The Goldman Sachs story is just getting bigger, and I get the sense it may be AIG time for Goldie.
I don’t mean AIG in the sense of a stupid company gobbling up all the risk on Wall Street for pennies and then nearly taking down the economy. I mean AIG in the sense of poster boy for What’s Wrong with the System.
Matt Taibbi did yeoman’s work in putting Goldman front and center with a fascinating-if-hyperbolic polemic whose first paragraph in less than three weeks has already entered the pantheon of Greatest Ledes of All Time:
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.
Bet you can’t get that imagery out of your head. And know that, by way of disclosure, Goldman’s “blood funnel” has in part funded The Audit.
Taibbi’s piece is finally fully online, which ought to amplify its reach even more (Hey, Wenner: I understand wanting to give subscribers reason to stay and others reason to buy on the newsstand, but it would have been nice to have an option to buy the article online for a couple of bucks. I only got to read Taibbi’s piece a couple of days ago, since it wasn’t online except in stolen form).
But “The Great American Bubble Machine” may turn out to have been well-timed fuel for the fire on the Goldman Sachs story. Two weeks after RS published it, Reuters broke a fascinating story that a Goldman computer programmer had left the firm, absconding with a huge piece of the code for its super-secret automated-trading platform.
The programmer was arrested in seemingly record time, but not before he uploaded it to a German server, leading the prosecutor to say this in arguing for a high bail:
The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.
Which we and others have noted is a pretty astonishing statement. If “somebody” can use the program to “manipulate markets in unfair ways,” then Goldman can, too. And how would we know if it was? That stuff is a black box and I doubt regulators have ever been under the hood—or would know what to look for if they have.
It’s unclear how the financial press can get in there, but you can bet they’re certainly exploring the so-called high-frequency trading world.
Now come the boffo profits reported by Goldman in the second quarter. It’s on all the major front pages this morning, with The New York Times and Financial Times zeroing in on the massive paydays Goldman’s profits mean for its bankers. Goldman’s $3.4 billion second quarter means its bankers are on track to get an average $770,000 each this year—a record.
The Wall Street Journal doesn’t go with the pay lede, but its business angle—how’d they do that?—could be just as problematic for Goldman, reporting as it does that the bank bulked up on business from weakened or dead rivals while ramping up its risk-taking.
The latter is something I expect we’ll read more about in the coming days. How exactly did Goldman up its risk-taking and what are the implications for it and for the financial system as a whole if its bets go bad (Jim Bianco had a fascinating post in this direction today at The Big Picture showing how huge Goldman’s credit exposure is compared to its peers)?
Some sort of one-two punch lede melding the increased risk and the increased pay would have been great, but none of these papers do that. The WSJ doesn’t really get to the pay implications until the twenty-first paragraph. Meanwhile, the NYT doesn’t ever adequately explain Goldman’s increased risk-taking.
The point is exactly to make this villain with a face and not to step into the quicksand of the general slung of "everybody is doin it" or "too little regulation" that the bizniz press is wrapped up in. How do you make the criminal responsible for his actions? You name him, as well as all the other. You don't solve many murders by looking at the general rules for manslaughter and how these rules ahve been to loose?
#1 Posted by Richard Langdon, CJR on Thu 16 Jul 2009 at 05:16 AM
Good post. I have one important disagreement though.
The leaders of our national discussion are cowards. They will only kick a man when he's down (see: Madoff, Bernie). AIG was in turmoil and couldn't really defend itself. Goldman, meanwhile, is perhaps the most powerful institution in the world. It may have to face attacks from many different directions, different respected news organizations and talk shows and comedians and short segments on Rick Sanchez, but it won't have to deal with the steady CNN Situation Room leadoffs or Maureen Dowd columns or WaPo headlines. If any damage is done, it will be death by a thousand cuts rather than a frontal assault.
I'm afraid you give our gatekeepers too much credit.
#2 Posted by LorenzoStDuBois, CJR on Thu 16 Jul 2009 at 10:53 AM
I'm as terrified of GS as anyone, but Megan McArdle pretty thoroughly gutted Taibbi's piece on her Atlantic blog.
http://politic.ology.com/2009/07/15/owning-matt-taibbi/
I, for one, welcome our new financier overlords. I'd like to remind them that as a trusted journalist, I can be helpful in rounding up others to toil in their underground sugar caves.
#3 Posted by D.R. Foster, CJR on Thu 16 Jul 2009 at 12:55 PM
This post entirely misses central issues:
1) Bonuses for excessive risk-taking aren't averaged out--it's not socialism driving it, but greed, indifference, hubris, or malefescence: bonuses are graduated so as to reward the biggest "Bernie Madoffs" with the most ill-gotten gains!
2) See Bloomberg.com's article(s) on NY law firm's Rosen: GS makes up to 40% of their profits within a $590 Trillion ($590,000,000,000,000) over-the-counter derivatives market, which finally made the New York Time's front page on May 14, 2009 (which usually prefers to bury systemic risks of Krakatoa proportions until too late). Rosen's a lobbyist who will try and water down regulations even lower than Geithner--who prefers "clearinghouses" to "exchanges," which are the safest of the two pieces of shite. My guess is Joseph Stiglitz wanted to nationalize the banks in part to rewrite these contracts, then sell them back to private industry in Paul Krugman's prefererred form--boring, as they were when American Capitalism wasn't nearly as myopically self-destructive and indifferent to the consequent risk to humanity, and to the ecology, on Earth. These brutal nerds should get a hobby--marijuana or some mistresses--before they screw everyone, including themselves and their supposed loved ones, like Mrs Madoff.
#4 Posted by TS, CJR on Sat 18 Jul 2009 at 07:57 AM
RICO Act indictments were prescribed by Paul B Farrell, PhD in the Wall Street Journal's sister paper, MarketWatch; but you guys missed that, too. He and others came out with the GS story (as well as that of the OTC derivatives bubble) months before Taibbi, who did package together it quite nicely for a more mainstream audience.
Megabubbles popping and "Great Depression 2" were predicted in 2011 by Dr Farrell, in Market Watch, I believe while Obama still in contention. Perhaps he knew already knew that he and Hillary would be ineffectual or were sell outs from the start.... Who knows, because 99.9% of your colleagues in the media have sold out (or were too myopic to begin with)?!
#5 Posted by TS, CJR on Sat 18 Jul 2009 at 08:24 AM
Res Ipsa Loquitor: Here's the real story that's been conveniently swept under the rug.
from Reuters:
QUESTION: Did Goldman do any due diligence on AIG before buying credit default swaps (CDS) from it?
ANSWER: "We do extensive due diligence on all our counterparties."
****************************
posted 4/2/09 by Karl Denninger
(Credit Barry Ritholtz and Institutional Risk Analytics, the original source)
WHOAH!
In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG’s foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.
As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.
Read that folks.
Then read it again.
Then read it AGAIN.
More excerpts:
There are two basic problems with side letters. First, they are a criminal act, a fraud that usually carries the full weight of an “A” felony in many jurisdictions. Second, once the side letter is discovered by a persistent auditor or regulator examining the buyer of protection, the transaction becomes worthless. You paid $6 million to AIG to shift risk via the reinsurance, but the side letter makes clear that the transaction is a fraud and you lose any benefit that the apparent risk shifting might have provided.
And finally, the last nail in the coffin:
The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams - with no correlation between “fees” paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world.
Indeed, our sources as well as press reports suggest that the CDS contracts written by AIG may have included side letters, often in the form of emails rather than formal letters, that essentially violated the ISDA agreements and show that the true, economic reality of these contracts was fraud plain and simple. Unfortunately, by not moving to seize AIG immediately last year when the scandal broke, the Fed and Treasury may have given the AIG managers time to destroy much of the evidence of criminal wrongdoing.
Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG’s operations.
Thank you Timmy, thank you Ben Bernanke,
#6 Posted by Calltoaccount, CJR on Sat 18 Jul 2009 at 09:40 AM
Full discussion of unvarnished truth at:
http://www.huffingtonpost.com/2009/03/17/goldman-sachs-goes-for-th_n_175638.html
#7 Posted by Calltoaccount, CJR on Sat 18 Jul 2009 at 09:50 AM
Thank you Calltoaccount
I have posted your comment on factsnews.wordpress.com
This totally blows my mind, and yet people act like "huh, whats wrong"
#8 Posted by Factsnews, CJR on Tue 21 Jul 2009 at 12:22 PM
The law of diminishing returns applies to all finance when weighed against the commodity crisis looming at the first sign of "improved economic activity". You can see it already as the first miserable signals of recovery send oil and gold higher.
Natural asset depletion, mostly in the form of peak energy supply - not coincidentally the major pre-collapse issue - will see these fiscal pirates hiding in walled communities fighting off hungry and angry hordes.
#9 Posted by William Jorgensen, CJR on Thu 23 Jul 2009 at 09:06 AM