders of its jurisdiction (the US), how likely are they to go after GS for something borderline?
Other readers can probably add some insight, but let me take a stab.
On your 1., my sense is there was a slide well before the firm went public, with the rise in importance of derivatives and fixed income as sources of profits. Both are lightly to almost unregulated. That led to a slide in standards in conduct across the industry in the 1990s. But yes, going public made a big difference. The firm was pretty balanced in its mix of business, according to its IPO documents, and the key bit was that investment banking and asset management were both large enough to have some clout. Those businesses have much longer time frames than trading, and reputation matters. Now something like 80% of the firm’s profits come from trading. It’s often described as a hedge fund with some client businesses attached.
2. Normally, I’d be cynical, but this may be in response to pressure from the EU. I’ve heard from quite a few people that central bankers and international regulators are cooperating a lot in the wake of the crisis.
Re profits, I’m not speaking in the immediate sense, but longer term. If someone with subpoena power goes into Goldman, I am sure they will find stuff that reflects badly on the firm. That is more likely to be the FCIC or SIGTARP.
Remember, what hurt Bankers Trust was that Proctor & Gamble got its hands on some amazingly damaging tapes. Goldman is much more clever than BT was, but I am sure some of the business they did will not stand much scrutiny.
I think the attempted explanations about question #1 (going public, the changing landscape of financial instruments) are potentially valid, but I also think those explanations are really just the “accelerators” that pushed Goldman more quickly down its natural path. What interests me is the “path.”
Just above, Hugh mentions Microsoft. He could just as well have mentioned IBM or many other previously unstoppable growth companies that just seemed to have, well, stopped growing. I think it is somewhat a matter of size. As you grow, you have to feed the beast you are creating, and you have to deal with many more individuals who want a bigger piece of the pie, not just a bigger pie. As Goldman grew, not only did it need *more* just to keep growing, it became much harder to control the rank and file (or subdue the rank and file) without stepping into the breach of “short term greedy.” We need *more* and at some point, “long term greedy” is just not enough. We have to steal intertemporally.
Living beings have a cycle. They are born, they grow, they die. Sometimes the cycle is long; sometimes it is short. Companies seem to share many of these characteristics.
[All of this is a totally unsupported musing by me, but hell, it might just be right.]
“We are looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece,” Mr Bernanke said
Herewegoagain, I had the same question you ask: why did Ben single out GS by name, and not naming others. I then answered our question: the outcome of the FED’s looking into this is preordained. The FED has already concluded, and will inform the public both in the US and EU at a later date, that GS and others did nothing illegal. Anybody who from then on still laments GS, can be silenced by Lucas van Praag with: ‘It has been studied and we did not do anything wrong’.
Realize that the FED can not be audited. So how can anybody — be it the Greek prime minister, or Angela Merkel — ever proof that the FED looked into it with both eyes closed?!
All critics on this particular matter will be silenced, hence ‘Mission accomplished’ as far as Government Sachs is concerned.
It is historically that true that those who overreach relative to the actual balance of power eventually destroy themselves.
But in this case those who in theory should want to smash Goldman seem self-hindered (by corruption, ideology, and preceived shared goals that allegedly outweigh conflicts) to an exceptional extent.
Mr Bernanke said default swaps are “properly used as hedging instruments” and that “using these instruments in a way that intentionally destabilises a company or a country is counterproductive”.
Ya think? According to the things he says, Bernanke sure is the dunce of the class, given how long it takes him to learn lessons that were obvious from the beginning decades ago. You would think Fed chairman doesn’t have a steep learning curve.
(And of course it doesn’t. Wingnut welfare means it’s a flat, even downhill grade forever, as long as you’re on board with the bankster party line. That’s the only way it was both possible and desired that Heckuva Job Bennie, one of history’s monumentally incompetent fuckups, could ever have even been considered for a second term.
So speaking of structures overreaching and psychopathically defying reality, part of those goals/traits Goldman shares with bigger structures like the US government is that same unnsustainable aggression. Reappointing Bennie was certainly as belligerent a gesture of spitting in everyone’s face as anything Goldman’s done.
The same “character” and quality of action is recursive at every level.)
Getting back to what Bennie said, how it allegedly portends constructive action, while I’d love to see it, as always I’ll believe it when I see it.
The very quote betrays continued lunacy or more likely bad faith. Yes, the only possible proper “use” for these things would be legitimate hedging by those who have a real stake in some transaction and not a purely derivative, gambler’s stake.
But that was always true of all derivatives. So who is Bennie fooling when he singles out CDS as somehow different, and implicitly says that just in this case speculation is an abuse, when the entire system he so ardently fights to empower and whose main bagman he is is based upon that same speculation?
Well, everything has to start somewhere, so maybe it’s possible that Goldman went so far in this case that even its political connections have to “run for cover”, as Tom warned Sonny (in “The Godfather”) would allegedly happen if he went too far.
But it’s more likely this is just a mood with no will for action behind it. That’s been the case every other time so far.
I’m surprised no one seems to have mentioned this on the blogs, but hasn’t GS gone from a privately funded balance sheet to a government funded balance sheet since the October meltdown.
They paid only $6.5B interest on only $500B of debt in 2009. Thats about 1.3%. Given that some of their debt is long term debt (e.g Buffet’s 10% loan etc) issued prior to 2009, they must have replaced almost all of the $500B in debt with loans from the Fed.
Looks like the financial crisis worked out very well for GS. They are paying $25B a year less in interest than they paid in 2008 and it looks like no one is even talking about why GS should not be given this huge and ongoing government subsidy.
Is Goldman Finally About to be Leashed and Collared?
Thanks I needed a good laugh this morning!!!
The Goldman/Enron comparison is a good one. Enron was also heavily connected all the way to the top, and had flacks running interference for it at every level, including Congress writing custom legislation just to increase their profits. Enron also of course fleeced the entire state of California and created political crises by tampering with the power supply.
They were untouchable, the golden boys held up as an example of the new anti-regulated economic alchemists, until they weren’t.
If (when) the worm turns (meaning a major political crisis at home), Goldman’s visibility will become its liability. Overnight, no one will return Blankfein’s calls, Treasury dept staffers will be shredding visitor logs, the media will discover a new villian faster than Donald Rumsfeld discovered that hils old business partner Saddam Hussein was an evildoer.
The C-level leaders will face a few heated Congress hearings, a couple second-tier execs will do some time, and the firm will be dissolved into other firms. Geithner will end up as President of some third rate university and Paulson will retire to fly fish with Cheney. The GOP will campaign as the anti-wall street party and then the entire episode will dissapear down the memory hole.
poor jackson hole, WY. pity the fish, birds and bears they don’t deserve this.
If you read the Partnership a history of Goldman, you find that every few years it has a near death experience. Corzine got fired over one involving Goldman mimicking LTCM. In the 1920 Goldman Sachs trading nearly did the partnership in. It seems to be a human trait relating to the old pride goeth before a fall line. The culture mentioned leads every so often to someone being so motivated for money that they step over the line from the public point of view but not their own.
As noted and reinforced by reading the book, its clear that Goldman sells its people that they are the best and can almost walk on water.
As noted and reinforced again by the book, the long term view win win at goldman has been replaced by win and damn what happens to the customer (as much of wall street became the house of the great casino).
gs may be leashed or collared but the real mastermind will just morphed into another monster.
“Mr Bernanke said default swaps are “properly used as hedging instruments” and that “using these instruments in a way that intentionally destabilises a company or a country is counterproductive.” -such a puny word for fraud.
I think Bernanke means that when Goldman Sachs packages toxic securities for Greek leader/predators in a way that defrauds it own Greek citizens and Goldman extracts a $100,000,000 – $300,000,000 cut for themselves up front that Greek citizens are now going to have pay off by reducing their status from middle-class to poverty, Goldman Sachs has committed crimes against humanity.
This is so true. When you read an article about Goldman Sachs and their statements that their actions around Greece were within the law (at the time) or similar comments you have to remember that the organisation is psycopathic or at the very least shows serious psycopathic tendancies.
Of course I don’t mean Hollywood Movie style psycopathic killers or anything as silly as that. Rather I am referring to the clinical definition under the Hare Psychopathy Checklist-revised which is conveniently available on wikipedia.
Some of the key diagnostic traits for psycopathy include lack of empathy (e.g. for the American people when they pay their billions in bonuses in a country with 10% employment), failure to take responsibility for own actions (e.g, creating and selling toxic securities while betting against them to the point the financial system is destroyed), cunning, manipulative (selling swaps to hide debt to Greece was clearly immoral but it was legal…at the time), grandious sense of self worth (more or less the definition of Goldman Sachs), pathological lying (claiming your purchase of GS shares immediatly after the AIG bailout was not based in insider knowledge might be a hypothetical example).
Remembering the Goldman Sachs is an organisation comprised of greedy psycopaths under the above clinical definition will greatly help you understand their press statements and role in various financial transactions.
Oh, come on, Yves, we now *exactly* which “senior partner” at Sullivan & Cromwell you’re talking about.
Ah, yet, I apparently don’t know how to spell “know”
And is it possible that the reason the Greece swaps might be A Bridge Too Far for our friends at 85 Broad is that it is an EU country, a Euro country, a NATO country, *and* Deutschland is pretty fecking pissed at the prospect of bailing them out?
Because, see, unlike Jefferson County, and even unlike Greece, there are a *few* countries possessing the wherewithal to enter the lists against GS.
Funnily enough, Bundesrepublik Deutschland happens to be one of those countries. So does la belle République.
I have a feeling that Merkel wants a pound of bloody flesh in return for even the possibility of a bailout, and Sarkozy is probably backing her up, since he sure as hell knows France can’t.
Goldman’s big, Goldman’s powerful, and Goldman’s rich. But Goldman’s profits are still just rounding errors to countries the size of Germany and France.
Plus, the Afghanistan mission is wildly unpopular in Germany.
The old kind of Kanzler would *certainly* have used the threat of withdrawal to goad the Feds.
It’s hard for Obama to have a surge if the largest foreign contingent pulls out. Especially since that would be the cue for the other NATO friends & family to get the hell out of Dodge.
Although the Fed is far from an aggressive investigator, the fact that is has taken interest in Goldman’s role in Greece is significant
I think your’re right. This is significant.
The crisis is a global issue. A global solution is required. Americans (or Europeans) alone don’t have the ability to unitlaterally fix the underlying flaws in the universal banking model and corresonding regulatory framework.
The open secret is that US Financial Holding companies compete with and effectively are EURO based universal banks with US addresses. In that respect the US definition of a bank is a technical issue, not a practical issue. The US reforms address some technical aspects, yet don’t adequately address the practical flaws of the banking model.
One reason the banking lobby in the US is so powerful is due to the fact that the banks themselves are transnational and lobby on a global scale. So Bernanke’s cooperation could be the signal to the banks that he’s no longer on his own.
Bernanke and Geithner’s challenge is to influence legislation in the US that doesn’t undermine global improvements. They can’t rally discuss this internal conflict openly. Active official negotiations are taking place with global regulators in the background (and I think under Summers(gasp)direction) and are running parallel with the negotiations for the legislative Regulatory reforms.
These background negotiations add a layer of complexity to the analysis of the US banking reforms.
The US and the EU gov’t now have a common enemy in GS. I’d argue they each also now have a common enemy in Deutsche and the Euro banks. As a result the FED and other Central bankers can now work more cooperatively, and openly.
The Tobin tax may be a Trojan Horse solution to accelerate global reform. Pre- Greece the idea seemed like an Anglo fantasy, but post Greece I think it provides a big bang. The Americans aren’t violenty opposed.
The banks now clearly threaten the EURO and the EU. It’s clear more taxes are needed from the Med countries to repay their debts. But they, the Meds, hate taxes, and as GS looked to govt to bail them out through AIG (which also thought they’d never have to repay their CDS debts anyway), the Greeks reasonably expect Brussels to come up with a solution for them.
Simple solution. transaction taxes on the banks , divert some of the increased taxes to a ‘Euro stabilization fund”. relieve the tax pressure on the greeks, and diffuse political tensions with the EU countries. The banks will be incented to reorganize themselve to avoid the tax, and they’ll be more vulnerable to demands for more changes from the regulators. (BTW I don’t mean to suggest it is a ‘simple’ solution. I’m oversimplifying to point to a some major benefits can result from the ‘simple’ solution of the Tobin tax)
Is Goldman Finally About to be Leashed and Collared?
Yawn! Just woke up and saw that post…is it 2023 yet?
Yves, just read two posts at the irascible Karl Denninger blog re AIG 10Q filing. Do you have any thoughts on this ? Does the language of going concern affect the viability of Goldman Sachs given their interconnection with so many things AIG ?
Thomas,
AIG’s exposure to CDS losses from certain undisclosed “European Institutions” sure smells like an all-too-familiar connection to the Greek-Goldman scandal doesn’t it? Is that why Bernanke is nosing around, ’cause US taxpayers are about to pay GS another wad for stuff it knew was toxic? It just keeps getting better.
in case of greece gs would better off, if they tell that they are just a greedy bank who tried to earn money in the short run. whatever. it is not the problem nor reponsibility of a bank if clients intent to cheat others.
Hey, i just came here when i did a fast google search. Neat blog you got here! Keep it up!