As I like to say, I started out on Wall Street when it was criminal only at the margin. The unseemly coziness between Goldman and various government agencies in critical episodes during the crisis illustrates how much standards of conduct have deteriorated.
This post first appeared on August 9, 2009
At this point, the New York Times story reporting that Treasury Secretary Hank Paulson and Goldman chief Lloyd Blankfein spoke frequently during the crisis is close to a “dog bites man” news item. After Goldman was the only Wall Street player involved in the discussions of what to do about the rapidly unravelling AIG, and Goldman then turned out to be the biggest beneficiary of the dubious credit default swaps unwinding, any other cases of undue attentiveness to the needs of Paulson’s former firm are likely to pale. The amusing bit is that the public is looking for more signs of behind the scenes winks and nods, when what is in the open is so blatant that there really wasn’t much need to do things in a covert fashion. You already have a very steep yield curve, FDIC guaranteed debt, the Fed engineering massive liquidity facilities, which reduces the risks of holding the types of paper the Fed is targeting (the Fed is working mightily to keep interest rates in a certain range, which reduces the risk of loss), all hugely props to the industry that no one seems to think about too much.
The real issue here is that this is yet another sign of how much standards have shifted. One of the curbs on behavior, believe it or not, was having a sense of propriety. Even though Treasury secretaries often came from the financial services industry, they were supposed not to try to look too close to it. In fact, past Treasury secretaries weren’t terribly involved in the markets, in part because investment banks were not huge donors and more credit intermediation was done through traditional loans that actually stayed on banks’ books. The sea change occurred the Clinton Administration, when Wall Street saved the flagging president’s bacon by amping up contributions after the 1994 Congressoinal rout. Rubin, as newly-installed Treasury secretary, promptly undertook a wave of Wall Street friendly initiatives: a strong dollar policy, balancing the budget (which if you read the record, was done much more to appease bond vigilantes than out of more general economic concerns) and a questionable Mexican rescue, which again was more a rescue to US firms exposed to Mexico, over a Congressional veto to boot (Rubin raided the Exchange Stabilization Fund, a Depression vehicle to defend the dollar, if need be, without needing to make potentially disruptive special budget allocations).
Even though a sense of proprietary does not stop chicanery, it does curb it. Fewer people will take part, and those who do have to go to considerable lengths to disguise their actions, which increases the costs and time needed.
However, Morgenson does muster up an outrage that is sorely missing. Many of us have become jaded, and that is part of the problem. Consider this telling bit:
Before he became President George W. Bush’s Treasury secretary in 2006, Henry M. Paulson Jr. agreed to hold himself to a higher ethical standard than his predecessors..
But today, seven months after Mr. Paulson left office, questions are still being asked about his part in decisions last fall to prop up the teetering financial system with tens of billions of taxpayer dollars, including aid that directly benefited his former firm. Testifying on Capitol Hill last month, he was grilled about his relationship with Goldman.
“Is it possible that there’s so much conflict of interest here that all you folks don’t even realize that you’re helping people that you’re associated with?” Representative Cliff Stearns, Republican of Florida, asked Mr. Paulson at the July 16 hearing.
“I operated very consistently within the ethic guidelines I had as secretary of the Treasury,” Mr. Paulson responded, adding that he asked for an ethics waiver for his interactions with his old firm….
Mr. Paulson did not say when he received a waiver, but copies of two waivers he received — from the White House counsel’s office and the Treasury Department — show they were issued on the afternoon of Sept. 17, 2008.
Rep. Stearns’ comment is key. The standards have fallen so low that people can fool themselves about what is acceptable. And that is pronounced among Goldman employees, since the firm is a cult. Even though the industry is known for violating personal boundaries (a big cult habit) and keeping people in a closed community of the likeminded, Goldman does that one better, making a point of hiring people when they are young and malleable, having a strong sense of elitism and resultant belief that leaving the firm to work anywhere else would be an admission of personal failure, and making even more extreme demands than the norm. For instance, it is not uncommon for Goldman to ask staff members to reschedule weddings if they will conflict with a deal.
As a result, Goldmanite are particularly prone to “all animals are equal, but some are more equal than others” thinking, and of course, the “more equal” ones hail from Goldman. Recall the bizarre incident revealed in May, in which Steve Friedman, former co-chairman of Goldman and then chairman of the New York Fed, not only failed to recuse himself on Goldman’s application to become a bank holding company, but while waiting for a waiver of his newly-conflicted status, he then also bought Goldman shares! Friedman resigned over the scandal, and sent a peturbed-sounding letter, clearly indicating he did not get it. A conflict of interest is not a conflict of interest if Goldman is involved. But the NY Fed’s general counsel didn’t back down on the Friedman waiver, so in his little ethics bubble, he got reinforcement of his dubious position.
Morgenson does give the required caveats, but the record show Goldman had much better access. And lobbyists are paid fortunes to secure “access”:
It is common, of course, for regulators to be in contact with market participants to gather valuable industry intelligence, and financial regulators had to scramble very quickly last fall to address an unprecedented crisis. In those circumstances it would have been difficult for anyone to follow routine guidelines.
While Mr. Paulson spoke to many Wall Street executives during that period, he was in very frequent contact with Lloyd C. Blankfein, Goldman’s chief executive, according to a copy of Mr. Paulson’s calendars acquired by The New York Times through a Freedom of Information Act request.
During the week of the A.I.G. bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives…
Ms. [Michele] Davis [a Paulson spokeswoman] also said that Federal Reserve officials, not Mr. Paulson, played the lead role in shaping and financing the A.I.G. bailout.
But Mr. Paulson was closely involved in decisions to rescue A.I.G., according to two senior government officials who requested anonymity because the negotiations were supposed to be confidential.
And government ethics specialists say that the timing of Mr. Paulson’s waivers, and the circumstances surrounding it, are troubling.
“I think that when you have a person in a high government position who has been with one of the major financial institutions, things like this have to happen more publicly and they have to happen more in the normal course of business rather than privately, quietly and on the fly,” said Peter Bienstock, the former executive director of the New York State Commission on Government Integrity and a partner at the law firm of Cohen Hennessey Bienstock & Rabin.
And some observers were more critical:
“I think it’s clear he had a conflict of interest,” Mr. Stearns, the congressman, said in an interview. “He was covering himself with this waiver because he knew he had a conflict of interest with his telephone calls and with his actions. Even though he had no money in Goldman, he had a vested interest in Goldman’s success, in terms of his own reputation and historical perspective.”
And let us not lose sight of what was at stake:
Ms. Davis reiterated.. that Mr. Paulson’s involvement in the A.I.G. bailout was meant to forestall a collapse of the entire financial system and not to rescue any individual firms exposed to A.I.G., like Goldman. However, she said, federal officials were worried that both Goldman and Morgan Stanley were in danger themselves of failing later in the week and it was in that context that Mr. Paulson received a waiver.
“The waiver was in anticipation of a need to rescue Goldman Sachs,” Ms. Davis said, “not to bail out A.I.G.”
With all this talk of banks repaying TARP money, only a teeny portion of the subsidies they’ve received, too many people have lost sight of the real issue: these banks would have collapsed were it not for the generosity of the American taxpayer. And the real crime here, as Roger Ehrenberg pointed out, is that the Treasury Department, in a deal Paulson was deeply involved in, badly underpriced the TARP warrants. Do you think that was an accident? If so, I have a bridge I’d like to sell you.
What still rankles is that during the crisis, investment bank wolves Goldman Sachs and Morgan Stanley were authorized (via waiver of a statutory 30-day period) to don woolly sheep’s clothing as meek commercial banks, and thus to be rewarded with a Federal Reserve membership card and an unlimited ZIRP overdraft line.
This occurred despite public deposit banking being a negligible share of their overall business. Ever seen a Goldman Sachs retail branch in your neighborhood? Me neither.
Investment banking is a field with big risks and big rewards. Putting it on a publicly-subsidized lifeline is unacceptable. Letting Goldman Sachs gurgle down the drain after Bear Stearns would have been a bracing lesson for Hank Paulson, Robbie Rubin and their junior masters of the universe (and no great loss to us).
But of course, this is exactly what was planned at Jekyll Island, when a publicly-sponsored bank cartel called the Federal Reserve was established by (guess who?) elite bankers. Corruption is baked in the cake.
Letting Goldman Sachs gurgle down the drain after Bear Stearns. .
Goldman’s survival is the crime of this millennium. The timing was perfect for this blatant heist by the banksters, right in the middle of an election with a power vacuum at the top.
I am looking forward to Yves’ further reporting on the AIG trial, where criminality and corruption by “our leaders” is exposed.
It is sickening when you hear them talk about how they should be compensated for “risk taking” with other peoples money, or freshly digitized money from the Fed, and get rewarded with even more money after their financial crime wave crashed the system.
If we had capitalism, Goldman Sachs would be dead, and a memory instead of inflicting it’s greedy insanity on the world.
I too am interested in Yves’ continued reporting on Starr Intl v. U.S.
In surveying the commentary on the web about the case, it seems to me that Yves has grasped the essential point of the Plaintiff’s case, which the government simply hasn’t been able to overcome. The problem of government exaction under the circumstances involved in this case is not easy for most observers to grapple with when their views of the case are colored by the tectonic context in which the events involved played out. Despite this, it is a very plain legal issue and a straight forward case to make. The Plaintiffs clearly were successful in making the case for an illegal exaction at the trial. If anyone has any doubt about this, a review of the pretrial decisions of Judge Wheeler on the Government’s motions seeking dismissal and the record at trial should resolve the doubts of the legal and factual basis of the exaction claim.
At this point, the most intelligent strategy for the Government to take (assuming the best interest of the public is the proper objective to be served), is for the Government to settle the case as soon as possible, and at all costs, before Judge Wheeler enters his judgment and order in the case. In fact, there are seriously deleterious consequences from the entry of a final judgment in this case regardless of whether the Government wins or loses. The entry of a judgment establishing a precedent which authorizes the Fed to acquire interests in financial institutions experiencing liquidity problems without express congressional authorization would be a profound extension of government authority which could ripple though out all levels of government. Likewise, allowing a judgment that is adverse to the government in this case would unnecessarily damage the prestige and institutional authority of the Fed. No doubt, the Plaintiffs would be willing to strike a settlement on terms favorable to the government. In short, it will certainly be in the best interests of the American Public, and promote confidence in the financial sector and the U.S. institutions involved in to avoid the emergence of any judicial precedent in this area of constitutional law.
Few can doubt the importance that was attached to the Fed being able to dictate the use of proceeds of the advances made to AIG (though what actually occurred via the “backdoor bailout” was both odious and unseemly (i.e, too close to corrupt to pass the smell test). But, there was absolutely no basis of the Govt to acquire and control 80% of the equity of the Company to do so. Nor was it necessary as the terms of the loan could have easily required the proceeds to be used for specific purposes desired by the Fed to protect the financial sector. However, that was never considered by the Fed. (And who can argue that the shareholders of AIG should have born the entire burden of the financial crisis as opposed to say, the shareholders of Goldman?
In fact, it is simply not appropriate from Treasury to secure control over the financial institutions they are charged with regulating, just at it would be unacceptable for the FAA to acquire a controlling interest in a major airline that is subject to its regulatory authority. Its an impossible and entirely unacceptable position for the government to defend.
The Plaintiffs have more than sufficiently established that the Govt, (and its lawyers) knew the Fed’s choice to do so was, from the legal standpoint, imprudent on its face, and could only be defended on a questionable contorted interpretation of the law. That argument is one that sanctions the arrogation of powers to the Fed never previously conceived or contemplated to have been granted by the Government to the Executive Branch. It speaks volumes about the mindset of the lawyers and principals at the Fed involved in the decision. It was a messy business that the government should be attempting to clean up and put to rest by setting the case.
And, like I say. The only thing lost, in the recession, we are yet going thru, was the respect , of government, for refusing to indict the inflictors. But that was the government, and the bank regulators being in bed.
We, the people, lost jobs, money, value and some even were jailed for doing as the conspiritors wanted. And the conspirators were rewarded for their ability to blind the eyes of the press, and judges. A shame.
Whenever the conversation reverts back to the fall of ’08 and the specter of imminent collapse, the crappy easy solution of providing liquidity is our history, I never cease to wonder what would have been the alternative had the government (I know..) followed the strict rule of law and an unfettered sense of propriety.
Say the government removed all the crash protection and training wheels from the financial sector and let the really bad positions unwind to their natural state. Allow the FDIC and other social safety nets to perform their intended function of insulating the guileless and unsophisticated public from the financial sectors self-inflicted demise,
How bad could it have really gotten I guess is my question.
I do understand the interconnectivity of financial products vis-a-vis the myriad of products such as overnight funding, short term commercial paper, margins and loan calls…
Having the benefit of hind sight, it’s clear the power of the Federal Reserve to rescue interests in our economy which has always left the surreal question of whether this omnipotence could have been deployed under the exigent circumstances condition to facilitate basic staples of an economy such as production, trade and commerce, after the financial markets were allowed to unwind.
Can we really say that any of the banks paid back the taxpayers in full when they’ve unloaded hundreds of billions of dollars in bad loans on the FR and the GSE’s? Not. There’s still huge bailouts going on behind the scenes including nearly unlimited zero interest loans. This welfare state we created for these TBTF corporations will put us all in the poor house. I dread the thought of the trillions in reserves the banks hold at the FR being spent into the economy because the banks need to bail themselves out, again, or else they’d fail. 2016 is my prediction, just like the last time, when a new President is elected so that in the turmoil they can slickly just pass off the problem again. JMHO
Agree with your post and your “take” on the situation. Seems to me that we, the proles, are still providing huge corporate welfare for the scum at the top. And my theory matches yours that 2016 is likely to be the big smack down when a new puppet-figurehead is “elected.” Always a good chance for much plunder and pillaging during a purported (but not really) “change in power.”
While the investment banks have always been in bed with Washington the big difference is that with the lowering of tax rates it is now possible for these people to make a dynasty creating amount of money. Before the top tax rates were so high that it really did not cost that much to be somewhat ethical. Now that does not seem to be the case. With a huge 90% or more tax rate and a hefty inheritance tax without loopholes targeted on these people they might decide it is more cost effective to go play golf on Wednesday afternoon than continue to amass outlandish fortunes. This would help other areas of the economy as well and the excess revenues could be targeted to a guaranteed annual income for all Americans…….boosting the economy for sure.
I wrote to my two Democrat Senators, Cantwell and Murray, referencing the latest admission of criminal behavior at Goldman Sachs that occurred when Hank was running the show, and asked if they voted Yea to confirm him. I expressed my concerns about having a criminal as a cabinet official. I did not even receive the obligatory intern penned response. I also wrote both Senators asking them not to vote to confirm Wall Street crimes facilitator Loretta Lynch. Murray in particular has made a career out of chest thumping for veterans’ rights. And HBSC laundered money for groups that killed US servicemen. Again, not even a boiler plate response from Murray.
Goldman Sharks got at least 100% from the public treasury for their compromised slime , and time to work the dead losers’ garbage to health with money for nothing and the checks for free.
During the week of the A.I.G. bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives…
B: shows how far we have come. Still sweep the street after the snowstorm.
P: the nut is panzers in the street, I may have misheard that . . .
B: still have to pick up the fallen nuts, trim and shave
P: we can only hope to hypothecate the ruins we create
This is a “dog bites man” story, every single one of our institutions is totally corrupted and captured by 1% and Citizens United cash. I propose from now on NC only do stories about what could, can, and is being done about it. They’re supposed to rule “by the consent of the governed” and we need action to follow that through. Ringing phone lines in Congressmen’s offices do make a difference, silent ones do not. Attendance at rallies is noticed, so is absence. Until you (yes YOU) give even the slightest damn about the theft of your future, nothing will change.
You know, I thought I was too old and cynical to be deeply disappointed by anything that the powers that be in this country would do, but what happened in 2007/2008 and since has really caused me to lose faith in the basic fairness of our system in a way that still affects me. I had, against all the evidence, maintained a belief that the people who were running the country had some sense of the ultimate good, by the people, for the people, and all that mooshy stuff. Now I know better, and even though in some sense I know I benefited from it — at my age, I have some assets to inflate — I feel very disheartened. I am glad that Naked Capitalism is one of the few places that still believes that we can get back to the system I thought we had, and has the courage to fight for it. I thank you for that, and I hope you are proved right.