You knew Goldman the ‘vampire squid’ since Matt Taibbi’s piece, but do you know Sachs its schizophrenic other?
Even without being familiar with the opaque world of Wall Street investment banks, it is difficult not to be aware about Goldman Sachs. Since the Global Financial Crisis they have become the bank everyone loves to hate.
The way they became ‘too big to fail’ by benefiting from every single economic bubble since the Great Depression has now been well documented, notably by Rolling Stone reporter Matt Taibbi who wrote a piece that went viral in 2009.
The inside job
They grew in strength in the 1930s, during the ‘tech bubble’ of the 90s, the ‘housing craze’ of the 2000s, and the ‘oil price rally’ of 2008. It culminated with the GFC when the US government chose to sacrifice their closest competitor Lehman Brothers. On the other hand not only Goldman Sachs got bailed out, but a heretofore unknown 35-year-old former Goldman banker named Neel Kashkari was put in charge of administering the $700 billion funds of the government rescue for the entire US financial industry!
That type of arrangement and the way they took the inside job to a whole new level is what has mostly attracted attention to date. In fact, they not only became insiders to the capitalist system, but became part of that system. It started in the 1930s, when Sidney Weinberg who ran Goldman for three decades, was a top fundraiser for Franklin D. Roosevelt. Since then, Goldman Sachs graduates have never stopped infiltrating the political system: as US Treasury Secretaries like Henry Paulson for the Republicans under George W Bush, or like Robert Rubin for the Democrats under Clinton; as Head of the European Central Bank like Mario Draghi, as Head of the World Bank like Robert Zoellick during the GFC, as Head of the New York Stock Exchange, etc…
As Taibbi put it, “any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything.”
Two sides of the coin. Head, a fiercely free-market Goldman.
However, if the way they move seamlessly between Washington and Wall Street influencing regulation to suit their needs is now well exposed, there is another equally important aspect to the way they operate that probably has not received the attention it deserves. It is their double language between the pro-business free-market small-government policies which they advocate ‘in public’, and the astonishing government support they lobby ‘in private’.
For instance the Wall Street Journal recently reported how US employees of Goldman Sachs have largely abandoned Obama 
and are now the top sources of money to Mitt Romney and the Republican Party. In the four decades since Congress created the campaign-finance system, no company’s employees have switched sides so abruptly, moving from top supporters of one camp to the top of its rival.
The reason for this mass defection is the firm’s fury for not being consulted when the Obama administration crafted regulations in response to the financial crisis. Contrary to the quasi Royal Privilege they expected, they were not included in Obama’s Privy Council and instead were shocked by measures such as “the Volcker rule banning proprietary trading”, effectively restricting US banks from taking speculative risks with their own money – one of Goldman’s lucrative businesses, and a key cause of the GFC.
So they decided to fight back. Of course big banks always fight regulation with the standard argument, heard for decades immemorial: Don’t you regulate us too hard, or you’ll hamper market liquidity, stifle competitiveness and wreck the economy. It’s pretty much the template for all anti-regulation parliamentary submissions these days.
But Goldman has to be the best at everything. So they did it the Sachs way by taking the Fed head on and sending a study estimating with extreme specificity just how much damage the proposed rule will do to the economy: It will destroy 150,000 to 300,000 jobs, to be exact. They invoked (hold your breath) :
“damage to market liquidity, generating lower returns for investors and driving higher funding costs for corporate debt issuers, as well as higher transaction costs for activities like hedging interest rate and foreign exchange exposures.” which would be “likely to harm U.S. economic growth and international competitiveness. We estimate that the liquidity impact to the corporate bond market alone would reduce real GDP growth in the US by 15 to 40 basis points over a year. This, in turn, could raise the unemployment rate by 10 to 20 basis points, eliminating 150,000 to 300,000 US jobs.”
Message to the Administration: take another spoonful of Finance numeracy, you Socialist morons…
Two sides of the coin. Tail, a more confidential Sachs.
This more confidential Sachs is the firm who organised a private ‘macro economic conference’ in Australia this October and put the below charts up on the screen to support the view that government intervention had been beneficial. Not rocket science given the money they got from the bailout.
However the conversation that ensued was probably less expected. Several Goldman Sachs executives clearly argued that for them, the ‘orthodox’ economic view to reduce public debt was actually a significant ’systemic risk’ that could cause another recession, and they would much prefer that governments kept intervening even if it meant delaying debt reduction by a few years. It is ‘government withdrawal’ that they see as a key systemic risk, not the public debt.
Yes, you read this properly: in that conference Goldman Sachs clearly joined Occupy Wall Street, the French Communist Party and Greece’s Syriza to demand that Austerity be stopped!
Let’s be clear. This was not a slip of the tongue: they pulled all their analytical wherewithal to back this view: that Quantitative Easing worked (QE = injection of government money in the economy), that political intervention of the European Central Bank long opposed by Germany had finally “saved the day” in Europe, that the Bundesbank and Finance minister Wolfgang Schaeuble who are taking a hard line in the EU are playing a ‘bad cop’ role very convenient to Merkel when she negotiates. However Goldman absolutely insisted that it is obviously in everyone’s interest to slow austerity measures which are not delivering results and are losing politically (take that Merkel), and that finally they do not believe the Euro will implode as feared a few months ago.
The reason they openly discussed is that they actually believe Merkel is playing the “good cop / bad cop game” to extract more from Europe (they singled out France as the obvious target of this game) but that despite the noise, “the German government is supporting President Draghi’s course. This should buy peripheral countries time to address the underlying structural problems.” History will tell if they are right, but this is where those guys, who are pretty ruthless at playing the market, put their money at the moment.
So much so that they actually bet on EU growth just behind the US in their risk framework, ahead of China which they fear is seriously slowing down (but that is a post for another day).
(click to enlarge)
So was this leftist moment confined to the restricted audience of this conference, or is this a view more broadly shared that would be at odds with the strong capitalist stand exposed previously?
Well, it takes a bit more digging in the public domain but it does turn out that Goldman’s CEO himself Lloyd Blankfein is having a change of heart. After having infamously declared that he was doing “God’s work” by amassing billions, he is now saying that the US economy does not do a good enough job of distributing wealth fairly. He adds that the US government needs to keep spending, that investment banks must accept more regulation. Oh, and bankers should be prepared for the criticism that comes with having been at the centre of the financial crisis.
He also argues that austerity is ‘killing’ the US economy, that “you can’t austere yourself into a higher GDP” and “it’s not going to be very good if the medicine kills the patient.”
You want more?
Blankfein pushed the envelope by adding on CNBC that he would be willing to pay higher US taxes if he thought it would help reduce the national debt: “No one is so unpatriotic that they wouldn’t pay a little bit more to resolve it” before adding what is for me a stunning confession: he apparently backed Hillary Clinton’s campaign for president in 2008 and hasn’t endorsed a candidate this year, but said he’s “on the left-center side of things” politically. “On the left-center side of things politically“… which probably makes the average reader of this blog a dangerous Trotskyist…
There you go. Pretty schizophrenic isn’t it. So who do you believe? Goldman who is switching support to Romney and fighting tooth and nail to dilute any serious regulation so that the Wall Street status quo remains untouched. Or Sachs who is now confessing social views and a renewed appreciation for public intervention?
But of course, there is nothing new in this: Goldman does what Sachs knows best: hedging.
Firstly, none this should not come as a contradiction, as it is just the illustration of the ‘privatisation of the profits’ and ’socialisation of the risks’ that the Wall Street class has been playing all along.
Secondly, playing both sides of the market is what hedging (arbitrage) is all about. A form of schizophrenia, but an institutionalised one, that makes a lot of money. And Goldman Sachs is a master at that. This is how they made their fortune. An example was in the early 2000s when they infamously ’shorted Greece’ after arranging “shady swaps” to mask its public debt (*): Goldman also bought insurance on Greek debt and engaged in other trades to protect itself against the risk of a default on those swaps, whilst having inside knowledge of the true nature of the Greek debt… A bit like a doctor treating patients, and at the same time buying a life insurance on those patients to recover money in case they die. Nice.
So by putting their money on Romney, whilst quietly spreading the word on the need for government support, Goldman does what Sachs knows best: hedging. They are backing the candidate that will keep regulation off their back, while asking for public money to support financial markets where they make their profits.
{ Sydney, 17 October 2012 }
Notes:
*: The question has been asked several times: did GS really short Greece when arranging swaps to help mask its debt? The answer is absolutely yes. It has been well documented and reported. Again, it’s not necessarily “illegal” as Hedging is a way to manage risk, but it would definitely fail the ethical test. The circumstances in which it was done, ie. having privileged insider knowledge of the fragility of Greece’s finances, make it more than dodgy.
Just a few sources:
- Business Insider: Goldman Sachs Shorted Greek Debt After It Arranged Those Shady Swaps
- New York Times: Wall St. Helped to Mask Debt Fueling Europe’s Crisis
- Americablog.com What Chase & Goldman Sachs did to Greece
- Huffington Post: Goldman Sachs Robbed the EU By Way of Greece
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