by Matt Taibbi
“Basically the way this worked is that the investment banker would call up the investor and say, ‘We’re taking this company public, here’s the offering price—I’m your buddy, would you be willing to take ten thousand shares?’ ” says Tony Perkins, author of The Internet Bubble. “Then he’d say, ‘But since I’m your buddy, if I give you ten thousand shares, next time you have some underwriting business, you’ve got to be my buddy.’ ”
The SEC “investigated” the problem in 1998 but in the end basically blew the issue off. “The SEC basically turned a blind eye to this,” says Ritter. “The code word for investment bankers and regulators was ‘Relationships are okay.’ That was the word for bribery—‘relationships.’ ”
All of these factors conspired to turn the Internet bubble into one of the greatest financial disasters in world history. More than $5 trillion of wealth was wiped out on the NASDAQ alone—an amount that doesn’t seem like an incomprehensible disaster only in light of recent developments. But despite the enormous evaporation of public wealth and similarly large job losses that without a shadow of a doubt were due in significant part to the bank’s indifferent IPO ethics, Goldman’s employees—in what again would be a pattern with the bank—managed to do just fine throughout the crash.
The bank paid out $6.4 billion in compensation and benefits to 15,361 employees in 1999 (an average of close to $420K per employee), paid $7.7 billion to 22,627 employees in 2000 (an average of $340K), and stayed at $7.7 billion, paid out to 22,677 employees ($339K), in 2001. Even in 2002, the year the bank was most affected by the crash, employee compensation barely moved: the total payout was $6.7 billion to 19,739 employees, an average of $341K per person—virtually the same as in the precrash years.
Those numbers are important because the key legacy of the Internet boom years was that the economy was now driven in large part by the pursuit by individual bankers of the enormous personal bonuses the bubble made possible. The notion of “long-term greedy” vanished into thin air as the game became about getting your check before the melon hit the pavement.
Now, if you laddered and spun fifty Internet IPOs and forty-five of them went bust within a year, and besides that you got caught by the SEC and your firm was forced to pay a $40 million fine, well, so what? By the time the SEC got around to fining your firm, the yacht you bought with your IPO bonuses was already five or six years old. Besides, you were probably out of Goldman by then, running the Treasury or maybe the state of New Jersey. (One of the truly comic moments in the history of America’s recent financial collapse came when Jersey governor Jon Corzine, who ran Goldman from 1997 to 1999 and left with $320 million in IPO-fattened Goldman stock, said in 2002 that “I’ve never even heard of ‘laddering.’ ”)
Thus, once the Internet bubble burst Goldman didn’t bother to reassess its strategy; it just searched around for a new bubble. As it happens, it had one ready, thanks in large part to Rubin.
Goldman’s role in the sweeping global disaster that was the housing bubble is not hard to trace. By the peak of the housing boom, 2006, Goldman was issuing $44.5 billion worth of mortgage-based investment vehicles annually (mainly CDOs), a lot of it to institutional investors like pensions and insurance companies. Of course, as we’ve seen, within this massive issue was loads of pure crap, loans underwritten according to a pyramid of lies and fraudulent information. How does a bank make money selling gigantic packages of grade-D horseshit? Easy: it bets against the stuff as it’s selling it! What was truly amazing about Goldman was the sheer balls it showed during its handling of the housing business. First it had the gall to take all this hideous, completely irresponsible mortgage lending from beneath-gangster-status firms like Countrywide and sell it to pensioners and municipalities, old people for God’s sake, and pretend the whole time that it wasn’t toxic waste. But at the same time, it took short positions in the same market, in essence betting against the same crap it was selling. And worse than that, it bragged about it in public.
“The problem I have with Goldman as opposed to all these other banks is that all the other banks, they were just stupid,” says a hedge fund CEO. “They bought this stuff and they actually believed it. But Goldman knew it was crap.”
Indeed, Goldman CFO David Viniar in 2007 boasted that Goldman was covered in the mortgage area because it had shorted the market. “The mortgage sector continues to be challenged,” he said. “As a result, we took significant write-downs on our long inventory positions … However, our risk bias in that market was to be short and that net short position was profitable.”
I asked the hedge fund CEO how it could be that selling something to customers that you’re actually betting against, particularly when you know more about the weaknesses of those products than the customer, how that isn’t securities fraud.
“It’s absolutely securities fraud,” he said. “It’s the heart of securities fraud.”
Eventually, lots of aggrieved investors would agree. In a virtual repeat of the IPO craze, Goldman after the collapse of the housing bubble was hit with a wave of shareholder lawsuits, many of which accused the bank of withholding pertinent information about the quality (or lack thereof) of the mortgages in their CDO issues.
In 2009, for instance, the New York City and State comptrollers sued Goldman for selling bundles of crappy Countrywide mortgages to the city and state pension funds, which lost as much as $100 million in the investments. The suit alleges that Goldman misled investors by “falsely representing that Countrywide had strict and selective underwriting … ample liquidity … and a conservative approach.”
When Viniar bragged about being short on mortgages, he was probably referring to credit default swaps the bank held with firms like AIG. This is part of the reason that the AIG bailout is so troubling: when at least $13 billion worth of taxpayer money given to AIG in the bailout ultimately went to Goldman, some of that money was doubtless going to cover the bets Goldman had made against the stuff the bank itself was selling to old people and cities and states. In other words, Goldman made out on the housing bubble twice: it fucked the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and fucked the taxpayer by making him pay off those same bets.
Again, while the world crashed down all around the bank in 2006, gross employee pay went up to $16.5 billion that year for 26,000 employees, an average of $634,000 per employee. A Goldman spokesman explained: “We work very hard here.”
Fall 2008. After the bursting of the commodities bubble, which, as we’ve seen, was another largely Goldman-engineered scam, there was no new bubble to keep things humming—this time the money seems really to be gone, like worldwide depression gone. Then–Treasury secretary and former Goldman chief Paulson makes a momentous series of decisions. Although he has already engineered a rescue of Bear Stearns that same spring, and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elects to let Lehman Brothers—one of Goldman’s last real competitors—collapse without intervention.
That same weekend, he green-lights a massive $80 billion bailout of AIG, a crippled insurance giant that just happens to owe Goldman Sachs about $20 billion. Paulson’s decision to intervene selectively in the market would radically reshape the competitive dynamic on Wall Street. Goldman’s main competitor, Lehman Brothers, was wiped out, as was Merrill Lynch, which was bought by Bank of America in a Treasury-brokered shotgun wedding. Bear Stearns had died six months earlier. So when the dust settles after the AIG wreck, only two of the top five investment banks on Wall Street are left standing: Goldman and Morgan Stanley.
Meanwhile, after the AIG bailout, Paulson announces his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program (or TARP), and immediately puts a heretofore unknown thirty-five-year-old Goldman banker named Neel Kashkari in charge of administering the funds. In order to qualify for bailout monies, Goldman announces that it will be converting from an investment bank to a bank h
olding company—a move that allows it access not only to $10 billion in TARP funds but to a whole galaxy of less conspicuous publicly backed funding sources, most notably lending from the discount window of the Federal Reserve Bank. Its chief remaining competitor, Morgan Stanley, announces the same move on the same day.
No one knows how much either bank borrows from the Fed, but by the end of the year upwards of $3 trillion will have been lent out by the Fed under a series of new bailout programs—and thanks to an obscure law allowing the Fed to block most congressional audits, both the amounts and the recipients of these monies remain almost entirely secret.
Moreover, serendipitously from Goldman’s point of view, its conversion to a bank holding company means that its primary regulator is now the New York Federal Reserve Bank, whose chairman at the time is one Stephen Friedman, a former managing director of, well, you know.
Friedman is technically in violation of Federal Reserve policy by remaining on the board of Goldman Sachs even as he supposedly is regulating the bank; in order to rectify the problem, he applies for, and of course gets, a conflict-of-interest waiver from Thomas Baxter, the Federal Reserve’s general counsel.
Friedman, in addition, is supposed to divest himself of his Goldman stock after Goldman becomes a bank holding company, but he not only doesn’t dump his holdings, he goes out and buys 37,000 additional shares in December 2008, leaving him with almost 100,000 shares in his old bank, worth upwards of $13 million at the time.
Throughout that crisis period Goldman can’t move an inch without getting a hand job from a government agency. In that same period, in late September 2008, both Goldman CEO Lloyd Blankfein and Morgan Stanley CEO John Mack lobby the government to impose restrictions on short sellers who were attacking their companies—and they get them, thanks to a decision by the SEC on September 21 to ban bets against some eight hundred financial stocks. Goldman’s share price rises some 30 percent in the first week of the ban.
The short-selling ban was galling for obvious reasons: the same bank that just a year before had bragged about the fortune it had made shorting others in the housing market was now getting its buddies in the government to protect it from short sellers in a time of need.
The collective message of all of this—the AIG bailout, the swift approval for its conversion to bank holding company status, the TARP funds, and the short-selling ban—was that when it came to Goldman Sachs, there wasn’t a free market at all. The government might let other players on the market die, but it simply would not allow Goldman Sachs to fail under any circumstances. Its implicit market advantage suddenly became an open declaration of supreme privilege.
“It wasn’t even an implicit assumption anymore,” says Simon Johnson, an economics professor at MIT and former International Monetary Fund official who compared the bailouts to the crony capitalism he had seen in the underdeveloped world. “It became an explicit assumption that the government would always rescue Goldman.”
All of this government aid belies the myth of Goldman as a collection of the smartest cats in the world. All of this stuff sounds complicated, but when you get right down to it, it isn’t. Ask yourself how hard it would be for you to make money if someone fronted you a billion free dollars a week, and you get a rough idea of how Goldman’s relationship to the government pays off.
“It takes skill to borrow money at three percent and lend it at five and make a profit,” says Peter Morici, a professor at the University of Maryland. “It takes less skill to borrow at two percent and lend at five and make a profit. And that’s what’s going on.”
Morici adds that these programs allow Goldman and other banks to make money on the backs of unsuspecting ordinary consumers. With so much cheap government money available, for instance, banks no longer need to pay a premium to attract money from private depositors, which (among other things) has driven interest rates on certificates of deposit (CDs) way down. Many elderly people rely on CD interest for their income, but they’re shit out of luck in an era when the government chooses to bail out rich bankers, not poor old people. “It’s taxing Grandma to pay Goldman,” says Morici.
Here’s the real punch line. After playing an intimate role in three historic bubble catastrophes, after helping $5 trillion in wealth disappear from the NASDAQ in the early part of the 2000s, after pawning off thousands of toxic mortgages on pensioners and cities, after helping drive the price of gas up above $4.60 a gallon for half a year, and helping 100 million new people around the world join the ranks of the hungry, and securing tens of billions of taxpayer dollars through a series of bailouts, what did Goldman Sachs give back to the people of the United States in the year 2008?
Fourteen million dollars.
That is what the firm paid in taxes in 2008: an effective tax rate of exactly 1, read it, one, percent. The bank paid out $10 billion in compensation and bonuses that year and made a profit above $2 billion, and yet it paid the government less than a third of what it paid Lloyd Blankfein, who made $42.9 million in 2008.
How is this possible? According to its annual report, the low taxes are due in large part to changes in the bank’s “geographic earnings mix.” In other words, the bank moved its money around so that all of its earnings took place in foreign countries with low tax rates. Thanks to our completely fucked corporate tax system, companies like Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely, even while they claim deductions up front on that same untaxed income. This is why any corporation with an at least occasionally sober accountant can usually find a way to pay no taxes at all. A Government Accountability Office report, in fact, found that between 1998 and 2005, two-thirds of all corporations operating in the United States paid no taxes at all.
This should be a pitchfork-level outrage—but somehow, when Goldman released its postbailout tax profile, barely anyone said a word: Congressman Lloyd Doggett of Texas was one of the few to remark upon the obscenity. “With the right hand begging for bailout money,” he said, “the left is hiding it offshore.”
Once the bleeding of the black summer of 2008 stopped, Goldman went right back to business as usual, immediately dreaming up new schemes despite the very recent glimpse of the abyss of bankruptcy its last run of bubble-manic Hamburglaring had provided. The bank was like a drug addict who wakes up from a near OD and, first thing, runs out of the ER in a hospital johnny to go cop again.
One of its first moves of the post-AIG era was to surreptitiously push forward its reporting calendar a month. For years Goldman had called its first quarter the three-month period beginning on December 1 and ending on February 28. In 2009, however, it started its first quarter on January 1 and ended it on March 31. The only problem was, its fourth quarter of the previous year had ended on November 30, 2008.
So what happened to that one-month period, December 1 to December 31, 2008? Goldman “orphaned” it, not counting it in either fiscal year. Included in that “orphaned” month were $1.3 billion in pretax losses and $780 million in after-tax losses; the bank’s accountants simply waved a wand and the losses were gone, disappeared Enron style down the wormhole of the nonexistent month. This is the accounting equivalent of kicking the ball forward ten yards between plays to get a first down, and they did it right out in the open.
At the same time it was orphaning more than a billion dollars in losses, the bank announced a highly suspicious $1.8 billion profit for the first quarter of 2009, with a large chunk of that money seemingly coming from money funneled to it by taxpayers via the AIG bailout (although the bank cryptically claims in its first-quarter report that the “total AIG impact on earnings, in round numbers, was zero”). “They cooked those first-quarter results six ways from Sunday,” says the hedge fund manager. “They hid the losses in the orphan month and called the bailout money profit.”
Two more numbers stood out from that stunning first-quarter turnaround: one, the bank paid out an astonishing $4.7 billion in bonuses and compensation in that quarter, an 18 percent incr
ease over the first quarter of 2008. The other number was $5 billion—the amount of money it raised in a new share issue almost immediately after releasing its first-quarter result. Taken altogether, what these numbers meant was this: Goldman essentially borrowed a $5 billion salary bump for its executives in the middle of a crisis, using half-baked accounting to reel in investors, just months after receiving billions in a taxpayer bailout.
Moreover, despite being instructed by the feds not to give any public indication of what the results of a government “stress test” of bailed-out banks might be, Goldman made its $5 billion share offering right before its test results were announced. The $5 billion offering came on April 15, 2008, and was later bumped up to $5.75 billion; Goldman also issued $2 billion in bonds two weeks later, on April 30. By the end of the first week in May, the stress test results had been announced and Goldman had passed with flying colors.
Doing the share offering and the bond when it did was more or less an open signal to the market that Goldman knew it was going to pass its test. It was a brazen announcement of insider privilege, and everybody on Wall Street knew what it meant. In a Bloomberg story on April 30 you could almost see the smirk emanating from the bank’s public relations department:
April 30 (Bloomberg)—Goldman Sachs Group Inc., by selling bonds and stock yesterday, may be signaling that there won’t be any surprises next week when the results of government stress tests are revealed …
Securities laws require the company to reveal material nonpublic information before selling any stock or bonds. Lucas van Praag, a spokesman for New York–based Goldman Sachs, declined to comment.
Beyond that, the bank somehow seemed to know exactly what the Federal Reserve’s conditions would be before it would be allowed by the government to repay its TARP debt, which was supposed to be a carefully managed process—the government, at least theoretically, did not want any of the TARP recipients paying the money back too soon, as this might reflect poorly on those banks that were still unable to pay.