Goldman Sachs Proof that God hates its Customers

By William K. Black

The chief executive of Goldman Sachs, which has attracted widespread media attention over the size of its staff bonuses, says he believes banks serve a social purpose and are “doing God’s work.”

November 9, 2009, 5:27 am

Blankfein Says He’s Just Doing ‘God’s Work’

One of our family rules is that it is impossible to compete with unintentional self-parody.  Lloyd Blankfein’s claim that investment bankers’ zeal in serving Mammon produces endless mitzvot is a jewel of self-parody.

Greenpeace and the Berne Declaration have given their jury’s shame award, the “Public Eye” prize, to Goldman Sachs.   The public voted the companion prize to Shell).  I participated as a keynote speaker at the January 23, 2013 award ceremony in Davos (fittingly at the same time it was hosting the World Economics Forum – with the special sponsorship of Goldman Sachs.  I was asked to discuss why the financial system has become so criminogenic.  The jury’s award to Goldman Sachs emphasized its role with Greece.  I write to supplement that episode.  The clear theme is that Goldman Sachs loves its clients with the same lip-smacking love that any predator has for incautious prey.  If Blankfein is right that Goldman Sachs is doing God’s work it follows logically that God hates Goldman’s clients.

Goldman Sachs’ serial abuses

Europeans are most likely to be familiar with Goldman Sachs’ role in assisting Greek politicians to hide sovereign debt so that Greece could appear to conform to the requirements to adopt the euro.  Greece and Goldman Sachs were not unique in running this scam and the scam was known to the EU, so I consider the scam aspect of the deal one of Goldman’s lesser abuses.

02/08/2010 06:55 PM
Greek Debt Crisis

How Goldman Sachs Helped Greece to Mask its True Debt

By Beat Balzli

“Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit.

Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought.  ‘Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future,’ one insider recalled, adding that Mediterranean countries had snapped up such products.

Greece’s debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.

Fictional Exchange Rates

Such transactions are part of normal government refinancing. Europe’s governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn’t show up in the Greek debt statistics. Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives. ‘The Maastricht rules can be circumvented quite legally through swaps,’ says a German derivatives dealer.

In previous years, Italy used a similar trick to mask its true debt with the help of a different US bank. In 2002 the Greek deficit amounted to 1.2 percent of GDP. After Eurostat reviewed the data in September 2004, the ratio had to be revised up to 3.7 percent. According to today’s records, it stands at 5.2 percent.

At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.”

The passage I have quoted shows two subtle problems that caused great harm during the crisis that prompted the Great Recession.  The swap deal was treated as “legal” by the EU even though it was an obvious fiction that would further reduce Greece’s ability to meet the fiscal requirements to adopt the euro.  Note the tone of the financial participants who commented on the scam – “no problem here.”

The swap deal was not “part of normal government refinancing.”  A Nation with a sovereign currency should be borrowing in its own currency rather than foreign currencies.  A Nation that borrows in a non-sovereign currency exposes itself to the bond vigilantes and a potential “death spiral” if it borrows in a non-sovereign currency.  The article was written in 2010 when these problems should have been obvious to any financial journalist.

My primary concern with the swap deal that Goldman designed for Greece, however, is that it was a terrible deal for the Greek people.  First, giving up its sovereign currency and adopting the euro created a terrible risk of financial crisis for Greece.  Goldman was one of the leading “bond vigilantes” that gained exceptional leverage over every EU periphery Nation that gave up its sovereign currency.  Goldman has an inherent conflict of interest with Greece when it came to the swap transaction designed to ensure that Greece would adopt the euro.  It is telling that Goldman sold its interest in the swap in 2005, relieving it of the risk of loss in the event of a Greek crisis.

Second, the swap deal was a terrible deal for Greece and a gold mine for Goldman.  Greece was guaranteed to lose on the deal. From Bloomberg:

On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.

Goldman Sachs and Enron

Goldman was sued by Enron’s bankruptcy trustee for a “fraudulent conveyance or preference” and by a major investor (the University of California) for a violation of the securities laws in its capacity as underwriter for an Enron investment.  It settled both cases for substantial sums.

It is telling that Goldman was far from an outlier in assisting Enron’s controlling officers’ frauds and it seeking to avoid losses when Enron failed.  Senator Levin emphasized this point.

The Senate Permanent Subcommittee on Investigations, which I chair, released reports on the failure of Enron’s board members to safeguard shareholder interests; actions taken by major financial institutions to help Enron cook its books; and Enron’s use of financial engineering to make its financial results look better than they were, while evading taxes.

The Financial Crisis Inquiry Commission (FCIC) obtained a devastating memorandum from the long-time head of supervision of the Federal Reserve.  He explains that he was so disturbed by the fact that many elite banks eagerly assisted Enron’s frauds that he arranged a special briefing for the Fed’s leaders to alert them to the problem and the need to take vigorous action.  He informed the FCIC that his briefing enraged the Fed’s senior leaders – against the supervisors – for daring to criticize the elite banks for aiding and abetting one of the largest frauds in world history.  As Chairman Levin explained; the Enron frauds that the banks aided created fictional income, hid real losses, disguised massive debt, and helped Enron commit massive tax fraud.  They also produced large fees for the banks.

“Notes on the performance of prudential supervision in the years preceding the financial crisis by a former director of banking supervision and regulation at the Federal Reserve Board (1991 to 2006)” Rich Spillenkothen (May 31, 2010) (available on the FCIC’s website archives at Stanford University).

The Fed’s reaction to the elite banks’ aiding and abetting Enron’s frauds was characteristic of its sister agencies.  They proceeded to stall and emasculate a proposed rule on “structured transactions” that was originally designed to prevent such frauds.  This travesty helped set the stage for the frauds of the ongoing crisis.

Goldman Sachs’ abuses that helped drive the crisis

Goldman was a major “vector” spreading the fraudulent mortgage transactions that drove the U.S. financial crisis.  The United States government has brought multiple fraud charges against Goldman.  The Federal Housing Finance Administration (FHFA), in its capacity as conservator for Fannie Mae and Freddie Mac), sued Goldman.  The FHFA charges that Goldman:

75. Defendants had enormous financial incentives to complete as many offerings as quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements, or conducting adequate and reasonable due diligence. For example, the depositor in virtually all the Securitizations, GS Mortgage Securities Corp., was paid a percentage of the total dollar amount of the offering on completion of the Securitizations. Similarly, Goldman, Sachs & Co., as the underwriter, was paid a commission based on the amount it received from the sale of the Certificates to the public.

76. As revealed by the U.S. Senate Permanent Subcommittee on Investigations, a March 9, 2007 e-mail from Defendant Daniel L. Sparks, who was both an officer and director of Defendant GS Mortgage Securities Corp., as well as the head of Goldman’s mortgage department, demonstrates that Goldman put the highest priority on packaging and selling Goldman’s warehoused mortgages, if for no other reason than to quickly get them off Goldman’s books: “Our current largest needs are to execute and sell our new issues—CDO’s and RMBS—and to sell our other cash trading positions…. I can’t overstate the importance to the business of selling these positions and new issues.” U.S. Senate Permanent Subcommittee on Investigations, Hearing on Wall Street and the Financial Crisis: The Role of Investment Banks, Ex. 76 (Apr. 27, 2010).

The context is that under the direction of Henry Paulson, Goldman Sachs invested heavily in non-prime loans.  Paragraph 153 of the FHFA complaint contains this statement.

Under Paulson’s leadership, Goldman Sachs had played a central role in the creation and sale of mortgage securities. From 2004 through 2006, the company provided billions of dollars in loans to mortgage lenders; most went to the subprime lenders Ameriquest, Long Beach, Fremont, New Century, and Countrywide through warehouse lines of credit, often in the form of repos. During the same period, Goldman acquired $53 billion of loans from these and other subprime loan originators, which it securitized and sold to investors. From 2004 to 2006, Goldman issued 318 mortgage securitizations totaling $184 billion (about a quarter were subprime) …. FCIC Report, at 142.

Ameriquest, Long Beach, Fremont, New Century, and Countrywide were all notorious for the disastrous quality of their mortgage loans.  Paulson’s actions put Goldman at a severe risk of catastrophic failure.

After Paulson left Goldman and became the U.S. Secretary of the Treasury, his successors realized that nonprime loans were likely to suffer severe losses.  They sought to sell their holding of nonprime loans as their top corporate priority.  That is the context of the Abacus deal that led the SEC to sue Goldman (discussed in paragraph 83 of the FHFA complaint).

82. Goldman has been the subject of numerous regulatory actions and investigations for matters similar to those raised in this Complaint. In May 2009, the Massachusetts Attorney General announced a settlement agreement with Goldman arising out of an investigation into the role of Goldman and other banks in: (i) facilitating the origination of illegal or otherwise improper mortgages; (ii) failing to ascertain whether loans purchased from originators complied with stated underwriting guidelines; (iii) failing to prevent problem loans from being put into securitization collateral groups; (iv) failing to correct inaccurate information in securitization trustee reports concerning repurchases of bad loans; and (v) failing to disclose to investors the problems with loans placed into securitization collateral groups. The Massachusetts Attorney General, in announcing the settlement, specifically stated that Goldman did not take “sufficient steps to avoid placing problem loans in securitization pools.” As part of its settlement with the Massachusetts Attorney General, Goldman agreed to provide approximately $50 million in relief to homeowners and an additional $10 million to the Commonwealth of Massachusetts. See Attorney General Martha Coakley and Goldman Sachs Reach Settlement Regarding Subprime Lending Issues (May 11, 2009). 

83. In addition, Goldman has been the subject of investigations by both the Securities and Exchange Commission and the New York Attorney General. On July 15, 2010, the SEC announced that Goldman had agreed to pay $550 million to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse. In agreeing to the SEC’s largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information. See Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO, SEC Litig. Release No. 21592 (July 15, 2010).

The FHFA complaint provides independent evidence indicating appraisal fraud and then adds:

This conclusion is further confirmed by the findings of the Financial Crisis Inquiry Commission, which identified “inflated appraisals” as a pervasive problem during the period of the Securitizations, and determined through its investigation that appraisers were often pressured by mortgage originators, among others, to produce inflated results. See Financial Crisis Inquiry Commission, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (2011).

I would add that no honest lender would inflate an appraisal and in almost all cases only lenders and their agents have the ability to induce appraisers to inflate appraisals.  “Pervasive” appraisal fraud demonstrates pervasive mortgage fraud by lenders.

The FHFA states that its investigation found that:

119. The Registration Statements contained material misstatements and omissions regarding compliance with applicable underwriting guidelines. Indeed, the originators for the loans underlying the Securitizations systematically disregarded their respective underwriting guidelines in order to increase production and profits derived from their mortgage-lending businesses.

Note that the complaint frequently alleges facts that would establish fraud but generally does not use the word “fraud” because the FHFA would have to bear a higher burden of proof and additional pleading requirements if it used that term in making each of its claims for relief.

The FHFA complaint explained that Goldman sold Fannie and Freddie large amounts of loans originated by Countrywide, and cites the FCIC report to explain why such loans were particularly likely to be abusive.

The FCIC Report singled out Countrywide for its role:

Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities.  As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in “catastrophic consequences.” Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in “financial and reputational catastrophe” for the firm. But they did not stop. See FCIC Report, at xxii.

The FHFA then goes through a series of mortgage originators that Goldman purchased loans from and then resold to Fannie and Freddie and cites evidence from government investigations indicating that these originators were engaged in fraud in the origination and sale of the mortgages.  (Again, the FHFA complaint does not use the word “fraud” in these paragraphs.)

The FHFA charges that Goldman knew it was selling bad loans to Fannie and Freddie with the aid of false representations and warranties.

Goldman Sachs was informed that 23 percent of the loans Clayton reviewed for Goldman “failed to meet guidelines.”  These loans were not subject to any proper “exceptions,” as they did not have any “compensating factors.” Rather, these loans were plainly defective.

157. Confronted with such a high failure rate, Goldman should have either rejected the pool outright, or investigated whether that originator could be considered a trusted source of loans in the future.

The FHFA charges that Goldman knowingly sold bad loans through false representations for the purpose of increasing its profits.

160. Goldman was not content simply to let poor loans pass into its securitizations in exchange for its fees and repayment of its warehouse loans. Goldman took the fraud further, affirmatively seeking to profit from this knowledge. According to the September 2010 FCIC testimony of Clayton’s former president, D. Keith Johnson, the investment banks would use the exception reports to force a lower price for itself, and not to benefit investors at all:

 I don’t think that we added any value to the investor, the end investor, to get down to your point. I think only our value was done in negotiating the purchase between the seller and securitizer. Perhaps the securitizer was able to negotiate a lower price, and could maximize the line. We added no value to the investor, to the rating agencies.

 FCIC Staff Int’v with D. Keith Johnson, Clayton Holdings, LLC (Sept. 2, 2010).

In other words, rather than reject defective loans from collateral pools, or cease doing business with consistently failing originators, investment banks like Goldman would instead use the Clayton data simply to insist on a lower price from the loan originators, leaving more room for its own profits while the defective loans were hidden from investors such as Fannie Mae and Freddie Mac in securitization pools.

 161. Goldman further sought to leverage this information in its warehouse lending business. Goldman used the discovery of poor lending practices to increase its profits—by charging higher warehouse fees to those originators identified as being problematic. See FCIC Report, at 484 n.2038 (citing Goldman email dated Feb. 2, 2007 which discussed proposal to charge higher warehouse fees to mortgage originators with higher EPD [early payment default] and “drop out” rates, including Fremont and New Century).

162. In light of the fact that Clayton was operating under extreme pressure from its clients to allow as many loans as possible to remain in the securitization pools and to conduct increasingly cursory reviews, the high rejection and waiver rates are even more damning for Goldman. Based upon such pressure on Clayton, Goldman knew the true rates of defects were actually much higher than Clayton reported, and that it was allowing in even more defective loans than Clayton’s Trending Reports have since revealed.

I need to emphasize that no honest seller of mortgages would exert “extreme pressure” on loan underwriters to act in this fashion.

The FHFA then cites Goldman’s internal communications to demonstrate that Goldman knew it was selling defective mortgages – and took great pride in doing so.

164. That Goldman knew of the originators’ abandonment of applicable underwriting guidelines and of the true nature of the mortgage loans it was securitizing is further evidenced by how Goldman handled its own investments. Goldman internally characterized its offerings as “junk,” “dogs,” “big old lemons,” and “monstrosities.” FCIC Report at 235–36. Nevertheless, it congratulated itself for successfully offloading such “junk” onto others. As the public learned in the FCIC’s Report, by January 2007, “Daniel Sparks, the head of Goldman’s mortgage department, extolled Goldman’s success in reducing its subprime inventory, writing that the team had ‘structured like mad and traveled the world, and worked their tails off to make some lemonade from some big old lemons.” Id. at 236.

165. Even more damning than Goldman’s decision to use securitization as a tool to move declining loans off of Goldman’s own books are the huge bets Goldman placed against the very mortgage-backed investments it sold to the GSEs and that are at issue in this Complaint.  Goldman coupled those sales with an aggressive campaign to force lenders (the very same ones who originated loans in the Certificates) to repurchase defective loans which, due to the slowing securitization market, had been stuck on Goldman’s own books.

The FHFA explains how early Goldman began to “short” the “junk” mortgages that it was so energetically seeking to dump on those who sold it mortgages and those who purchased mortgages from Goldman.

166. Beginning in 2005 and into 2006, Goldman began to take an increasingly pessimistic view of the subprime mortgage market. Goldman’s sophisticated and powerful proprietary models analyzed trends in the performance of the hundreds of thousands of mortgages that collateralized its RMBS, and those models and superior access to data regarding the underlying mortgage positions on its books gave Goldman unique knowledge that those securities were not as safe as their offering materials and ratings represented to investors. In fact, Goldman’s models and data showed that the RMBS had declined up to 70 percent from their face amounts. In his book, Money and Power: How Goldman Sachs Came to Rule the World 494–95 (2011) William D. Cohan explained:

Goldman’s RMBS model could analyze all the underlying mortgages and value the cash flows, as well as what would happen if interest rates changed, if prepayments were made, or if the mortgages were refinanced. The model could also spit out a valuation if defaults suddenly spiked upward …. [Goldman’s] proprietary model was telling [Goldman] that it would not take much to wipe out the value of tranches of a mortgage-backed security that had previously looked very safe, at least in the estimation of the credit-rating agencies that had been paid (by Wall Street) to rate them investment grade. By tweaking the various assumptions based on events that seemed increasingly likely, [Goldman’s] models were showing a marked decrease in the value of mortgage-related securities. Goldman’s models said even if you don’t believe housing prices are going to go down, even if we apply low-probability scenarios about it going negative … there’s no way this stuff can be worth anywhere near one hundred [cents on the dollar]…. [Goldman’s] models had them pegged anywhere between 30 cents and 70 cents ….

According to a former Goldman employee, these models as well as other information in Goldman’s exclusive possession showed it “the writing on the wall in this market as early as 2005,” Gretchen Morgenson & Louise Story, Banks Bundled Bad Debt, Bet Against It and Won, N.Y. Times, Dec. 24, 2009, and into the “the early summer of 2006,” Senate PSI Report at 398.

By 2005, Goldman believed that the nonprime mortgage paper market would collapse, with losses running between 30%-70%.  Losses that large would cause any bank with large nonprime holdings to fail.  Goldman didn’t simply wish to avoid these losses.  Goldman saw its superior knowledge of the coming catastrophe as an opportunity to profit from its clients’ losses.

168. Goldman entered into swaps worth hundreds of millions of dollars during this time period, where it stood of the “short” side of the transaction, while its counterparty went “long.” For example, according to the Senate PSI Report, Goldman underwrote GSAMP 2007-FM2, a securitization it sold to Freddie Mac, and then turned around and bet against that same securitization through use of credit default swaps. As the Senate PSI Report explained:

Goldman marketed and sold the Fremont securities to its customers, while at the same time purchasing $15 million in CDS contracts referencing some of the Fremont securities it underwrote. Seven months later, by October 2007, the ratings downgrades had begun; by August 2009, every tranche in the GSAMP securitization had been downgraded to junk status.

Senate PSI Report at 516 (footnotes omitted). Goldman’s shorting of GSAMP 2007-FM2 was emblematic of its approach to the Securitizations it marketed and sold to the GSEs. As a recent magazine article explained, “Goldman was like a car dealership that realized it had a whole lot full of cars with faulty brakes. Instead of announcing a recall, it surged ahead with a two-fold plan to make a fortune: first, by dumping the dangerous products on other people, and second, by taking out life insurance against the fools who bought the deadly cars.” Matt Taibbi, The People vs. Goldman Sachs, Rolling Stone, May 26, 2011.

Goldman’s shorting led to it taking enormous bets against its clients’ interests.

169. Continuing from 2006 and 2007, Goldman used its shorting strategy as a way to reduce its own mortgage risk while continuing to create and sell mortgage-related products to its clients. In 2006, Goldman made a massive $9 billion bet that the same type of assets it was selling to investors like Fannie Mae and Freddie Mac would collapse. See id. at 419. The $9 billion short bet was placed in 2006 by Goldman’s mortgage department, the same department that oversaw the sale of the Certificates to the GSEs. Goldman’s net short position in 2007 rose as high as $13.9 billion. Id. at 430. As the Senate PSI Report explained, Goldman “sold RMBS and CDO securities to its clients without disclosing its own net short position against the subprime market or its purchase of CDS contracts to gain from the loss in value of some of the very securities it was selling to its client.” Id. at 9.

170. On March 9, 2007, Goldman’s Daniel Sparks wrote: “Our current largest needs are to execute and sell our new issues—CDO’s and RMBS—and to sell our other cash trading positions …. I can’t overstate the importance to the business of selling these positions and new issues.” A leading structured finance expert reportedly called Goldman’s practice “the most cynical use of credit information that I have ever seen,” and compared it to “buying fire insurance on someone else’s house and then committing arson.” Senate PSI Hearing Ex. 4/27-76. As the Senate PSI found, Goldman “sold RMBS securities to customers at the same time it was shorting the securities and essentially betting that they would lose value.” Senate PSI Report at 513.

I want to emphasize the devastation caused by Goldman’s failure to warn about the coming crisis.  Goldman’s CEO, Henry Paulson, became Treasury Secretary on July 10, 2006 and served for the remainder of Bush’s term.  In 2005 and 2006, when Goldman’s “quants” became aware of the coming catastrophe, there was time for the Bush administration and the industry to vastly reduce the financial crisis and the severity of the recession. Millions of people would have kept their jobs and massive amounts of wealth could have been saved if Goldman had warned Henry Paulson of the coming disaster and told him it was essential to act immediately against nonprime lending, collateralized debt obligations (CDOs), and “liar’s” loans.  In Paulson, Goldman had what should have been the perfect person, in the perfect role, at the perfect time to save the Nation from a catastrophe.  I have not read any account suggesting that they even considered picking up the phone and calling to warn Henry Paulson.  Instead, they worked secretly with John Paulson (no relation) to seek to maximize their profits, at the expense of their clients, from the coming collapse.

Indeed, this discussion understates Goldman’s culpability because Goldman’s executives were principal architects of the crisis.  Its former CEO, Robert Rubin, led the disastrous deregulation in the Clinton administration and was a leader in pushing Citicorp to become a major contributor to the hyper-inflation of the bubble.  Henry Paulson, when he was Goldman’s CEO, made Goldman a leading “vector” spreading fraudulent mortgages through the global financial system (and creating Goldman’s holdings of toxic mortgages that produced huge, fictional, accounting income in the short-term – making Paulson’s already large compensation massive).  As President Bush’s Treasury Secretary, Paulson was an important obstruction to efforts to adopt vital regulations and provide effective supervision.  The Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) are bureaus of Treasury.  Paulson took no action to prevent the OTS’ and the OCC’s tragic “competition in regulatory laxity” that produced the inevitable “race to the bottom.”  Their race was particularly destructive because the agencies competed to be the most aggressive in “preempting” state efforts to regulate the accounting control frauds that were hyper-inflating the bubble that would soon cause the Great Recession.  Paulson could have stopped that race to the bottom with two one-minute telephone calls.  Paulson never did so.  He was too busy working on his personal priority – emasculating the Sarbanes-Oxley Act (the reform legislation adopted in response to the Enron-era reforms).  Paulson’s effort to emasculate the Act would have further enriched Goldman.

Because Goldman has long-followed the strategy of placing senior officials in high government positions in which they can shape national financial policies it bore a special moral responsibility to undo the actions it, and its alums, took to make the financial system so criminogenic.  Any patriotic American would have warned President Bush that his anti-regulatory policies were creating a catastrophe for America.  There is no evidence that any Goldman official even considered making such a mitzvah.

The FHFA complaint notes that Goldman’s mortgage misconduct continued after the housing market bubbles burst.

186. Even more recently, on September 1, 2011, the Federal Reserve Board sanctioned Goldman Sachs for “a pattern of misconduct and negligence relating to deficient practices” in its former mortgage unit, Litton Loan Servicing LP., including those involving “robo-signing”—a practice that often results in defective foreclosures.

“Robo-signing” is a form of fraud that relies on fraud and perjury on affidavits.  Goldman Sachs has recently settled these claims of foreclosure fraud.

No elite banker is going to be prosecuted for these massive frauds, but a minor league player that the elite bankers used to do their dirty work on foreclosures may serve a relatively brief term in prison.

“DocX” processed millions of mortgage foreclosures, primarily for the largest banks.  Ms. Brown was its CEO.  How many of the firm’s foreclosures were fraudulent?

In her plea, Ms. Brown admitted to participating in the falsification of more than a million documents.

Over a million felonies – and this epidemic of fraud was not stopped by the industry, regulators, or whistleblowers at DocX.  It would still be going on but for the work of lawyers defending homeowners in foreclosures who became suspicious and took the depositions that exposed the fraud.

Goldman and the Divine Right of Financial Kings

Elite bankers do not react well to inquiries about their ethics.  I will mention only two examples.

At one point Mr. Viniar prompted a collective gasp when Mr. Levin asked him how he felt when he learned that Goldman employees had used vulgar terms to describe the poor quality of certain Goldman deals. Mr. Viniar replied, “I think that’s very unfortunate to have on e-mail.”

Yes, the problem was not Goldman’s celebration of selling “shitty” loans to customers, but of keeping a record of that celebration.  The second was also in Senate testimony, but by the senior HSBC official who led the push to evade U.S. sanctions on funding terrorist organizations.  These two adjacent sentences in the newspaper account of his testimony.

Christopher Lok, the former head of HSBC’s banknotes department, was said to have pressed other executives at the bank to reopen the account of a Saudi Arabian bank with suspected ties to Al Qaeda.

During the hearing, Mr. Lok said that “there were some occasions when I communicated with my colleagues in compliance in a manner that was unnecessarily aggressive and harsh. These communications were unprofessional, and I deeply regret them.”

His regret was possible impoliteness to his colleagues in the course of ordering them to fund Al Qaeda.  The gulf between elite bankers and human beings is immense.

Goldman Sachs’ alumni network is extraordinary.  In the U.S., we refer to it as “Government Sachs.”

It exerts additional power on regulators and politicians through political contributions.

Goldman alums get treated in a unique fashion; which allows them to do unique favors for Goldman.

Treasury Secretary Geithner used AIG, when it was primarily owned by the government, to do a back door bailout of AIB’s bank creditors, including Goldman.  In the course of the strategy discussions, two prominent Goldman alums who were federal officials were given special exemptions from normal conflict of interest rules.

Geithner gave Fed official waiver on AIG holdings

Thu, July 21, 2011

By Mark Felsenthal and Pedro da Costa

“WASHINGTON (Reuters) – Treasury Secretary Timothy Geithner, while head of the New York Federal Reserve Bank, granted a waiver that allowed his eventual successor William Dudley to hold on to investments in firms getting emergency help.

Dudley, a former partner at Goldman Sachs who at the time ran the New York Fed’s powerful markets desk, was allowed to maintain his financial stake in insurance giant AIG, whose government bailout helped prop up investment firms like Goldman Sachs.

Among the 12 regional Fed banks, the New York institution is first among peers because of its location on the doorstep of financial markets. Its president has a permanent vote on the Fed’s interest rate-setting panel and it manages the Fed’s all-important market operations.

The Fed was embarrassed in early 2009 when it became public that New York Fed Board Chairman Stephen Friedman, a member of the Goldman Sachs board, held a substantial amount of stock in that company when it was allowed to come under the Fed’s protection during the crisis.

Friedman defended the holding, for which he received a waiver, but resigned from his position to spare the Fed the controversy.”

In addition to Henry Paulson, Robert Rubin ran Goldman Sachs before becoming Treasury Secretary.  John Corzine ran Goldman Sachs before becoming Governor of New Jersey and then blowing up MF Global.

Europe’s key financial positions have often been held by Goldman alums.  It includes Mario Draghi, Mario Monti, and Mark Carney.

There are other scandals brewing allegedly involving Goldman and other elite banks.  Matt Taibbi describes the bid rigging involved in determining which firm would issue municipal bonds.

The Scam Wall Street Learned From the Mafia

How America’s biggest banks took part in a nationwide bid-rigging conspiracy – until they were caught on tape (June 21, 2012).

Four banks that took part in the scam (UBS, Bank of America, Chase and Wells Fargo) paid $673 million in restitution after agreeing to cooperate in the government’s case. (Bank of America even entered the Justice Department’s leniency program, which is tantamount to admitting that it committed felonies.) Since that settlement involves only four of the firms implicated in the scam (a list that includes Goldman, Transamerica and AIG, as well as banks in Scotland, France, Germany and the Netherlands), and since settlements in Wall Street cases tend to represent only a tiny fraction of the actual damages (Chase paid just $75 million for its role in the bribe-and-payola scandal that saddled Jefferson County, Alabama, with more than $3 billion in sewer debt), it’s safe to assume that Wall Street skimmed untold billions in the bid-rigging scam. The UBS settlement alone, for instance, involved 100 different bond deals, worth a total of $16 billion, over four years.

In the bankruptcy of Jefferson County, Alabama, we learned that Goldman Sachs accepted a $3 million bribe from J.P. Morgan Chase to permit Chase to serve as the sole provider of toxic swap deals to the rubes running metropolitan Birmingham – “an open-and-shut case of anti-competitive behavior,” as one former regulator described it.

But I will end the discussion of Goldman on a “business as usual” note.  Blankfein has been pushing for the U.S. to engage in austerity.  In particular, he is eager to cut the safety net.  His purported logic is that the budget deficit is alarming.  So what did Blankfein cause Goldman to do at year end in connection with the “fiscal cliff” deal?  First, he successfully lobbied for the deal to include a special tax break for Goldman.  Second, he paid the top executives’ bonuses early so that they would receive it before taxes on the wealthiest two percent of Americans went up in January 2013.  The special tax benefits were so egregious that even the Wall Street Journal blasted them as a “Crony Capitalist Blowout.”  The combined effect of his display of political power and greed was to reduce tax revenue for the government, increase the deficit, and to make the top one-thousandth of the one percent even wealthier.

The ‘Crony Capitalist Blowout’

By Bill Moyers, Bill Moyers and Company (12 January 2013).



Goldman Sachs is a fitting recipient of the “Public Eye” shame prize, but it is vital to remember that Goldman is not a singular rotten apple in a healthy bushel.  It is characteristic of the abuses that become endemic when powerful plutocrats achieve de facto immunity from the criminal laws.  A very conservative French economist described the inevitable corrupting effect of absolute corporate power over government.

“When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it.”

  • Frederic Bastiat

“Doing God’s work” – Blankfein has announced a moral code that glorifies ripping off Goldman’s clients for the greater glory and wealth of Goldman’s senior officers.

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