by Matt Taibbi
One quick humorous side note: the new revelations on ABACUS also helped to underscore Charlie Gasparino’s Nostradamus act—he ridiculed the assertion in my piece that “Goldman likely committed ‘securities fraud’ because it later shorted the same mortgage bonds tied to subprime loans after it knew that billions it underwrote all those years were going bad.” He scoffed: “Try proving that one.”
Anyway, the SEC suit for the first time gave the general public a villain with a face. It was a wonderfully serendipitous thing that it ended up being the face of a Frenchman named Fabrice Tourre, the Goldman banker who had put together the ABACUS deal, who in almost every way was like a cartoon caricature of an entitled rich dickhead. With his styled hair, his neat, ferretlike manner, his expensive suits, and, well, his Frenchness, Tourre was a personage almost guaranteed to make all of America recoil in disgust, as from rotting cheese, once introduced to him. And introduced to him they would be, as the U.S. Senate called hearings on the ABACUS deal and dragged Tourre and other Goldman employees up on stage to be tele–tarred and feathered for the viewing public.
Through these hearings America got to hear a lot about how Goldman employees behaved in their own environment. They got to hear about Tourre bragging in an e-mail about how much money he was going to make on a deal that he knew was about to blow up and leave a huge omelet in the face of customers like the Dutch bank ABN-AMRO. “More and more leverage in the system. The whole building is about to collapse anytime now,” he wrote. “Only potential survivor, the fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created!”
They got to hear about e-mails between Goldman employees talking about other deals like ABACUS that they’d successfully dumped on unwitting clients—including a deal full of subprime trash called Timberwolf that the higher-ups in Goldman had instructed its sales force to unload with gusto. In one e-mail dated June 22, 2007, a Goldman executive named Tom Montag wrote to Daniel Sparks, head of the bank’s mortgage division, and said, “Boy, that Timberwolf is one shitty deal.”
Remarkably, just one week later, the Goldman sales staff was instructed to make selling the shitty Timberwolf deal a “top priority.”
This whole exchange was aired out in the Senate permanent subcommittee on investigations, where chairman Carl Levin, in what was to become a defining moment in the history of Goldman, continually hammered Sparks about selling that “shitty deal.”
“You knew it was a shitty deal and that’s what your e-mails show,” Levin barked. “How much of this shitty deal did you continue to sell to your clients?”
Sparks, like most of the Goldman witnesses who appeared during the hearings, was blatantly evasive and refused to answer. He kept interrupting Levin—whose famed comb-over was practically shaking with anger as he repeated the word “shitty” twelve times, certainly a first for the Senate—and trying to soften the impact of these revelations by asking the senator to consider “some context.”
“Some context might be helpful …,” Sparks muttered.
Even the audience in the Senate hall twittered at Sparks’s continual niggling about context. In fact, the audience literally giggled when Levin read off the July 1, 2007, e-mail instructing the Goldman sales team to make selling Timberwolf a “top priority.” The laugh was notable because a year before it would have been unthinkable to imagine a gallery of reporters and observers in a Senate committee hearing being tuned in to Wall Street practices enough to laugh at the outrageousness of a bank pushing its sales staff to unload exotic mortgage-backed securities just a week after its executives were e-joking to each other about what a “shitty” product they’d created. At that moment, on some level, the truth about what Goldman and banks like it do to make their money became mainstream.
Goldman survived the initial uproar over the scandal; in fact, although its share price dipped 12.8 percent on the day the SEC filed its suit, the share price jumped back up on the next trading day. A few days after that, Goldman announced a first-quarter profit of $3.46 billion. The bank was still cruising, although its reputation had clearly taken a hit. Over the next months investors gradually began to flee the company, which had been outed not for screwing the taxpayer or mom-and-pop investors, but its own clients. Goldman ended up losing nearly $8 billion in share value between the date the suit was announced and the date that it ultimately settled with the SEC later in the summer of 2010 for $550 million—a record fine, but one that nonetheless represented just a fraction even of Goldman’s first-quarter profits that year. In fact, news that the SEC fine wasn’t larger (many analysts expected it to be over a billion dollars) sent Goldman’s stock price soaring back up 9 percent in one day; the bank recovered over $550 million in share value the day the fine was announced.
Nonetheless, the bank’s image took such a hit that during the debate on the Senate floor over the Financial Regulatory Reform bill, senators from both parties were invoking the firm’s name as a way of disparaging the bill. I was in the Senate chamber one day listening as ant-brained Wyoming Republican Mike Enzi was (incorrectly, I should point out) railing against the regulatory bill on the grounds that it was something Wall Street banks wanted. “Why, Goldman Sachs likes this bill!” he boomed. A year or two before, it would have been impossible to imagine a Republican senator saying that something Goldman Sachs wanted had to be a bad thing.
All of these revelations helped solidify Goldman’s status as the ultimate symbol of the devious, pompous, entitled criminality of the Bubble Era. Its pop-culture status was formalized when a new Michael Moore movie, Capitalism: A Love Story, featured a scene in which Moore wrapped Goldman’s 85 Broad Street offices in crime scene tape.
Goldman’s response to all of this was remarkable in its tone-deafness. At first it contented itself with mocking dismissals of the various attacks, but as time wore on it gradually became clear that some executives were genuinely wounded by the criticism. They didn’t understand it; they really thought they were doing the right thing by rapaciously lunging after every buck within breathing distance.
The Senate testimony of its leading executives after the ABACUS deal was a remarkable demonstration of how insulated and clueless a group of people can become when they make too much money too quickly. In the most important public relations moment in the history of the firm, Blankfein stood up in the Senate and actually said, out loud, that he didn’t think his company was obligated to tell his customers that they were being sold a defective product. “I don’t think there is a disclosure obligation,” Blankfein said, looking incredulous that the question was even being asked.
Even worse was the response of the mortgage chief Sparks, when asked by Carl Levin if he had any regrets. “Regret to me means something that you feel like you did wrong, and I don’t have that,” Sparks said. Asked a similar question, the French twit Tourre thought for a moment before replying, “I regret these e-mails. They reflect very bad on the firm and on myself. And, um, you know—I wish I hadn’t sent those.”
They were like a bunch of husbands caught bonking thousand-dollar hookers who, under questioning later on by their wives, could only admit to being sorry they got caught. Now, obviously for legal reasons alone the Goldman executives couldn’t stand before the Senate and just admit to being sorry, to knowing they were wrong, to seeing the problem with selling “shitty deals” to clients without telling them.
So no one was surprised that they didn’t make admissions; that would have been tantamount to surrendering in the lawsuit. But it was the tone that startled most people. If your wife catches you with another woman, every man knows, even if you’re not sorry, you have to act sorry. You can’t just stare back at her and say, “I don’t get what you’re so upset about.”
And that’s exactly how the Goldman executives behaved. It wasn’t so much that they lied, it was that they seemed to think they were telling the truth. They seemed to really believe they were right. One Senate aide I talked to after the hearings was still la
ughing about it weeks later. “It’s sort of like someone who goes outside with his fly open and then just walks all the way down the street with his balls hanging out,” he said. “You think to yourself: doesn’t this person have friends, a wife, somebody to tell him how bad he looks? It’s like these guys really don’t know.”
Even before the Senate hearing, there was plenty of evidence of that. Goldman Sachs international adviser Brian Griffiths reached a new low in late 2009 when he told an audience at St. Paul’s Cathedral in London that “the injunction of Jesus to love others as ourselves is an endorsement of self-interest” and “We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all.”
Griffiths was followed in very short order by Lloyd Blankfein himself, who in a remarkable interview with the Times (London) doled out perhaps the quote of the year. From that piece:
Is it possible to make too much money? “Is it possible to have too much ambition? Is it possible to be too successful?” Blankfein shoots back. “I don’t want people in this firm to think that they have accomplished as much for themselves as they can and go on vacation. As the guardian of the interests of the shareholders and, by the way, for the purposes of society, I’d like them to continue to do what they are doing. I don’t want to put a cap on their ambition. It’s hard for me to argue for a cap on their compensation.”
So, it’s business as usual, then, regardless of whether it makes most people howl at the moon with rage? Goldman Sachs, this pillar of the free market, breeder of super-citizens, object of envy and awe will go on raking it in, getting richer than God? An impish grin spreads across Blankfein’s face. Call him a fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker “doing God’s work.”
The now-notorious “God’s work” interview might have been the last straw, the thing that caused Goldman to forfeit for at least the near future any hope at rehabilitating its name with the general public, but here’s the interesting thing. From their point of view: so what?
In retrospect the Brookses of the world were right about one thing: it is extremely easy just to point a finger at Goldman Sachs. At this point, it’s easy to win a public relations fight with the bank, the same way it’s easy to win the public relations battle against Stalin, Charlie Manson, Union Carbide, and syphilis—because what the bank does is indefensible. They’re criminals. And if you put what they do in front of enough eyes, even Americans can’t miss it.
So we know that now. So what? Now all our cards are on the table, and America and Wall Street are staring at each other like a married couple that has few secrets left between them. But knowing about something and being able to do anything about it are two different things.
Banks like Goldman remain largely shielded from the impact of public opinion because while the public’s only link to power is through the clumsy and highly imperfect avenue of elections, a bank of this size has a whole network of intimate connections with direct access to policy. In many cases, their people are sitting in the relevant positions themselves. And while the public at best is left to press their elected representatives (who inevitably are heavily funded by these banks) for investigations or prosecutions to remedy offenses committed years ago, the bank has already moved on to five, six, seven new schemes since then, each shrouded in a layer of complexity that will take years for the public consciousness to even begin to penetrate.
But at least the mystique is gone. The drivers of the Great American Bubble Machine aren’t producers, but takers, and we know that now—the only question is, what do we do about it?
*The original story, “The Great American Bubble Machine,” appeared in Rolling Stone 1082–83, July 9–23, 2009.
EPILOGUE
Summer 2010: more financial crisis hearings in Washington, this time on the role of derivatives in causing the crash. It’s almost a packed house in the cavernous fifth-floor Senate conference hall in the Dirksen building, but the crowd is very lobbyist-heavy—not much press. The Gulf oil spill is the big disaster drama now, as the world has mostly moved on from the finance story. A year ago, I was seeing a lot of campaign-trail types at financial hearings on the Hill; now I’m the only political reporter I recognize in the crowd.
The witness before the Financial Crisis Inquiry Commission is one Steve Kohlhagen, a former Cal-Berkeley professor. Back in the nineties and the first years of the 2000s, he headed the derivatives and risk management desk at First Union, the predecessor to Wachovia—a megabank that, thanks in no small part to the failure of its mortgage-backed derivative holdings, disappeared from the face of the earth two years ago.
A Wachovia guy. I wonder what he’ll have to say about this mess.
The Wells Fargo–Wachovia merger was formally announced on October 12, 2008, the same day that Barack Obama had his infamous encounter with Samuel “Joe the Plumber” Wurzelbacher in Ohio. When the last McCain-Obama debate took place three days later in Hempstead, New York, there was plenty of talk about which candidate was a bigger buddy to middle America’s plumbers, but neither man bothered to mention that week’s sudden disappearance of the country’s fourth-largest commercial bank. In fact, the Wachovia deal was one of many gigantic crisis stories the public never heard much about—the bank was a perfect symbol of the third-world-style oligarchical backroom mergers of public and private interests that became common after the crash.
When Wachovia’s portfolio started to go up in smoke in the fall of 2008 thanks to the collapse of the housing boom, depositors started to pull money out of the bank. Seeing this, government officials like future Obama Treasury secretary Tim Geithner (then heading the New York Fed) and FDIC chief Sheila Bair declared the bank a “systemically important” institution, and started frantically searching for a buyer to rescue the firm.
Just like the JPMorgan Chase–Bear Stearns deal and the Bank of America–Merrill Lynch deal, in which taxpayers ended up subsidizing megamergers that left the banking sector even more concentrated and dangerous than before, in the Wachovia mess regulators like Geithner and Bair scrambled to find ways to use taxpayer money to bribe would-be buyers like Citigroup and Wells Fargo into swallowing up the troubled bank. They initially settled on a plan to use FDIC funds to subsidize a Citigroup rescue, but in early October backroom negotiations shifted and Wells Fargo announced that it was coming to Wachovia’s rescue.
Wells Fargo had originally balked at rescuing Wachovia. But two things happened that changed the bank’s mind. First, then–Treasury secretary Hank Paulson made a change in the tax code that promised to mean an almost $25 billion tax break for Wells Fargo. Then Congress passed the TARP bailout, which gave Wells Fargo a $25 billion cash injection. On October 3, the very same day the bailout passed, Wells Fargo decided it would help out the government and buy Wachovia after all, for a bargain price of $12.7 billion. The deal was formally announced a week or so later. “This is of course a very exciting moment in the long history of Wachovia and Wells Fargo,” said Wells Fargo’s chairman, Richard Kovacevich.
To recap: America’s fourth-largest bank goes broke gambling on mortgages, then gets sold to Wells Fargo for $12.7 billion after the latter receives $50 billion in bailout cash and tax breaks from the government. The resulting postmerger bank is now the second-largest commercial bank in the country, and, presumably, significantly more “systemically important” than even Wachovia was. Fattened by all this bailout cash, incidentally, postmerger Wells Fargo would end up paying out $977 million in bonuses for 2008.
Steve Kohlhagen, the witness at the FCIC hearing, has nothing to do with any of this, of course—he left First Union way back in George W. Bush’s first term. But as the former derivatives chief of one of the largest derivatives merchants in the country, he’ll certainly be worth listening to. Even if he isn’t directly guilty, I think, maybe Kohlhagen will break down weeping and confessing anyway, admitting that he sent Wachovia down the road to ruin by cramming its books full of deadly mortgage
-backed CDOs. Or maybe he’ll apologize on behalf of Wachovia for forcing the American taxpayer to have to pay off Wells Fargo by the tens of billions to take flat-broke, disfigured Wachovia to the altar.
Or maybe not. After FCIC chairman Phil Angelides stumbles while introducing Kohlhagen—he forgets to call him “Doctor”—the former Wachovia chief leans forward and shakes his head generously. “ ‘Mister’ is fine,” he says.
Then he starts in about the causes of the financial crisis. Kohlhagen’s first point is that over-the-counter derivatives like the mortgage-backed CDOs that sank Wachovia and the credit default swaps that killed AIG had “absolutely no role whatsoever in causing the financial crisis.”
Uh-huh. He’s entitled to his opinion, I guess. But then he goes on:
“The cause of the financial crisis,” he says, “was quite simply the commitment by the United States government to bring home ownership to the next group of people who previously had not been able to own their own homes.”
There it is. The financial crisis, you see, had nothing to do with huge aggrandized financial institutions borrowing vast fuckloads of money and gambling it all away, knowing that the government would have to swoop in and rescue them if they failed. No, what sank the economy was poor black people who were pushed into buying houses they couldn’t afford by the government.
You have to have truly giant balls to stand up in a senatorial hearing room after your old bank was rescued by a $50 billion government bailout effort and blame the financial crisis on poor people on welfare, which is essentially what Kohlhagen was doing.
A few minutes later, the next witness, Albert “Pete” Kyle, a professor of finance at the University of Maryland, offered his analysis of the crisis. He cited as one of the chief causes “government mandates for home ownership,” and said that, in the way of a solution, we “need less emphasis on home ownership as an intrinsically desirable social goal undertaken for its own sake.”