Goldman Sachs is one of the shadowy figures that you hear about in passing related to the so-called "Great Recession." They are an investment bank on Wall Street. You may not have heard of them because they don't do traditional deposit banking like the ones that you use regularly. Why are they important? Why does Congress regularly call Goldman's CEO Lloyd Blankfein to testify about his company's role in nearly making the world burn? Let's start with the story of Goldman Sachs itself.
Goldman's rise and history is well-chronicled by Matt Tabbi in Rolling Stone. Here's my general synopsis for you: Goldman Sachs was founded in 1869 and more or less survived as a "normal" small investment bank in Manhattan. They lended money to small businesses and made money on repayment. All was well. Then in the 1920's Goldman realized it was in the small pond of investments.
They opened themselves up as a trading company at $100/share on the market. Then they bought all their own shares and sold them to the public at $104/share. Essentially making $4/share. They took that profit and formed a new "trust" (ironic name indeed) called the Shenandoah Corp. They sold those shares and formed another trust called Blue Ridge Corp. In essence, Blue Ridge was Goldman, so was Shenandoah, and so was Goldman itself. It was a nearly endless pyramid of bullshit. The problem, of course, is that none of those corporations were real. It is simply borrowing money using borrowed money as collateral. When the public tried to sell its shares and collect cash, well there was no cash. The cash was a myth. It was magic. It was borrowing on borrowing. Maybe you remember reading about the bank runs during The Depression where people went to the bank to pull out their money and found, no doubt to their great surprise, that there money wasn't there. Anyone? Bueller? This was, in part, what led to the stock market crash of 1929 and The Great Depression.
Now, you can read Tabbi's article to learn more about Goldman's wonderful skill at sinking an entire economy. But let's talk today. What does Goldman actually do? According to their website they are a "financial advisor, lender, investor, and asset manager." They give companies information about what to buy and sell and how to manage their money. Furthermore, they invest on their own behalf when they like. I want you to let those two points sink in real deep, they are important. Goldman gives governments and corporations advice on what to buy and sell on the market, and also buys and sells for itself.
Now, The Great Recession had many causes. But let's talk about mortgage securities. In short, mortgage securities are bets that a person will pay their mortgage. They organize large numbers of mortgages into pools and then investment banks, among others, buy these securities. In doing so, they are betting that most of the people in that pool will pay their mortgage. If they don't, the investor loses out. Mortgage-backed-securities are priced, generally, by assessing default risk and interest rate exposure (risk of losing money based on interest rate adjustments). So here's another important point: investors buy mortgage securities based on many things, but two chief factors are the risk that the homeowner pays their mortgage and the risk that interest rate changes might cause them to lose money.
Goldman's job is to assess that risk, among many other types of risk, and give the client a recommendation as to whether or not to buy. Furthermore, insurance giant AIG might issue a credit default swap, basically an insurance policy that "guarantees" the investor will still get paid even if the mortgage security ends up being a horrible investment. The government announced today that it is charging Goldman with fraud. Now, if you have followed this crisis at all, you will know that this is the best news since the first caveman drove in from the dregs, plugged a toaster in the wall and bought a bag of bread. He made toast. Google it. Goldman has been accused in the media over and over by many different people of wrongdoing. However, the SEC has been very slow in actually filing charges. But what did Goldman do?
Goldman was clever on several fronts. First, they gave advice to investors that they should buy certain securities and then bet against them in the market. They also suggested AIG give default swaps for securities that Goldman knew were poor bets. So remember my important point #1 from above: Goldman gives advice to investors about what they should buy or sell, and sometimes buy and sells for itself. In this case, Goldman gave advice and then did the opposite. This is illegal and is the definition of fraud. Further investigation has suggested that Goldman may have performed fraudulant acts in Greece's pursuit of inclusion in the Euro. If you have paid attention, Greece is now in a huge debt hole. Greece's story, however, is a story for another day.
Now all this, ahem, naughty behavior left Goldman and other banks scrambling for cash when a huge number of people with a $50,000 income couldn't pay their $250,000 mortgage. So we bailed Goldman out. The purpose here isn't to debate whether banks should be bailed out or not. Just understand that if banks sank into the abyss, businesses would have no one to borrow from. They need to borrow folks. So we gave Wall Street banks some cash to loan. Goldman was clever enough (remember that W.'s Secretary of the Treasury, Henry Paulson, was a former Goldman CEO) to use their bailout money to buy treasury bonds. They then kindly sold those bonds back to us for a nice profit. Matt Tabbi also outlines this here.
I'm sure conservatives will cry and whine about regulating Wall Street more. I'm also sure that they are either completely crooked, or too dumb to understand that they are falling for the sales pitch a bit too easily. Many industries, pharmaceutical companies for instance, face strong regulation and still post profits well into the billions. Wall Street would be no different. However, strong regulation can help prevent this type of bullshit from happening again.
I, for one, hope Goldman burns in effigy before us all. I hope that everyone knows who they are and that they, along with JP Morgan and all those other rotten companies, get fined and get hurt. I feel bad for the honest employees of those companies. They will be hurt too, and that's a shame. But fear not employees. Hopefully soon we will remove your completely crooked, if not inept, leadership. Maybe if we search high and low we will find some people who are honest and care about you too. For all the talk about governments oppressing and controlling people, think about this. Before this post, some of you may not have even known Goldman existed. You wouldn't know that they are over 140 years old. You may never hear of them again until the next bailout and crisis. But know that they control things. They lobby and try to find ways to screw you and me every single day. The difference between they and government is, at least, we can vote the government out.
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