Taibbi: "Goldman Raped The Taxpayer, And Raped Their Clients"
Nothing really new, just the most searing and comprehensive evisceration of the vampire squid's "profitability tactics" to date, packaged in a box of exquisite semantic brilliance that only Matt Taibbi can provide, and comprehensible enough for anyone to understand. Taibbi points out: "the fact that we haven't done much of
anything to change the rules and behavior of Wall Street shows that
we still don't get it. Instituting a bailout policy that
stressed recapitalizing bad banks was like the addict coming back
to the con man to get his lost money back. Ask yourself how well
that ever works out. And then get ready for the reload." It is time to break up the market monopolizing force known as Goldman Sachs.
Published in Rolling Stone magazine
Wall Street's Bailout Hustle
Goldman Sachs and other big banks aren't just pocketing the trillions we gave them to rescue the economy - they're re-creating the conditions for another crash
On January 21st, Lloyd Blankfein left a
peculiar voicemail message on the work phones of his employees at
Goldman Sachs. Fast becoming America's pre-eminent Marvel Comics
supervillain, the CEO used the call to deploy his secret weapon: a
pair of giant, nuclear-powered testicles. In his message, Blankfein
addressed his plan to pay out gigantic year-end bonuses amid
widespread controversy over Goldman's role in precipitating the
global financial crisis.
The bank had already set aside a tidy $16.2 billion for salaries
and bonuses — meaning that Goldman employees were each set to
take home an average of $498,246, a number roughly commensurate
with what they received during the bubble years. Still, the troops
were worried: There were rumors that Dr. Ballsachs, bowing to
political pressure, might be forced to scale the number back. After
all, the country was broke, 14.8 million Americans were stranded on
the unemployment line, and Barack Obama and the Democrats were
trying to recover the populist high ground after their
bitch-whipping in Massachusetts by calling for a "bailout tax" on
banks. Maybe this wasn't the right time for Goldman to be throwing
its annual Roman bonus orgy.
Not to worry, Blankfein reassured employees. "In a year that
proved to have no shortage of story lines," he said, "I believe
very strongly that performance is the ultimate narrative."
Translation: We made a shitload of money last year because we're
so amazing at our jobs, so fuck all those people who want us to
reduce our bonuses.
Goldman wasn't alone. The nation's six largest banks — all
committed to this balls-out, I drink your milkshake!
strategy of flagrantly gorging themselves as America goes hungry
— set aside a whopping $140 billion for executive
compensation last year, a sum only slightly less than the $164
billion they paid themselves in the pre-crash year of 2007. In a
gesture of self-sacrifice, Blankfein himself took a humiliatingly
low bonus of $9 million, less than the 2009 pay of elephantine New
York Knicks washout Eddy Curry. But in reality, not much had
changed. "What is the state of our moral being when Lloyd Blankfein
taking a $9 million bonus is viewed as this great act of
contrition, when every penny of it was a direct transfer from the
taxpayer?" asks Eliot Spitzer, who tried to hold Wall Street
accountable during his own ill-fated stint as governor of New
Beyond a few such bleats of outrage, however, the huge payout
was met, by and large, with a collective sigh of resignation.
Because beneath America's populist veneer, on a more subtle strata
of the national psyche, there remains a strong temptation to not
really give a shit. The rich, after all, have always made way too
much money; what's the difference if some fat cat in New York
pockets $20 million instead of $10 million?
The only reason such apathy exists, however, is because there's
still a widespread misunderstanding of how exactly Wall Street
"earns" its money, with emphasis on the quotation marks around
"earns." The question everyone should be asking, as one bailout
recipient after another posts massive profits — Goldman
reported $13.4 billion in profits last year, after paying out that
$16.2 billion in bonuses and compensation — is this: In an
economy as horrible as ours, with every factory town between New
York and Los Angeles looking like those hollowed-out ghost ships we
see on History Channel documentaries like Shipwrecks of the
Great Lakes, where in the hell did Wall Street's eye-popping
profits come from, exactly? Did Goldman go from bailout city to
$13.4 billion in the black because, as Blankfein suggests, its
"performance" was just that awesome? A year and a half after they
were minutes away from bankruptcy, how are these assholes not only
back on their feet again, but hauling in bonuses at the same rate
they were during the bubble?
The answer to that question is basically twofold: They raped the
taxpayer, and they raped their clients.
The bottom line is that banks like Goldman have learned
absolutely nothing from the global economic meltdown. In fact,
they're back conniving and playing speculative long shots in force
— only this time with the full financial support of the U.S.
government. In the process, they're rapidly re-creating the
conditions for another crash, with the same actors once again
playing the same crazy games of financial chicken with the same
toxic assets as before.
That's why this bonus business isn't merely a matter of getting
upset about whether or not Lloyd Blankfein buys himself one
tropical island or two on his next birthday. The reality is that
the post-bailout era in which Goldman thrived has turned out to be
a chaotic frenzy of high-stakes con-artistry, with taxpayers and
clients bilked out of billions using a dizzying array of old-school
hustles that, but for their ponderous complexity, would have fit
well in slick grifter movies like The Sting and
Matchstick Men. There's even a term in con-man lingo for
what some of the banks are doing right now, with all their cosmetic
gestures of scaling back bonuses and giving to charities. In the
grifter world, calming down a mark so he doesn't call the cops is
known as the "Cool Off."
To appreciate how all of these (sometimes brilliant) schemes
work is to understand the difference between earning money and
taking scores, and to realize that the profits these banks are
posting don't so much represent national growth and recovery, but
something closer to the losses one would report after a theft or a
car crash. Many Americans instinctively understand this to be true
— but, much like when your wife does it with your 300-pound
plumber in the kids' playroom, knowing it and actually watching the
whole scene from start to finish are two very different things. In
that spirit, a brief history of the best 18 months of grifting this
country has ever seen:
THE SWOOP AND SQUAT
By now, most people who have followed the
financial crisis know that the bailout of AIG was actually a
bailout of AIG's "counterparties" — the big banks like
Goldman to whom the insurance giant owed billions when it went
What is less understood is that the bailout of AIG
counter-parties like Goldman and Société
Générale, a French bank, actually began
before the collapse of AIG, before the Federal Reserve
paid them so much as a dollar. Nor is it understood that these
counterparties actually accelerated the wreck of AIG in what was,
ironically, something very like the old insurance scam known as
"Swoop and Squat," in which a target car is trapped between two
perpetrator vehicles and wrecked, with the mark in the game being
the target's insurance company — in this case, the
This may sound far-fetched, but the financial crisis of 2008 was
very much caused by a perverse series of legal incentives that
often made failed investments worth more than thriving ones. Our
economy was like a town where everyone has juicy insurance policies
on their neighbors' cars and houses. In such a town, the driving
will be suspiciously bad, and there will be a lot of fires.
AIG was the ultimate example of this dynamic. At the height of
the housing boom, Goldman was selling billions in bundled
mortgage-backed securities — often toxic crap of the
no-money-down, no-identification-needed variety of home loan
— to various institutional suckers like pensions and
insurance companies, who frequently thought they were buying
investment-grade instruments. At the same time, in a glaring
example of the perverse incentives that existed and still exist,
Goldman was also betting against those same sorts of
securities — a practice that one government investigator
compared to "selling a car with faulty brakes and then buying an
insurance policy on the buyer of those cars."
Goldman often "insured" some of this garbage with AIG, using a
virtually unregulated form of pseudo-insurance called
credit-default swaps. Thanks in large part to deregulation pushed
by Bob Rubin, former chairman of Goldman, and Treasury secretary
under Bill Clinton, AIG wasn't required to actually have the
capital to pay off the deals. As a result, banks like Goldman
bought more than $440 billion worth of this bogus insurance from
AIG, a huge blind bet that the taxpayer ended up having to eat.
Thus, when the housing bubble went crazy, Goldman made money
coming and going. They made money selling the crap mortgages, and
they made money by collecting on the bogus insurance from AIG when
the crap mortgages flopped.
Still, the trick for Goldman was: how to collect the
insurance money. As AIG headed into a tailspin that fateful summer
of 2008, it looked like the beleaguered firm wasn't going to have
the money to pay off the bogus insurance. So Goldman and other
banks began demanding that AIG provide them with cash collateral.
In the 15 months leading up to the collapse of AIG, Goldman
received $5.9 billion in collateral. Société
Générale, a bank holding lots of mortgage-backed crap
originally underwritten by Goldman, received $5.5 billion. These
collateral demands squeezing AIG from two sides were the "Swoop and
Squat" that ultimately crashed the firm. "It put the company into a
liquidity crisis," says Eric Dinallo, who was intimately involved
in the AIG bailout as head of the New York State Insurance
It was a brilliant move. When a company like AIG is about to
die, it isn't supposed to hand over big hunks of assets to a single
creditor like Goldman; it's supposed to equitably distribute
whatever assets it has left among all its creditors. Had AIG gone
bankrupt, Goldman would have likely lost much of the $5.9 billion
that it pocketed as collateral. "Any bankruptcy court that saw
those collateral payments would have declined that transaction as a
fraudulent conveyance," says Barry Ritholtz, the author of
Bailout Nation. Instead, Goldman and the other
counterparties got their money out in advance — putting a
torch to what was left of AIG. Fans of the movie
Goodfellas will recall Henry Hill and Tommy DeVito taking
the same approach to the Bamboo Lounge nightclub they'd been
gouging. Roll the Ray Liotta narration: "Finally, when there's
nothing left, when you can't borrow another buck . . . you bust the
joint out. You light a match."
And why not? After all, according to the terms of the bailout
deal struck when AIG was taken over by the state in September 2008,
Goldman was paid 100 cents on the dollar on an additional $12.9
billion it was owed by AIG — again, money it almost certainly
would not have seen a fraction of had AIG proceeded to a normal
bankruptcy. Along with the collateral it pocketed, that's $19
billion in pure cash that Goldman would not have "earned" without
massive state intervention. How's that $13.4 billion in 2009
profits looking now? And that doesn't even include the
direct bailouts of Goldman Sachs and other big banks,
which began in earnest after the collapse of AIG.
THE DOLLAR STORE
In the usual "DollarStore" or "Big Store"
scam — popularized in movies like The Sting —
a huge cast of con artists is hired to create a whole fake
environment into which the unsuspecting mark walks and gets robbed
over and over again. A warehouse is converted into a makeshift
casino or off-track betting parlor, the fool walks in with money,
leaves without it.
The two key elements to the Dollar Store scam are the whiz-bang
theatrical redecorating job and the fact that everyone is in on it
except the mark. In this case, a pair of investment banks were
dressed up to look like commercial banks overnight, and it was the
taxpayer who walked in and lost his shirt, confused by the
appearance of what looked like real Federal Reserve officials
minding the store.
Less than a week after the AIG bailout, Goldman and another
investment bank, Morgan Stanley, applied for, and received, federal
permission to become bank holding companies — a move that
would make them eligible for much greater federal support. The
stock prices of both firms were cratering, and there was talk that
either or both might go the way of Lehman Brothers, another
once-mighty investment bank that just a week earlier had
disappeared from the face of the earth under the weight of its
toxic assets. By law, a five-day waiting period was required for
such a conversion — but the two banks got them overnight,
with final approval actually coming only five days after the AIG
Why did they need those federal bank charters? This question is
the key to understanding the entire bailout era — because
this Dollar Store scam was the big one. Institutions that were, in
reality, high-risk gambling houses were allowed to masquerade as
conservative commercial banks. As a result of this new designation,
they were given access to a virtually endless tap of "free money"
by unsuspecting taxpayers. The $10 billion that Goldman received
under the better-known TARP bailout was chump change in comparison
to the smorgasbord of direct and indirect aid it qualified for as a
When Goldman Sachs and Morgan Stanley got their federal bank
charters, they joined Bank of America, Citigroup, J.P. Morgan Chase
and the other banking titans who could go to the Fed and borrow
massive amounts of money at interest rates that, thanks to the
aggressive rate-cutting policies of Fed chief Ben Bernanke during
the crisis, soon sank to zero percent. The ability to go to the Fed
and borrow big at next to no interest was what saved Goldman,
Morgan Stanley and other banks from death in the fall of 2008.
"They had no other way to raise capital at that moment, meaning
they were on the brink of insolvency," says Nomi Prins, a former
managing director at Goldman Sachs. "The Fed was the only
In fact, the Fed became not just a source of emergency borrowing
that enabled Goldman and Morgan Stanley to stave off disaster
— it became a source of long-term guaranteed income.
Borrowing at zero percent interest, banks like Goldman now had
virtually infinite ways to make money. In one of the most common
maneuvers, they simply took the money they borrowed from the
government at zero percent and lent it back to the government by
buying Treasury bills that paid interest of three or four percent.
It was basically a license to print money — no different than
attaching an ATM to the side of the Federal Reserve.
"You're borrowing at zero, putting it out there at two or three
percent, with hundreds of billions of dollars — man, you can
make a lot of money that way," says the manager of one prominent
hedge fund. "It's free money." Which goes a long way to explaining
Goldman's enormous profits last year. But all that free money was
amplified by another scam:
THE PIG IN THE POKE
At one point or another, pretty much
everyone who takes drugs has been burned by this one, also known as
the "Rocks in the Box" scam or, in its more elaborate variations,
the "Jamaican Switch." Someone sells you what looks like an
eightball of coke in a baggie, you get home and, you dumbass, it's
The scam's name comes from the Middle Ages, when some fool would
be sold a bound and gagged pig that he would see being put into a
bag; he'd miss the switch, then get home and find a tied-up cat in
there instead. Hence the expression "Don't let the cat out of the
The "Pig in the Poke" scam is another key to the entire bailout
era. After the crash of the housing bubble — the largest
asset bubble in history — the economy was suddenly flooded
with securities backed by failing or near-failing home loans. In
the cleanup phase after that bubble burst, the whole game was to
get taxpayers, clients and shareholders to buy these worthless
cats, but at pig prices.
One of the first times we saw the scam appear was in September
2008, right around the time that AIG was imploding. That was when
the Fed changed some of its collateral rules, meaning banks that
could once borrow only against sound collateral, like Treasury
bills or AAA-rated corporate bonds, could now borrow against pretty
much anything — including some of the mortgage-backed sewage
that got us into this mess in the first place. In other words,
banks that once had to show a real pig to borrow from the Fed could
now show up with a cat and get pig money. "All of a sudden, banks
were allowed to post absolute shit to the Fed's balance sheet,"
says the manager of the prominent hedge fund.
The Fed spelled it out on September 14th, 2008, when it changed
the collateral rules for one of its first bailout facilities
— the Primary Dealer Credit Facility, or PDCF. The Fed's own
write-up described the changes: "With the Fed's action, all the
kinds of collateral then in use . . . including
non-investment-grade securities and equities . . . became
eligible for pledge in the PDCF."
Translation: We now accept cats.
The Pig in the Poke also came into play in April of last year,
when Congress pushed a little-known agency called the Financial
Accounting Standards Board, or FASB, to change the so-called
"mark-to-market" accounting rules. Until this rule change, banks
had to assign a real-market price to all of their assets. If they
had a balance sheet full of securities they had bought at $3 that
were now only worth $1, they had to figure their year-end
accounting using that $1 value. In other words, if you were the
dope who bought a cat instead of a pig, you couldn't invite your
shareholders to a slate of pork dinners come year-end accounting
But last April, FASB changed all that. From now on, it
announced, banks could avoid reporting losses on some of their
crappy cat investments simply by declaring that they would "more
likely than not" hold on to them until they recovered their pig
value. In short, the banks didn't even have to actually
hold on to the toxic shit they owned — they just had to
sort of promise to hold on to it.
That's why the "profit" numbers of a lot of these banks are
really a joke. In many cases, we have absolutely no idea how many
cats are in their proverbial bag. What they call "profits" might
really be profits, only minus undeclared millions or
billions in losses.
"They're hiding all this stuff from their shareholders," says
Ritholtz, who was disgusted that the banks lobbied for the rule
changes. "Now, suddenly banks that were happy to mark to market on
the way up don't have to mark to market on the way down."
THE RUMANIAN BOX
One of the great innovations of Victor
Lustig, the legendary Depression-era con man who wrote the famous
"Ten Commandments for Con Men," was a thing called the "Rumanian
Box." This was a little machine that a mark would put a blank piece
of paper into, only to see real currency come out the other side.
The brilliant Lustig sold this Rumanian Box over and over again for
vast sums — but he's been outdone by the modern barons of
Wall Street, who managed to get themselves a real Rumanian Box.
How they accomplished this is a story that by itself highlights
the challenge of placing this era in any kind of historical context
of known financial crime. What the banks did was something that was
never — and never could have been — thought of before.
They took so much money from the government, and then did so little
with it, that the state was forced to start printing new cash to
throw at them. Even the great Lustig in his wildest, horniest
dreams could never have dreamed up this one.
The setup: By early 2009, the banks had already replenished
themselves with billions if not trillions in bailout money. It
wasn't just the $700 billion in TARP cash, the free money provided
by the Fed, and the untold losses obscured by accounting tricks.
Another new rule allowed banks to collect interest on the cash they
were required by law to keep in reserve accounts at the Fed —
meaning the state was now compensating the banks simply for
guaranteeing their own solvency. And a new federal operation called
the Temporary Liquidity Guarantee Program let insolvent and
near-insolvent banks dispense with their deservedly ruined credit
profiles and borrow on a clean slate, with FDIC backing. Goldman
borrowed $29 billion on the government's good name, J.P. Morgan
Chase $38 billion, and Bank of America $44 billion. "TLGP," says
Prins, the former Goldman manager, "was a big one."
Collectively, all this largesse was worth trillions. The idea
behind the flood of money, from the government's standpoint, was to
spark a national recovery: We refill the banks' balance sheets, and
they, in turn, start to lend money again, recharging the economy
and producing jobs. "The banks were fast approaching insolvency,"
says Rep. Paul Kanjorski, a vocal critic of Wall Street who
nevertheless defends the initial decision to bail out the banks.
"It was vitally important that we recapitalize these
But here's the thing. Despite all these trillions in government
rescues, despite the Fed slashing interest rates down to nothing
and showering the banks with mountains of guarantees, Goldman and
its friends had still not jump-started lending again by the first
quarter of 2009. That's where those nuclear-powered balls of Lloyd
Blankfein came into play, as Goldman and other banks basically
threatened to pick up their bailout billions and go home if the
government didn't fork over more cash — a lot more.
"Even if the Fed could make interest rates negative, that wouldn't
necessarily help," warned Goldman's chief domestic economist, Jan
Hatzius. "We're in a deep recession mainly because the private
sector, for a variety of reasons, has decided to save a lot
Translation: You can lower interest rates all you want, but
we're still not fucking lending the bailout money to anyone in this
economy. Until the government agreed to hand over even more
goodies, the banks opted to join the rest of the "private sector"
and "save" the taxpayer aid they had received — in the form
of bonuses and compensation.
The ploy worked. In March of last year, the Fed sharply expanded
a radical new program called quantitative easing, which effectively
operated as a real-live Rumanian Box. The government put stacks of
paper in one side, and out came $1.2 trillion "real" dollars.
The government used some of that freshly printed money to prop
itself up by purchasing Treasury bonds — a desperation move,
since Washington's demand for cash was so great post-Clusterfuck
'08 that even the Chinese couldn't buy U.S. debt fast enough to
keep America afloat. But the Fed used most of the new cash to buy
mortgage-backed securities in an effort to spur home lending
— instantly creating a massive market for major banks.
And what did the banks do with the proceeds? Among other things,
they bought Treasury bonds, essentially lending the money back to
the government, at interest. The money that came out of the magic
Rumanian Box went from the government back to the government, with
Wall Street stepping into the circle just long enough to get paid.
And once quantitative easing ends, as it is scheduled to do in
March, the flow of money for home loans will once again grind to a
halt. The Mortgage Bankers Association expects the number of new
residential mortgages to plunge by 40 percent this year.
THE BIG MITT
All of that Rumanian box paper was made
even more valuable by running it through the next stage of the
grift. Michael Masters, one of the country's leading experts on
commodities trading, compares this part of the scam to the poker
game in the Bill Murray comedy Stripes. "It's like that
scene where John Candy leans over to the guy who's new at poker and
says, 'Let me see your cards,' then starts giving him advice,"
Masters says. "He looks at the hand, and the guy has bad cards, and
he's like, 'Bluff me, come on! If it were me, I'd bet everything!'
That's what it's like. It's like they're looking at your cards as
they give you advice."
In more ways than one can count, the economy in the bailout era
turned into a "Big Mitt," the con man's name for a rigged poker
game. Everybody was indeed looking at everyone else's cards, in
many cases with state sanction. Only taxpayers and clients were
left out of the loop.
At the same time the Fed and the Treasury were making massive,
earthshaking moves like quantitative easing and TARP, they were
also consulting regularly with private advisory boards that include
every major player on Wall Street. The Treasury Borrowing Advisory
Committee has a J.P. Morgan executive as its chairman and a Goldman
executive as its vice chairman, while the board advising the Fed
includes bankers from Capital One and Bank of New York Mellon. That
means that, in addition to getting great gobs of free money, the
banks were also getting clear signals about when they were
getting that money, making it possible to position themselves to
make the appropriate investments.
One of the best examples of the banks blatantly gambling, and
winning, on government moves was the Public-Private Investment
Program, or PPIP. In this bizarre scheme cooked up by goofball-geek
Treasury Secretary Tim Geithner, the government loaned money to
hedge funds and other private investors to buy up the absolutely
most toxic horseshit on the market — the same kind of
high-risk, high-yield mortgages that were most responsible for
triggering the financial chain reaction in the fall of 2008. These
satanic deals were the basic currency of the bubble: Jobless dope
fiends bought houses with no money down, and the big banks wrapped
those mortgages into securities and then sold them off to pensions
and other suckers as investment-grade deals. The whole point of the
PPIP was to get private investors to relieve the banks of these
dangerous assets before they hurt any more innocent bystanders.
But what did the banks do instead, once they got wind of the
PPIP? They started buying that worthless crap again,
presumably to sell back to the government at inflated prices! In
the third quarter of last year, Goldman, Morgan Stanley, Citigroup
and Bank of America combined to add $3.36 billion of exactly this
horseshit to their balance sheets.
This brazen decision to gouge the taxpayer startled even
hardened market observers. According to Michael Schlachter of the
investment firm Wilshire Associates, it was "absolutely ridiculous"
that the banks that were supposed to be reducing their exposure to
these volatile instruments were instead loading up on them in order
to make a quick buck. "Some of them created this mess," he said,
"and they are making a killing undoing it."
Here's the thing about our current
economy. When Goldman and Morgan Stanley transformed overnight from
investment banks into commercial banks, we were told this would
mean a new era of "significantly tighter regulations and much
closer supervision by bank examiners," as The New York
Times put it the very next day. In reality, however, the
conversion of Goldman and Morgan Stanley simply completed the
dangerous concentration of power and wealth that began in 1999,
when Congress repealed the Glass-Steagall Act — the
Depression-era law that had prevented the merger of insurance
firms, commercial banks and investment houses. Wall Street and the
government became one giant dope house, where a few major players
share valuable information between conflicted departments the way
junkies share needles.
One of the most common practices is a thing called
front-running, which is really no different from the old "Wire"
con, another scam popularized in The Sting. But instead of
intercepting a telegraph wire in order to bet on racetrack results
ahead of the crowd, what Wall Street does is make bets ahead of
valuable information they obtain in the course of everyday
Say you're working for the commodities desk of a big investment
bank, and a major client — a pension fund, perhaps —
calls you up and asks you to buy a billion dollars of oil futures
for them. Once you place that huge order, the price of those
futures is almost guaranteed to go up. If the guy in charge of
asset management a few desks down from you somehow finds out about
that, he can make a fortune for the bank by betting ahead of that
client of yours. The deal would be instantaneous and undetectable,
and it would offer huge profits. Your own client would lose money,
of course — he'd end up paying a higher price for the oil
futures he ordered, because you would have driven up the price. But
that doesn't keep banks from screwing their own customers in this
The scam is so blatant that Goldman Sachs actually warns its
clients that something along these lines might happen to them. In
the disclosure section at the back of a research paper the bank
issued on January 15th, Goldman advises clients to buy some dubious
high-yield bonds while admitting that the bank itself may bet
against those same shitty bonds. "Our salespeople, traders
and other professionals may provide oral or written market
commentary or trading strategies to our clients and our proprietary
trading desks that reflect opinions that are contrary to the
opinions expressed in this research," the disclosure reads. "Our
asset-management area, our proprietary-trading desks and investing
businesses may make investment decisions that are inconsistent with
the recommendations or views expressed in this research."
Banks like Goldman admit this stuff openly, despite the fact
that there are securities laws that require banks to engage in
"fair dealing with customers" and prohibit analysts from issuing
opinions that are at odds with what they really think. And yet here
they are, saying flat-out that they may be issuing an opinion at
odds with what they really think.
To help them screw their own clients, the major investment banks
employ high-speed computer programs that can glimpse orders from
investors before the deals are processed and then make trades on
behalf of the banks at speeds of fractions of a second. None of
them will admit it, but everybody knows what this computerized
trading — known as "flash trading" — really is. "Flash
trading is nothing more than computerized front-running," says the
prominent hedge-fund manager. The SEC voted to ban flash trading in
September, but five months later it has yet to issue a regulation
to put a stop to the practice.
Over the summer, Goldman suffered an embarrassment on that score
when one of its employees, a Russian named Sergey Aleynikov,
allegedly stole the bank's computerized trading code. In a court
proceeding after Aleynikov's arrest, Assistant U.S. Attorney Joseph
Facciponti reported that "the bank has raised the possibility that
there is a danger that somebody who knew how to use this program
could use it to manipulate markets in unfair ways."
Six months after a federal prosecutor admitted in open court
that the Goldman trading program could be used to unfairly
manipulate markets, the bank released its annual numbers. Among the
notable details was the fact that a staggering 76 percent of its
revenue came from trading, both for its clients and for its own
account. "That is much, much higher than any other bank," says
Prins, the former Goldman managing director. "If I were a client
and I saw that they were making this much money from trading, I
would question how badly I was getting screwed."
Why big institutional investors like pension funds continually
come to Wall Street to get raped is the million-dollar question
that many experienced observers puzzle over. Goldman's own
explanation for this phenomenon is comedy of the highest order. In
testimony before a government panel in January, Blankfein was
confronted about his firm's practice of betting against the same
sorts of investments it sells to clients. His response: "These are
the professional investors who want this exposure."
In other words, our clients are big boys, so screw 'em if
they're dumb enough to take the sucker bets I'm offering.
Not many con men are good enough or
brazen enough to con the same victim twice in a row, but the few
who try have a name for this excellent sport: reloading.
The usual way to reload on a repeat victim (called an "addict" in
grifter parlance) is to rope him into trying to get back the money
he just lost. This is exactly what started to happen late last
It's important to remember that the housing bubble itself was a
classic confidence game — the Ponzi scheme. The Ponzi scheme
is any scam in which old investors must be continually paid off
with money from new investors to keep up what appear to be high
rates of investment return. Residential housing was never as
valuable as it seemed during the bubble; the soaring home values
were instead a reflection of a continual upward rush of new
investors in mortgage-backed securities, a rush that finally
collapsed in 2008.
But by the end of 2009, the unimaginable was happening: The
bubble was re-inflating. A bailout policy that was designed to help
us get out from under the bursting of the largest asset bubble in
history inadvertently produced exactly the opposite result, as all
that government-fueled capital suddenly began flowing into the most
dangerous and destructive investments all over again. Wall Street
was going for the reload.
A lot of this was the government's own fault, of course. By
slashing interest rates to zero and flooding the market with money,
the Fed was replicating the historic mistake that Alan Greenspan
had made not once, but twice, before the tech bubble in the early
1990s and before the housing bubble in the early 2000s. By making
sure that traditionally safe investments like CDs and savings
accounts earned basically nothing, thanks to rock-bottom interest
rates, investors were forced to go elsewhere to search for
Now we're in the same situation all over again, only far worse.
Wall Street is flooded with government money, and interest rates
that are not just low but flat are pushing investors to seek out
more "creative" opportunities. (It's "Greenspan times 10," jokes
one hedge-fund trader.) Some of that money could be put to use on
Main Street, of course, backing the efforts of investment-worthy
entrepreneurs. But that's not what our modern Wall Street is built
to do. "They don't seem to want to lend to small and medium-sized
business," says Rep. Brad Sherman, who serves on the House
Financial Services Committee. "What they want to invest in is
marketable securities. And the definition of small and medium-sized
businesses, for the most part, is that they don't have
marketable securities. They have bank loans."
In other words, unless you're dealing with the stock of a major,
publicly traded company, or a giant pile of home mortgages, or the
bonds of a large corporation, or a foreign currency, or oil
futures, or some country's debt, or anything else that can be
rapidly traded back and forth in huge numbers, factory-style, by
big banks, you're not really on Wall Street's radar.
So with small business out of the picture, and the safe stuff
not worth looking at thanks to the Fed's low interest rates, where
did Wall Street go? Right back into the shit that got us here.
One trader, who asked not to be identified, recounts a story of
what happened with his hedge fund this past fall. His firm wanted
to short — that is, bet against — all the crap toxic
bonds that were suddenly in vogue again. The fund's analysts had
examined the fundamentals of these instruments and concluded that
they were absolutely not good investments.
So they took a short position. One month passed, and they lost
money. Another month passed — same thing. Finally, the trader
just shrugged and decided to change course and buy.
"I said, 'Fuck it, let's make some money,'" he recalls. "I
absolutely did not believe in the fundamentals of any of this
stuff. However, I can get on the bandwagon, just so long as I know
when to jump out of the car before it goes off the damn cliff!"
This is the very definition of bubble economics — betting
on crowd behavior instead of on fundamentals. It's old investors
betting on the arrival of new ones, with the value of the
underlying thing itself being irrelevant. And this behavior is
being driven, no surprise, by the biggest firms on Wall Street.
The research report published by Goldman Sachs on January 15th
underlines this sort of thinking. Goldman issued a strong
recommendation to buy exactly the sort of high-yield toxic crap our
hedge-fund guy was, by then, driving rapidly toward the cliff.
"Summarizing our views," the bank wrote, "we expect robust flows .
. . to dominate fundamentals." In other words: This stuff is crap,
but everyone's buying it in an awfully robust way, so you should
too. Just like tech stocks in 1999, and mortgage-backed securities
To sum up, this is what Lloyd Blankfein meant by "performance":
Take massive sums of money from the government, sit on it until the
government starts printing trillions of dollars in a desperate
attempt to restart the economy, buy even more toxic assets to sell
back to the government at inflated prices — and then, when
all else fails, start driving us all toward the cliff again with a
frank and open endorsement of bubble economics. I mean, shit
— who wouldn't deserve billions in bonuses for doing all
Con artists have a word for the inability
of their victims to accept that they've been scammed. They call it
the "True Believer Syndrome." That's sort of where we are, in a
state of nagging disbelief about the real problem on Wall Street.
It isn't so much that we have inadequate rules or incompetent
regulators, although both of these things are certainly true. The
real problem is that it doesn't matter what regulations are in
place if the people running the economy are rip-off artists. The
system assumes a certain minimum level of ethical behavior and
civic instinct over and above what is spelled out by the
regulations. If those ethics are absent — well, this thing
isn't going to work, no matter what we do. Sure, mugging old ladies
is against the law, but it's also easy. To prevent it, we depend,
for the most part, not on cops but on people making the conscious
decision not to do it.
That's why the biggest gift the bankers got in the bailout was
not fiscal but psychological. "The most valuable part of the
bailout," says Rep. Sherman, "was the implicit guarantee that
they're Too Big to Fail." Instead of liquidating and prosecuting
the insolvent institutions that took us all down with them in a
giant Ponzi scheme, we have showered them with money and guarantees
and all sorts of other enabling gestures. And what should really
freak everyone out is the fact that Wall Street immediately started
skimming off its own rescue money. If the bailouts validated anew
the crooked psychology of the bubble, the recent profit and bonus
numbers show that the same psychology is back, thriving, and
looking for new disasters to create. "It's evidence," says Rep.
Kanjorski, "that they still don't get it."
More to the point, the fact that we haven't done much of
anything to change the rules and behavior of Wall Street shows that
we still don't get it. Instituting a bailout policy that
stressed recapitalizing bad banks was like the addict coming back
to the con man to get his lost money back. Ask yourself how well
that ever works out. And then get ready for the reload.
[From Issue 1099 — March 4, 2010]
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