As Goldman Sachs posts huge profits from the economic crisis, the question is: Did it cause the problems in the first place?
By Alex Brummer
No name is more ubiquitous in the pantheon of global finance than that of Goldman Sachs. At a time when world commerce and banking has been brought to a shuddering halt by greed, excess and foolishness, this investment bank provoked astonishment and disgust this week by handing out record bonuses.
It was revealed that the bank’s 29,400 staff - including about 5,500 based in the firm’s plush marbled London headquarters on Fleet Street - are each in line for bonuses averaging £475,000 this year.
While Britain and the rest of the world is struggling with record levels of unemployment and when governments are battling to find better ways of curbing banks’ profligacy, this is an obscene amount of money.
It is an old City adage that when someone makes a big loss on the financial markets, there must always also be a big winner. And that is certainly true of the bank that was founded in 1869 in New York by the German immigrant Marcus Goldman and his son-in-law Samuel Sachs.
Of course, Goldman Sachs’s bosses would like us to believe that it has come out on top, during the worst financial catastrophe since the Great Depression of the Thirties, through sheer brilliance.
Certainly, it seems to have an ability to capture the best and the brightest of every generation. But like a bookmaker who enjoys a special relationship with one horse-racing trainer, Goldman has proved highly skilled at fixing the odds.
The bank’s employees make so much money in their early careers that alumni are able to ‘retire’ in their 40s and go into what the current chairman Lloyd Blankfein described to me as ‘public service’ or giving back something to society. This, one hastens to add, does not mean working in the soup kitchens of Deptford or among the starving millions in sub-Saharan Africa.
Instead it means filling the top jobs in the Treasuries, central banks and stock exchanges around the world where, like members of a secret society, they are able to ensure the wealth of the next generation of Goldmanites.
The tentacles of this operation reach right into the heart of Washington. It is no coincidence that President Barack Obama’s chief-of-staff, Rahm Emanuel, who shaped much of the bail-out plan and stimulus package which has helped to save America - and Goldman Sachs - from ruin, served his time inside the hallowed walls of the bank.
So did President Bush’s last Treasury Secretary Hank Paulson, the nervy, shaven-headed financier who decided that rival investment bank Lehman Brothers should be allowed to go under last September and who then persuaded Congress to cough up $700bn worth of rescue funds for America’s banks - an estimated $5bn chunk of which (yes, you guessed it) went to Goldman Sachs.
In a searing analysis of Goldman Sachs’s survival strategy down the generations, the American writer Matt Taibbi of Rolling Stone magazine has described the firm as ‘a great vampire squid wrapped around the face of humanity, relentlessly jabbing its blood funnel into anything that smells like money’.
Taibbi’s thesis is simple and he sets it out in meticulous, if one-sided, detail - written with a fury not seen in the more conventional financial press. According to him, Goldman Sachs is at the heart of all that has gone wrong with Anglo-Saxon capitalism.
He alleges that it has been ‘manipulating whole economic sectors for years, moving the dice game as this or that market collapses, and all the time gorging itself on the financial vicissitudes that are breaking families everywhere - high petrol prices, rising consumer credit rates, devalued pension funds, mass lay-offs, future taxes to pay off bail-outs.’
In other words, Goldman Sachs is to blame for many of our ills, ranging from the surging cost of petrol to the collapse in value of pension funds and the stock market, as well as other investments which have suffered big losses.
Certainly, there can be no dispute that while much of the world is being devastated by falling trade and reduced living standards and when governments are faced with the biggest debt mountains in history, Goldman Sachs is living high off the hog. The group’s earnings in the past three months alone were $3.44billion - 65 per cent up on the same period last year.
As the financial crisis unfolded, the fingerprints of Goldman Sachs have been seen on almost everything that has happened. Along with the other Wall Street investment houses, it was at the centre of the scandal under which sub-prime mortgages - provided to the lowest echelons of American society - were packaged up as solid investments with a good return and sold on to unsuspecting investors.
Goldman even went as far as to buy a couple of brokerage firms who sold these corrupt mortgages ’so that it better understood how the market worked’.
Having helped to create a market in which it underwrote $76.5bn of sub-prime mortgages, it sold off these broker firms which meant it had protected itself from huge losses when the mortgage market went bad.
It also made a cynical policy U-turn and gambled on the markets that the value of the toxic debt, some of it even sold on to its own clients and associates, would fall in value. It did this by taking out large scale insurance, known as a hedge, so as to protect itself against losses. Thus it made billions by having its cake and eating it.
Yet despite this unseemly episode, New Labour’s luminaries have remained inextricably linked to Goldman Sachs. The bank’s former chief economist and partner Gavyn Davies, who is married to Gordon Brown’s special adviser Sue Nye, was made chairman of the BBC. His successor as chief economist at Goldman, the late David Walton, was handed a seat on the Bank of England’s interest-rate setting Monetary Policy Committee.
Then, when Northern Rock became the first bank to run into trouble in autumn 2007, Gordon Brown hired Goldman Sachs to assess the firms who were queuing up to buy the collapsed bank. It was on Goldman Sachs’s advice that Brown, after more than six months of dithering, decided that there was no alternative but to nationalise the Newcastle-based mortgage lender.
But Goldman Sachs’s influence over Britain’s economic and political establishment is only a fraction of the power it exercises over the American and global elite. The bank has been at the epicentre of the decline, fall and rescue of America’s financial system over the past year.
The architect of the contentious taxpayer bail-out of Wall Street was former Goldman Sachs chief executive Hank Paulson. He also decided to put the giant mortgage lenders Fannie Mae and Freddie Mac under ‘government conservatorship’ (the equivalent of public ownership) - in a bid to rescue the housing market and stop America’s financial system crashing over the edge.
Then, when investment bank Lehman Brothers collapsed, Paulson took the decision to bail out American Insurance Group (AIG) which, through its London office, had insured trillions of dollars of toxic assets using a new kind of financial instrument known as a ‘credit default swap’.
Old boys network
The rescue of AIG was critical for Paulson’s old firm Goldman Sachs because it had insured many of the toxic loans issued by the bank. As soon as AIG received its hand-out from the U.S. Treasury, Goldman Sachs benefited from the pay-out on these contracts to the tune of $13bn.
Crucially, this rescue package enabled Goldman Sachs to survive at a critical point when its share price was tumbling and when there were concerns that it might even join investment banks Bear Stearns and Lehman on the fatality list.
Elsewhere, other Goldman alumni were also being well looked after. Citigroup, which would receive an astonishing $300bn bail-out from Paulson, was chaired by none other than former Goldman Sachs chairman Robert Rubin, Bill Clinton’s former Treasury Secretary.
The richest man in the Clinton White House, he never lost his appetite for making money - having been paid $126m by Citigroup before being removed in January with a $30m pay-off.
Elsewhere, former Goldman Sachs employees were on huge financial packages in the months before their firms collapsed. When the North Carolina bank Wachovia ran into difficulty, its chairman, the former Goldman Sachs executive Robert Steel, naturally hired his old firm to advise it what to do.
Eventually, it was sold to California-based Wells Fargo, and Steel and his team of executives, like rats, managed to leave the sinking ship clutching golden handshakes worth $225m.
Another example of the Goldman old boys’ network looking after itself was when Hank Paulson saved his former colleague John Thain, the boss of Merrill Lynch, from ignominy by handing him a large chunk of government money and a takeover rescue by Bank of America.
The tentacles of Goldman Sachs’s ‘great vampire squid’ are not restricted to the private sector. Other alumni are employed by government bodies where they make key decisions on the series of financial bailouts.
These include the President of the New York Federal Reserve (the operational arm of the American central bank), the bosses of the Canadian and Italian central banks and the head of the New York Stock Exchange.
And last, but not least, is the President of the World Bank, Bob Zoellick, a former senior banker at Goldman Sachs, currently involved in an unprecedented lending programme designed to help those poor countries hit by the credit crisis - which, ironically, Goldman Sachs helped cause by destabilising the financial system.
Kings of the meltdown
In any analysis of the web of high-level connections that Goldman Sachs managed to build up over the decades, it is not hard to see why it has come out of the financial crash as the king of post-meltdown Wall Street. What’s more it has shown a nasty habit of turning the tables on the very clients whose interests it is supposed to be looking after.
For example, during the dotcom boom of the early part of this decade, Goldman Sachs was at the forefront of bringing dozens of new technology and online firms to the stock market. Several of these companies turned out to be duds. Those Goldmans Sachs clients which had invested heavily in these firms lost huge sums when the boom turned to bust. One of the questionable techniques used by Goldman Sachs to keep the flow of these dotcom offerings going was to offer special incentives to directors by allowing them to buy shares at preferential prices - a practice known as ’spinning’.
Eventually, Goldman Sachs was forced to concede this two-tier system was wrong and had to settle with New York regulators by quietly paying $110m to settle market manipulation charges.
Goldman Sachs’s greatest triumph of all, however, has been to emerge from the credit crisis not only unscathed, but extravagantly enriched - despite having to be bailed out itself.
It has achieved this by a mixture of guile and influence. In the wake of the Lehman collapse, Goldman Sachs was also facing the precipice. Its share price was plunging and it had to take any help it could get. This, of course, came from its former boss Hank Paulson.
He allowed both Goldman and Morgan Stanley to change their status from broker-dealers to bank holding companies. This meant that Goldman could borrow directly from the U.S. central bank, the Federal Reserve, and shore up its business as money drained away. It also was forced to allow the taxpayer to take a $5bn stake in the company.
Just how good is Goldman Sachs for the world economy?
Rather than let the public restrict its ability to make money for itself, Goldman Sachs significantly set about paying the money back early this year.
Freed from government obligations, the sharks could start looking for more prey. The profit opportunities left by the credit crisis were too good to miss. With its rivals almost all eliminated, any big corporation looking for financial services had virtually no where else to turn but to Goldmans Sachs.
Huge profits were made from this advice, from mergers and takeovers, and from trading in foreign exchange and commodities such as oil, where Goldman Sachs has been among the principle speculators.
The paradox is that Goldman Sachs had come as close to destruction as at any time in its long history. Indeed, the boast from its chairman, Lloyd Blankfein, to me (at a briefing session for London-based writers) that the firm had enough liquidity to withstand almost anything, turned out to be poppycock.
Even now, Goldman Sachs could not be operating at its current velocity without the help of the trillions of dollars being flushed through the financial system by central banks including the Federal Reserve and the Bank of England.
Because of its friends in the highest places of global finance, no one even dares question the notion that what is good for Goldman Sachs is good for the global economy.