Goldman Sachs: going broke for profit

Lonesome Hobo Economics:

… Kind ladies and kind gentlemen …
Once I was very prosperous
There was nothing I did lack
I had fourteen carat gold, in my mouth,
and silver on my back

But I did not trust my brother
I carried him to blame
Which led me to my fatal doom
To wander off in shame.

– Bob Dylan, “Lonesome Hobo,” 1967

The Securities and Exchange Commission has charged Goldman Sachs with massive fraud. The golden boys, the guys with so many connections they could NOT lose, the ones that played the big games at the top, whose true dimensions of gangsterish culture even Hollywood has not, despite thousands of attempts, yet fully captured. Them.

Here’s the smoking gun email:

“At the same time, GS&Co recognized that market conditions were presenting challenges to the successful marketing of CDO transactions backed by mortgage-related securities. For example, portions of an email in French and English sent by Tourre to a friend on January 23, 2007 stated, in English translation where applicable: ‘More and more leverage in the system, The whole building is about to collapse anytime now … Only potential survivor, the fabulous Fab[rice Tourre] … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!’ Similarly, an email on February 11, 2007 to Tourre from the head of the GS&Co structured product correlation trading desk stated in part, ‘the cdo biz is dead we don’t have a lot of time left.'”

It turns out they sold billions of dollars of dubiously rated securities to their customers while privately using hedge funds and credit default swaps to bet even more money – the fees they collected and their own money – that their foolish customers would likely be wiped out!

This is called “going broke for profit” in a famous study by George Akerlof and Paul Romer on why bailouts can encourage gangsterish activity in the most “high-minded and prudent people” (Alan Greenspan’s affectionate salute to the bankers’ mentality).

Not only that, Goldman made another fabulous getaway. They persuaded the Federal Reserve and the Treasury Department that regardless of whatever else may happen to companies like insurance giant AIG, the money owed Goldman would be paid in full, by taxpayer dollars if necessary.

It looked like they were going to sail untouched through the greatest financial crisis since the 1930s.

Once client alone, Paulson & Company, cost investors close to $1 billion in mortgage-backed securities while investing heavily in a hedge fund, to capitalize on the housing bust. As noted above, the Goldman executive accused of shepherding the deal boasted about the “exotic trades” he created “without necessarily understanding all of the implications of those monstrosities!!!”

The news sent Goldman Sachs shares and the stock market reeling as the SEC said other financial deals related to the meltdown continue to be investigated.

Goldman Sachs denied the allegations. In a statement, it called the SEC’s charges “completely unfounded in law and fact” and said it will contest them.

Of course the real crime of Goldman Sachs – buying the U.S. government through lobbying and placing former executives as appointees in high places – is not yet exposed. Like CEO Blankenship of Massey Energy, who blatantly bought one, possibly two, state Supreme Court justices to put itself beyond law enforcement, the Hobo would like to see both him and Goldman CEO Blankfein doing the “perp” walk for supreme corruption.

The case highlights the urgent need to bear down on financial reform, and put the shadow banking system which permitted the fraud under firm public control and regulation. Goldman is the argument par exemplar for also breaking up the big banks, and especially the investment houses. It can be argued that Goldman effectively captured the government regulators of the past 20 years – it will be harder for any regulatory regime to enforce the public interest when the regulate-ee has 10 times the resources of the regulator!