Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America

by Matt Taibbi

  So on June 1, the Fed outlined its criteria for repayment: banks hoping to pay money back would have to do so by issuing non-FDIC-backed debt and meet a series of other conditions, all of which Goldman appeared to know in advance.

  “They seemed to know everything that they needed to do before the stress test came out, unlike everyone else, who had to wait until after,” says Michael Hecht of JMP Securities. “[The government] came out as part of the stress test and said, If you want to be able to pay back TARP eventually, you have to issue five-year or greater, non-FDIC-insured debt—which Goldman Sachs already had, a week or two before.”

  Unlike Morgan Stanley, which didn’t orphan its losses in a phantom December and didn’t show a house-of-cards profit in the first quarter of 2009, Goldman was pronounced healthy enough to start repaying TARP. “We would like to get out from under [TARP],” said Goldman CFO David Viniar, who described repayment of TARP as the bank’s patriotic “duty.”

  Which it might have been, but it also happened to be the last necessary step to ending the compensation restrictions that went with the bailout money. Once the bank fulfilled its “duty,” its executives would be free once again to pay themselves truly obscene salaries without government interference.

  And that’s exactly what happened: Goldman announced a stunning second-quarter profit of $3.44 billion. Less than a year removed from its near-death experience after the AIG implosion—when the bank needed an overnight conversion to bank holding company status because it apparently couldn’t last through the mandatory five-day waiting period to borrow money—it was posting the richest quarterly profit in its 140-year history. It simultaneously announced that it had already set aside $11.4 billion for bonuses and compensation for 2009, a staggering amount that was hard to interpret as anything other than a giant “fuck you” to anyone who might suggest that more moderation was in order after the crisis.

  That second-quarter profit number would prove to be the high-water mark for Goldman assholedom. From that point forward they would enter new territory, becoming involuntary characters in a media narrative they had little control over. The popular perception is that when the bank was forced to make its debut as a mainstream media pariah, it did a terrible job of it, with its executives proving themselves to be almost comically tone-deaf to public outrage over the bubble thievery they had come to represent.

  That’s one take on what happened. Since I personally had a role in this I’ll offer my own take: Goldman’s late-2009 media coming-out party wasn’t nearly the disaster many people make it out to be. True, when forced to come out into the light a little, people like Lloyd Blankfein proved to be jaw-droppingly obnoxious douchebags who made you want to drive a fist through your TV set.

  But they never really apologized and never renounced their Randian belief system, and despite all the criticism ended the year with $13 billion in profits that they got to keep every last dime of. Which sent a powerful message to the rest of the country: public sentiment, it turns out, is a financial irrelevancy.

  Goldman’s run of bad luck that summer really began with a Wall Street Journal exposé on Stephen Friedman’s stock purchases. The WSJ story came out in the first week of May 2009, virtually simultaneously with the release of the stress test results. Friedman, at the time still the chairman of the New York Federal Reserve Bank, the most powerful of all the Fed branches and the primary regulator of Wall Street, resigned just days after the Journal story broke.

  Right around that same time, there were three media stories that helped focus a swirl of seriously negative attention on the bank. My piece was one, New York magazine’s Joe Hagan wrote another, and the third was a series of stories by a heretofore little-known blogger who went by the nom de plume of “Tyler Durden” on a blog called Zero Hedge.

  Durden’s blog was written in impenetrable Wall Street jargon, and the man himself—later outed by nosy reporters as an Eastern European trader who had been sanctioned by FINRA, the financial services industry regulator—was intimidating even to Wall Street insiders. “Zero Hedge, man, he makes my head hurt” was a typical comment from my Wall Street sources.

  Beginning in early 2009 Durden had been on a jihad about Goldman, having sifted through trading data to make what he insisted was an airtight case proving that the bank’s high-frequency or “flash” trading desk was engaged in some sort of large-scale manipulation of the New York Stock Exchange. Durden drew his conclusions by scrupulously analyzing trading data the NYSE released each week. So what happened? Naturally, the NYSE on June 24 changed its rules and stopped releasing the data, seemingly to protect Goldman from Zero Hedge’s meddling. The NYSE memo reads:

  The purpose of this Information Memo is to advise all member organizations that the New York Stock Exchange LLC (“NYSE”) will be decommissioning the requirement to report program trading activity via the Daily Program Trading Report (“DPTR”), which was previously approved by the Securities and Exchange Commission (the “Commission”).

  The Zero Hedge war on Goldman became legend when his seemingly far-fetched conspiracy theories came sensationally true that summer. That’s when a Russian Goldman employee named Sergey Aleynikov was alleged to have stolen the bank’s computerized trading code. Aleynikov worked at precisely the desk Zero Hedge had accused of being involved in large-scale manipulations.

  And indeed, in a court proceeding after Aleynikov’s arrest, Assistant U.S. Attorney Joseph Facciponti reported that “the bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.” Yes, indeed, it could.

  Hagan’s piece, meanwhile, was damaging in other ways. Most notably, it reported that Goldman had very nearly gone out of business in the wake of the AIG disaster:

  As the market continued to plunge and Goldman’s stock price nosedived, people inside the firm “were freaking out,” says a former Goldman executive who maintains close ties to the company.

  Many of the partners had borrowed against their Goldman stock in order to afford Park Avenue apartments, Hamptons vacation homes, and other accoutrements of the Goldman lifestyle. Margin calls were hitting staffers up and down the offices. The panic was so intense that when the stock dipped to $47 in intraday trading, Blankfein and Gary Cohn, the chief operating officer, came out of the executive suite to hover over traders on the floor, shocking people who’d rarely seen them there. They didn’t want staffers cashing out of their stock holdings and further destroying the share price. (Even so, many did, with $700 million in employee stock liquidated in the first nine months of the crisis.)

  Among other things, the significance of the Hagan piece was that it underscored just how completely Goldman’s recent success was dependent upon taxpayers. Less than a year before, its executives had been panic selling their beach estates; now they were rolling in billions in profits, all thanks to you, me, and every other taxpayer in the country.

  My contribution to this was to launch a debate over whether or not it was appropriate for a reputable mainstream media organization to publicly call Lloyd Blankfein a motherfucker. This was really what most of the “vampire squid” uproar boiled down to. The substance of most of the freak-outs by mainstream financial reporters and the bank itself over the Rolling Stone piece was oddly nonspecific. Goldman spokesman Lucas van Praag called the piece “vaguely entertaining” and “an hysterical compilation of conspiracy theories.” Van Praag even made an attempt at humor, saying, “Notable ones missing are Goldman Sachs as the third shooter [in John F. Kennedy’s assassination] and faking the first lunar landing.”

  But at no time did the bank ever deny any of the information in the piece. Their only real factual quibble was with the assertion that they were a major player in the mortgage market—the bank somewhat gleefully noted that its “former competitors,” like the since-vaporized Bear Stearns, were much bigger players.

  The bank didn’t really bother with me at all—why would it need to?—but o
ther financial reporters surely did. Overwhelmingly the theme of the criticism was not that my reporting was factually wrong, but that I’d missed the larger, meta-Randian truth, which is that while Goldman might be corrupt and might have used government influence to bail itself out, this was necessary for the country, because our best and our brightest must be saved at all costs. Otherwise, who would put bread on our tables? Gasparino, the CNBC tool, put it best:

  And thank God Paulson and Bernanke turned to Blankfein and not the editors at Rolling Stone for help. I hate to break it to everyone out there in a class-warfare mood, but if AIG is imploding and you’re the government and you need help restructuring the company or figuring out ways the government can fix the problem, Goldman is a good place to start.

  Gasparino said this in the midst of an article that was filled with an extraordinary series of concessions; he ended up agreeing with almost everything I wrote. Some examples:

  Was Blankfein in the room when they discussed this and how to save the system? Of course he was. Was Goldman saved from extinction in the process? Undoubtedly … Say what you want about the bailout—it was fast and dirty, but it was necessary … Of course the firm had conflicts of interest—given its exposure to AIG insured debt and all its connections in government—but so did just about everyone else in this sordid mess … No rational person can deny the fact that Goldman is benefiting from its status as a government protected bank, as it makes big bucks ($3 billion in just the second quarter alone), acting like a hedge fund just after getting bailed out by the feds, and using its status as a commercial bank to borrow cheaply and make huge bond market bets … Is Goldman too powerful? Maybe. Was it too big to fail back in September? Given the size of its balance sheet, Goldman’s demise would have made Lehman’s look insignificant.

  There was a lot of stuff like this, where the people who were whaling away at me and Rolling Stone were continually conceding the factual parts of the argument but insisting that the wrongness was in the conclusions I was drawing. Megan McArdle of the Atlantic put it this way:

  No, [Taibbi’s] facts are wrong, his conclusions are wrong, and only his discomfort with Goldman Sachs’ role in our public life is correct … Or perhaps a better way to say it is that his facts are right, but the mini narratives are ludicrously wrong, which makes the meta narrative suspect.

  And what I missed in the meta narrative, of course, is that Goldman Sachs, while perhaps corrupt, and too closely tied to government, and the recipient of far too much taxpayer support, was nonetheless not an appropriate target for anger because we just need them so badly to keep our ship afloat. Once this argument was out there it was only a matter of time before it was institutionalized in the New York Times in a column by the archpriest of American conventional wisdom, David Brooks. Brooks argued that the problem with critiques like mine was that while the financial crisis had many causes (including, he insisted with a straight face, the economic rise of China), we were just taking the easy way out—“with the populist narrative, you can just blame Goldman Sachs.”

  Again, Brooks never at any time took issue with any of the facts in the case against Goldman Sachs. In fact, he conceded them and insisted that this was actually the point, that it’s precisely despite the ugly facts that we must indulge the Goldmans of the world. He summed up this point of view in an extraordinary passage:

  Political populists … can’t seem to grasp that a politics based on punishing the elites won’t produce a better-educated work force, more investment, more innovation or any of the other things required for progress and growth …

  Hamilton championed capital markets and Lincoln championed banks, not because they loved traders and bankers. They did it because they knew a vibrant capitalist economy would maximize opportunity for poor boys like themselves. They were willing to tolerate the excesses of traders because they understood that no institution is more likely to channel opportunity to new groups and new people than vigorous financial markets.

  And that’s basically what this argument came down to, in the end. It came down to an argument about class privilege. Yes, Goldman might be guilty of many things, they may even have stolen billions of your hard-earned tax dollars to buy themselves yachts and blowjobs, but we can’t throw out the baby with the bathwater!

  But things did shift a bit. The Narrative was wounded. The mainstream media act just like in the classic studies of herd animals: at the exact instant more than half of the herd makes a move to bolt, they all move. That’s what happened in the summer of 2009: for a variety of reasons, including the Friedman and Aleynikov scandals, the tide of public opinion turned against Goldman. The same on-their-knees/at-your-throat media reversal that George Bush felt at the end of his term was now being experienced by the bank. And from there, the next year or so was like one long chorus of exposés about Goldman’s behavior. Among the stories that came out:

  In August 2009, the New York Times reported that Treasury Secretary Paulson and Lloyd Blankfein were in regular telephone contact throughout the period of the AIG bailout, bolstering the case that Goldman had used its access to its former chief, Paulson, to secure the $13 billion it ultimately got through the AIG bailout. Humorously, the Times piece came out just weeks after Gasparino had derided as “the mother of all conspiracy theories” the notion that “during those dark days of 2008, right after the Lehman collapse, and with AIG on the verge of death, Blankfein picked up the phone and called his old partner, then–Treasury Secretary Hank Paulson, and asked to be bailed out.”

  The financial services industry was faced with yet another potential catastrophe in early 2010 when some of the interest rate swaps Goldman had created for the nation of Greece blew up. The Greece scandal was a variation on a predatory scam that banks like Goldman and JPMorgan had been using to fleece municipalities in the United States for years; the swaps essentially allowed cities, counties, and countries to refinance their debt in a scheme that was very similar to the mortgage-refi schemes used by predatory lenders in the mid-2000s. The idea behind an interest rate swap, which is yet another type of unregulated derivative instrument, goes like this: a debtor who is paying variable-rate interest pays a bank like Goldman a fee in exchange for the security of fixed interest. In a simplified example, if you’re paying a variable rate on a home loan, you go to Goldman and pay them to accept the variable risk; in return, they swap you a new fixed interest rate. The scheme allows politicians to kick their debts down the road years, and in some cases (e.g., in the case of Greece) to actually receive cash up front for doing the swap. Unbeknownst to its citizens, Greece had also traded away rights to airport and highway revenue to Goldman in exchange for its cash up front. In this case the Nostradamus was McArdle, who a half year before Greece blew up was reaming me for being too general in my description of Goldman’s aggressive forays into the unregulated derivatives market. “At any rate,” she wrote, “none of these derivatives have much to do with CDOs or CDSs; you might as well conflate stocks and bonds because they’re both ‘securities.’ No one, as far as I know, is now proposing that we need to curtail the use of interest rate swaps [emphasis mine].”

  An earlier example of an interest rate swap disaster had been Jefferson County, Alabama, which in 2008 had been virtually bankrupted by a series of swap deals it entered into with JPMorgan, deals that forced the county to institute mass layoffs and unpaid leave and left its residents facing a generation of massively inflated sewer bills. In a rare instance of restraint, Goldman was not actually involved with the JeffCo swap deals—but only because it had accepted a $3 million payment from JPMorgan to back off the kill and allow Morgan to do the deals all by itself. The revelations about Goldman’s payoff in the Alabama disaster did not raise much public furor but were a classic example of what the bank was all about. “An open-and-shut case of anticompetitive behavior” is how Christopher “Kit” Taylor, the former chief regulator of the municipal bond industry, put it.

  Finally, and most importantly, Goldman in the spring o
f 2010 was sued by the SEC in a hugely publicized case that sent shock waves rippling across Wall Street. The CliffsNotes version of the scandal: Back in 2007, a Harvard-educated hedge fund king named John Paulson (no relation to former Goldman CEO Hank Paulson) decided the housing boom was a mirage and looked for ways to bet against it. So he asked Goldman to work with him to put together a billion-dollar basket of crappy subprime investments he could bet against. Goldman complied, taking a $15 million fee to do the deal and letting Paulson choose some of the toxic mortgages in the portfolio, which would come to be called ABACUS.

  Paulson specifically chose to jam into ABACUS adjustable-rate mortgages, mortgages lent to borrowers with low credit ratings, and mortgages from states like Florida, Arizona, Nevada, and California that had recently seen wild home price spikes. In metaphorical terms, Paulson was choosing, as sexual partners for future visitors to the Goldman bordello, a gang of IV drug users and hemophiliacs.

  Then Goldman turned around and sold this same poisonous mortgage-backed stuff as good and healthy investments to its customers, in particular a pair of foreign banks—a German bank called IKB and a Dutch bank called ABN-AMRO.

  Where Goldman broke the rules, according to the SEC, was in failing to disclose to these two customers the full nature of Paulson’s involvement with the deal. Neither investor knew that the deal they were buying into had essentially been put together by a financial arsonist who was rooting for it all to burn down.