Goldman Sachs Back in the Hot Seat
March 18, 2012
Founded in 1869, Goldman Sachs evolved as Wall Street’s most prestigious investment bank, performing mergers and acquisitons, securities, investment and asset management, underwriting, prime brokerage, market making, private equity, U.S. Treasury bond sales, etc. Goldman Sach’s clients are among the most well-healed private investors and corporations on the planet. Goldman’s executive suite provides interchangeable parts to the Federal Reserve Board and U.S. Treasury, with Robert Rubin, former Treasury Secretary under Bill Clinton and Henry “Hank” Paulson, former Treasury Secretary under George W. Bush, among the best examples. President Barack Obama’s Treasury Secretary Timothy Geithner was Paulson’s understudy at Goldman Sachs before joining the New York Fed. When finanical scandals hit Wall Street, Goldman Sachs seemed too close for comfort.
When Clinton’s late 1990s bull market drove the tech bubble to record federal budget surpluses, it was executives at Goldman Sachs routinely appeared on MSNBC and newtwork news to drive stocks into the stratosphere. No one complained in 1999 when Clinton signed into law Gramm Leach Bliley permitting banks, for the first time since the 1933 Depression-era Glass Stegall Act, to own brokerage houses. Less than 10 years later another 1929-type crash occurred in 2008, losing $8 trillion in market wealth, shedding nearly 8 million American jobs. When AIG went bust in 2008, it was AIG’s CEO Edward Liddy’s relationship with fomrer Goldman Sach’s CEO Hank Paulson that helped AIG win $150 billion in federal bailout. It shocked no one that Liddy, a member of Goldman’s board, handed over 14 billion in bailout funds to Goldman Sachs, displaying the ugly truth about how Wall Street’s cash changes hands.
Called the biggest financial crisis since the 1929 stock market crash by former Federal Reserve Board Chairman Alan Greenspan, it was Goldman Sachs that created and peddled the lucraticve “derivative” investments that nearly brought down the international banking industry. When Goldman Sach’s London director Gregg Smith resigned March 13, he published a scathing indictment on the op-ed page of the New York Times. Smith said Goldman Sachs had lost its “moral fiber,” calling cutomers “muppets.” Smith, who headed Goldman’s European and African derivatives trading unit, watched European and foreign banks lose their shirts on bad derivative investments. Goldman Sachs promptly dismissed Smith’s remarks as sour grapes, insisting “we will only be successful if our clients are successful. This fundamental turth lies at the heart of how we conduct outselves.”
Goldman Sachs has been fined millions by the Securities and Exchange Commission for various shady investment practices. It wasn’t that long ago that Goldman Sachs paid the SEC $550 million July 10, 2010 to settle fraud charges for clients fleecing its clients on derivative investments. Former Bush Treasury Hank Paulson was heavily involved in structuring the kinds of collaterialized debt obligations [CDOs] that eventually went bust in the 2008 market collapse. U.S. regulators convicted Goldman Sachs of making billions from bad investments by shorting the derivatives market. While dismissed by Goldman Sachs as sour grapes, Smith’s remarks were mild compared to those losing billions in the derivatives market. “If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all,” said Smith.
Smith, who spent 12 years at Goldman Sachs, blamed current 57-year-old Andrew Blankfein and President Gary D. Cohen for a “decline in the firm’s moral fiber,” though clearly, Smith forgets that there’s a long lineage of corrupt CEOs, including Paulson. Goldman Sach responded to Smith’s op-ed insisting “how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients,” in an anemic rejoinder. Goldman’s excuses sound strangely reminiscent of the late former Enron CEOs Ken Lay and Jeffrey Skilling, still doing time in Club fed, vouching for loyal employees. Of course down-stream employees, oblivious to the shenanigans going on in the executive suite, are persons of integrity. Only the scoundrels at the top are privy to the kind of game-playing, corruption and fleecing all too familiar on Wall Street.
No one likes whistle blowers, certainly not venerable Wall Street firms fighting the public relations’ battles of maintaining a good reputation when all else points to corruption and larceny in the executive suite. Smith’s confession in the New York Times exposes the ugly underbelly of Wall Street’s money machine, spewing aspersions on notorious characters like Bernard Madoff. “Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mails,” Smith wrote in the Times, attesting to the same cavalier approach that forced Goldman Sachs in 2010 to pay out $550 million. Instead of dismissing Smith’s remarks out of hand, the White House should work with the SEC on better financial reform. Obama’s July 20, 2010 financial reform didn’t deal with Gramm Leach Bliley or currently unregulated hedge and private equity funds.
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