Sunday, March 07, 2010

The Goldman Sachs / Government Connection

"AIG exploited a huge gap in the regulatory system. There was no oversight of the Financial Products division. This was a hedge fund, basically, that was attached to a large and stable insurance company." - Fed Chairman, Ben Bernanke

Financial industry giants have taken hold of our government. By becoming "too big to fail," they are living out a calculated, self-fulfilling prophecy.

According to a TIME Magazine story from last year, Goldman Sachs and AIG made huge, irresponsible bets, seemingly with the explicit knowledge that the government would back them if / when they failed.

Goldman entered into a series of highly expensive contracts with AIG, surely knowing how risky they were. Yet they did so anyway. Only the assurance of a government bailout could have compelled such recklessness. The whole thing seemed to be orchestrated to blow up.

As the article pointed out, the government is absolutely littered with former Goldman execs. Obviously, that is a huge conflict of interest.

In a rare interview, former AIG CEO Hank Greenberg told TIME that once the company lost its top credit rating, AIG FP should have stopped writing swaps and hedged, or reinsured, its existing ones.

But AIG FP President Joe Cassano's unit doubled down after the spring of 2005, writing more and more subprime-linked swaps as the ratings plunged. This raised the potential for enormous amounts of collateral being needed in the event that its debt was subsequently downgraded.

Such downgrades eventually occurred in 2008.

Ultimately, AIG — which was bailed out by US taxpayers — ended up bailing out the very same Wall St. banks that had already been rescued by those same taxpayers.

Despite the investment banks having taken such enormous risks with such obvious consequences, the Fed still paid many of them in full. Heads, they win; tails, the taxpayers lose. Gains are private, while losses are public.

Ostensibly, the intention was to keep the financial system fluid. But this moral hazard was perhaps a bigger scandal than the highly controversial bonus payouts.

Many experts wondered why AIG paid 100 cents on the dollar. Among the biggest beneficiaries of the AIG pass-through, at $12.9 billion, was Goldman Sachs — the investment-banking house that has been the single largest supplier of financial "talent" to the government.

Critics have been quick to note — and not favorably — the almost uncanny influence of former Goldman executives.

Initial phases of the rescue were orchestrated by ex–Goldman chairman Hank Paulson, who was recruited as Treasury Secretary, in part, by former White House chief of staff and Goldman senior exec Josh Bolten.

Goldman's current boss, Lloyd Blankfein, was invited to participate in meetings with the Fed.

Recent AIG Chairman Edward Liddy is a former Goldman director and an ex-CEO of Allstate.

Another alum, Mark Patterson, once a Goldman lobbyist, serves as chief of staff at the Treasury, while Neel Kashkari, who ran TARP, was a Goldman vice president.

Goldman has repeatedly declared that its exposure to AIG was "immaterial" and fully hedged. But some rivals point to the fact that Goldman had uncharacteristically piled into contracts with a single counterparty.

"I am shocked that Goldman had this much exposure [to AIG]," says an analyst at a competing bank. "This was a major failing, but they got bailed."

How was AIG able to live so dangerously for so long? In part because for years Washington has looked the other way.

The company befriended politicians with campaign cash — $9.3 million divided evenly between Democrats and Republicans from 1990 to 2008, according to the Center for Responsive Politics.

And it spent more than $70 million to lobby them over the past decade, escaping the kind of regulation that might have prevented the current crisis.

So, in essence, our elected leaders were bribed to look the other way and allow these egregious transgressions to take place. And Wall St. was given carte blanche to do whatever it likes. It has essentially written its own rules.

In February 2000, one of Wall Street’s most powerful executives petitioned the Securities and Exchange Commission (SEC) to allow his firm and other investment banks to raise their levels of leverage.

He wanted the commission to alter something called the net-capital rule, which he said was “the single most important factor in driving significant parts of our business offshore.”

That exec was Henry Paulson, then the CEO of Goldman Sachs, and the previous U.S. Treasury Secretary.

So, in 2004, after hard lobbying by Paulson and other Wall Street execs, the SEC complied. It reversed its 1975 rule limiting investment banks to leverage of 15-to-1.

The amended rule allowed banks and other Wall Street firms to borrow even more money to finance their businesses. The new limit could be as high as 40-to-1 if the investment banks' own computer models said it was safe.

The most aggressive investment banks gladly took on these absurd leverage ratios. What this meant is that, for every dollar in equity capital a firm had, it could borrow $40.

Now those ratios are being unwound with a vengeance and we taxpayers are being held hostage to the process.

What has been hatched is a public/private partnership – amounting to a good ol' boys network – that is absconding with our tax dollars.

Nothing less than a revolving door exists between Wall St. and Washington DC, and back again, just like the Military-Industrial Complex. The whole scheme is appalling.

It is now abundantly clear that Goldman Sachs is nothing less than a mammoth criminal enterprise, and our government aids and abets them. In fact, our government is under Goldman's spell, if not outright control.

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