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20 April 2010 By Stephen
Lendman The status applies to all Wall
Street giants, none, however, the equal of Goldman,
the Grand Master. Like the fabled comic book Superman
hero, it's: -- faster than its competitors,
thanks to its proprietary software ability to front
run markets (illegal, but no matter); -- more powerful than the
government it controls; and -- able to leap past competitors,
given its special status. Founded in 1869, GS calls itself
"a leading global investment banking, securities and
investment management firm that provides a wide range
of services worldwide." Since going public in 1999, the
same year Glass-Steagall ended letting banks, insurers
and securities companies combine, GS became a giant
hedge fund trading against the advice given clients
with the full faith and blessing of Washington - the
same thing other Street giants did and profited
handsomely. In his April 17 article
headlined, "Goldman Sachs Vampire Squid Gets
Handcuffed," L. Randall Wray noted SEC laxity for
years, "managing to sleep through every bubble and
bust in recent memory," and saying Goldman acts above
the law "since it took over Washington during the
Clinton years." Their criminal behavior is nothing
new. It's their established business model, the reason
it's been immersed in nearly all financial scandals
since the 19th century. Wray notes that John Kenneth
Galbraith's famous 1954 book, "The Great Crash," had a
chapter titled "In Goldman We Trust" on its
contribution to the Great Depression through risky
investment trusts (an early mutual fund cum Ponzi
scheme) sold to unwary buyers. Goldman and other "whip(ped) up a
speculative fever in shares, reaping (highly
leveraged) capital gains with other people's money."
They were fraudulent pyramid schemes, a "Charles Ponzi-Bernie
Madoff scam." Then and today, they collapsed, the way
they always do when insiders pull the plug at the same
time, cashing out to let their customers take the
pain. At the end of his Goldman
chapter, Galbraith recounted this years after the
crash encounter before a Senate committee: "Senator Couzens. Did Goldman,
Sachs and Company organize the Goldman Sachs Trading
Corporation (to sell junk trusts to unwary buyers)? Mr. Sachs. Yes, sir. Senator Couzens. And it sold its
stock to the public? Mr. Sachs. A portion of it. The
firm invested originally in 10 per cent of the entire
issue for the sum of $10,000,000. Senator Couzens. And the other 90
per cent was sold to the public? Mr. Sachs. Yes, sir. Senator Couzens. At what price? Mr. Sachs. At 104. That is the
old stock....the stock was split two for one. Senator Couzens. And what is the
price of the stock now? Mr. Sachs. Approximately 1 and
3/4. Buyers then and now lost their
shirt, not knowing that betting against Goldman is a
sure way to get fleeced. Yet even sophisticated lambs
volunteer to be slaughtered, thinking they're as
smart, will get out in time, then learning otherwise
and discovering Goldman cheats all its clients, even
nation states like Greece by hiding its debt and
shorting it. Around a dozen US states as well,
including California, the same way. Wall Street's
culture encourages this and rewards it greatly, the
price for getting caught usually fines too small to
matter. Will this time be different? No
matter the cost to others, like Enron and Savings and
Loan crooks, don't ever bet against Goldman,
especially given the SEC's shoddy crime fighting
record, picking off small fry but barely slowing big
ones, and hardly up to a serious tangle with the Grand
Master, regardless of the extent of its sleaze. So what to make of April 16's
breaking news, headlined by New York Times writers
Louise Story and Gretchen Morgenson saying the "SEC
Accuses Goldman of Fraud in Housing Deal." The SEC filed civil, not
criminal, suit named Fabrice Tourre, "the fabulous Fab,"
(GS's 31-year old VP involved in creating junk
investments), charging fraud. GS, in turn, called the
accusations "completely unfounded in law and fact (and
would) vigorously contest them and defend the firm and
its reputation" - indeed so with all the legal talent
billions in ready assets can buy, and no shortage of
top tort attorneys willing to line up and take it. Watch for more suits to follow,
but is Goldman sacked? Don't bet on it in what for
sure will be long drawn out proceedings, including
appeals that will drag on for years. Case in point, among others - the
notorious Exxon Valdez incident after the March 24,
1989 spill, ravaging Alaska's Prince William Sound and
Lower Cook Inlet, ruining the livelihoods of area
fishermen and residents. Lawsuits followed: -- In September 1994, $287
million in compensatory damages and $5 billion in
punitive ones were awarded; -- In December 2002, the Ninth US
Circuit Court of Appeals reduced the latter to $4
billion. -- In December 2006, after more
appeals, the same court cut another $1.5 billion; and -- In June 2008, the US Supreme
Court reduced punitive damages to $500 million - the
equivalent of about 1.5 days profit from ExxonMobil's
first quarter 2008 operations. No company executive
went to jail for perhaps the worst environmental crime
in history. It was whitewashed for 10 cents on the
dollar after nearly 20 years of litigation. On April 16, the SEC: "charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the US housing market was beginning to falter." Allegations are: "that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund (Paulson & Co.) played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO" - junk assets its president, John Paulson, made $4 billion on in 2007 by correctly betting on the housing collapse he and GS helped initiate. "The SEC's complaint charges Goldman Sachs and Touree with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties." Fabrice Touree was "principally responsible" for the fraud and sent an email before they were sold saying: "the whole building is about to collapse anytime now," calling himself the "Only potential survivor, the fabulous Fab....standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those 'monstruosities!!!' " According to the SEC, he wasn't alone as senior GS executives signed off on them. Likely, but unnamed, they include CEO Lloyd Blankfein - profiled on November 8, 2009 in the London Sunday Times saying "I'm doing 'God's work,' " the height of audacity matching the firm's history of criminality and getting away with it. In their April 17, 2010 article headlined, "Goldman Sachs Charged With Fraud," Wall Street Journal writers Gregory Zukerman, Susanne Craig and Serena NG called GS Wall Street's most profitable firm, "emerg(ing) as a symbol of excess, (having) paid out about $16 billion in compensation to employees in 2009," the firm's most profitable ever year. In her April 18 article headlined, "Top Goldman Leaders Said to Have Overseen Mortgage Unit," Louise Story said: "....according to interviews with eight former Goldman employees, senior bank executives played a pivotal role in overseeing the mortgage unit just as the housing market began to go south. These people spoke on the condition that they not be named so as not to jeopardize business relationships or to anger executives at Goldman.... According to these people, executives up to and including Lloyd C. Blankfein, the chairman and chief executive, took an active role in overseeing the mortgage unit as the tremors in the housing market began to reverberate through the nation's economy." A top level decision was made - short the market at the same time advising clients to buy. Around 99% of the mortgage securities sold went sour. In her April 18 articled headlined "Savage Truth: Goldman Tarnished America," financial writer Terry Savage put it this way: It was "as if the dealer in a card game had purposely handed all the players the low cards, while dealing himself all the aces and picture cards from the bottom of the deck. Those (in the game) were bound to get fleeced." One of Goldman's board members, Rajat Gupta, is also being investigated about whether he shared inside information with Galleon Group hedge fund founder Raj Rajaratnam, he then used to initiate trades from June - October 2008. Thus far, no charges have been filed. Gupta said he did nothing wrong, and Rajaratnam had no comment, despite last October being charged with insider trading to which he pled not guilty. For years, Goldman executed Galleon trades. The relationship is close, and Gupta and Rajartnam were former business partners. The Goldman suit involves an investment vehicle called Abacus 2007-AC1, one of two dozen or more like it for the firm and select clients to bet against the housing market. The scheme was to sell toxic asset-backed securities (ABSs) to unwary customers (including foreign banks, pension funds, insurance companies and others), then apparently use credit default swaps (CDSs) to profit when they defaulted, or in other words the equivalent of buying life insurance on an undisclosed terminally ill patient. More still, given Paulson & Co.'s role in helping to structure and select assets, then buying CDSs to short them, betting they'll decline. Paulson thus far faces no charges. Goldman's so far are civil. If criminal ones are filed, prosecutors will have to prove intent, perhaps coming given enough evidence to proceed. On April 19, Wall Street Journal writers Carrick Mollenkamp, Serena NG, Gregory Zukerman, and Scott Patterson headlined, "SEC Investigating Other Soured Deals," saying: Besides Goldman, the SEC "is investigating whether other mortgage deals arranged by some of Wall Street's biggest firms may have crossed the line into misleading investors." Definition of Fraud Black's Law Dictionary, 5th edition, 1979 defines fraud as follows: "All mutifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated." The legal-dictionary.thefreedictionary.com/fraud calls it: "A false representation of a matter of fact - whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed - that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury." Criminal and civil frauds differ in the level of proof required - the former needs a "preponderance of evidence;" the latter must prove intent and be "beyond a reasonable doubt." Times writers Story and Morgenson call the SEC action "a sign (it may be) revitalized." Don't "bet" on it given the agency's deplorable history of being a facilitator, not a regulator, now run Mary Schapiro, a high level industry insider, revolving door into her position before returning to another top spot. Before being appointed, she was CEO of the Financial Industry Regulatory Authority (FINRA), served as president of NASD Regulation (National Association of Securities Dealers, then was NASD's chairman and CEO. Earlier she was an SEC commissioner, and in 2008, George Bush appointed her to the newly established President's Advisory Council on Financial Literacy, focusing on economic empowerment issues. She was also chairperson of the IOSCO SRO Consultative Committee under Bush, another body supposedly "promot(ing) high standards of regulation in order to maintain just, efficient and sound markets," the same ones manipulated to collapse, while the SEC and other watchdogs stayed silent and watched. Will SEC go the limit on Goldman, add criminal to civil charges, lodge them against board members and other top officials, then take on other guilty firms? Goldman is the most prominent, but there's plenty of culpability to go around among the major banks and their complicit hedge fund and other trading partners. According to Karl Denninger: "The real problem is with these so-called 'complex securities' that are in fact nothing more than a gambling contract designed and constructed in such a fashion as to make proper due diligence impossible. Some of these synthetics had literally 100,000 pages of referenced documentation related to them - how can anyone reasonably expect to read and understand that sort of paperwork?" Even worse, they're "abusive (because) someone believes that the reference security or securities in question will decline...." In other words, they're structured to fail - clear evidence of criminal intent by companies and complicit employees, but will SEC officials charge it? Will the Justice Department pursue RICO violations involving the largest financial fraud in history with plenty of guilt to go around? Don't bet on it! The Power of Goldman On October 17, 2008, New York Times writers Julie Creswell and Ben White's article headlined, "The Guys from 'Government Sachs,' " showing how embedded they are in Washington - so much so that competitors call them "Government Sachs." Long regarded as Wall Street savviest firm, "The power and influence that Goldman wields at the nexus of politics and finance is no accident." It has a history and culture of "encouraging its partners to take leadership roles in public service," for the obvious benefit to the firm. Among insiders, it's widely acknowledged that "no matter how much money you pile up, you are not a true Goldman star until you make your mark in the political sphere." According to some, it's a conflict of interest, since the decisions they make directly benefit the firm. Former Treasury Secretary Henry Paulson was appointed because of Joshua B. Bolten, former GS alum and GW Bush chief of staff. "And if there is one thing Goldman has, it is an imposing army of top-of-their-class, up-before-dawn uber-achievers." Other Paulson Treasury stalwarts included: -- Neel Kashkari - originally ran a $700 billion fund buying toxic assets before becoming Interim Assistant Treasury Secretary for Financial Stability under Paulson, his "right-hand man," according to The Times, playing a major role in selling Bear Stearns to JP Morgan; -- Dan Jester, former GS strategic officer involved in 2008 Treasury initiatives, especially the Fannie and Freddie takeovers and bailing out his former employer; -- Steve Shafran, formerly a GS Asian executive involved in Treasury's guarantee of money market funds among other activities; -- Kendrick Wilson III, "a seasoned adviser to chief executives of the nation's biggest banks;" unpaid, he worked on apprising them of possible Treasury plans to get their reaction; -- Edward Forst, a former Paulson adviser on setting up the bailout fund, then returned to his position as Harvard executive vice president; and -- Robert K. Steel, Goldman's former vice chairman, hired to shore up Fannie and Freddie. Other prominent alumni include: -- Robert Rubin, former co-chairman and Treasury Secretary; -- John Corzine, former CEO and chairman, US senator and New Jersey governor; -- Robert Zoellick, former managing director, Deputy Secretary of State and US Trade Representative, and current World Bank president; -- Jeffrey Reuben III, former European managing partner and Under Secretary of State; -- Mark Patterson, former Goldman lobbyist and current Treasury chief of staff; -- Ed Liddy, former GS board member and Paulson-appointed AIG CEO; -- Gene Sperling, former Goldman consultant and Deputy Treasury Secretary under Robert Rubin; -- Robert Hormats, former vice chairman GS International and Under Secretary of State; -- Stephen Friedman, former Bush National Economic Council director, New York Fed board chairman, and Goldman chairman, now a Goldman board member; -- George Herbert Walker IV, former Goldman managing director, current mutual fund manager, and Bush family member; -- John Thain, former GS mortgage desk chief, CEO of the New York Stock Exchange, and Merrill Lynch chairman and CEO; -- and numerous other prominent GS alums with ties to Washington, the New York Fed, and other institutions of power, including currently under Treasury Secretary Geithner. Institutional Risk Analytics managing partner Christopher Whalen called Goldman's ties to the New York Fed "grotesque, (giving) the appearance of conflict of interest....everywhere" - under Paulson, unconstrained as Treasury Secretary to stack the agency with his cronies and run it like a GS subsidiary. A Brief History of Goldman Sachs, Courtesy of the Wall Street Journal -- founded by Marcus Goldman in 1869; -- in 1906, became a major player in the IPO (initial public offering) business; -- in 1929, Goldman involved in the market crash, suffers big losses like others on the Street; -- in 1930, Sidney Weinberg (aka "Mr. Wall Street") becomes CEO; -- in 1956, GS is Ford's lead underwriter; -- in 1969, Gus Levy succeeds Weinberg; -- in 1976, John Weinberg (Sidney's son) succeeds Levy; -- in 1981, Goldman acquires J. Arons & Co., a commodities trading firm; -- in 1990, Robert Rubin and Stephen Friedman succeed J. Weinberg, expanding the company globally; -- in 1999, CEO and chairman Jon Corzine resigns as co-head, leaving Henry Paulson in charge; -- in 2006, Paulson becomes Treasury Secretary; Blankfein succeeds him; -- in 2008, Goldman becomes a bank holding company to have easier access to liquidity and funding; -- in 2009, Goldman has its most profitable ever year; What's Next Goldman stands civilly charged. Will criminal ones follow? One executive only was named. The firm's loyalty to clients has before been questioned. It calls the accusations "unfounded" and claims no responsibility for the credit crisis. So far, its public image alone is tarnished as the symbol of popular outrage, but its profits are the highest ever. Will key top executives be hung out to dry? Will those from other top firms follow? If past is prologue, look for modest fines to be levied, appealed and lowered; perhaps a few prosecutions below the top; pleas to be copped for light (later reduced) sentences; and so-called "financial reform" to become law, the kind this writer addressed in an article titled, "Bogus Washington-Proposed Financial Reform," amounting to "show," but little "dough" to assuage public anger. It will leave business as usual unchecked, so ordinary people will remain "sitting ducks to be scammed again with the full faith and blessing of Washington" - where everything changes but stays the same, and each party is as corrupt as the other. Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached at lendmanstephen@sbcglobal.net. Also visit his blog site at sjlendman.blogspot.com and listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network Thursdays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening. http://www.progressiveradionetwork.com/the-progressive-news-hour/.
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