Three Modest Proposals For Goldman Sachs

By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

At this stage in the proceedings, the Goldman Sachs’ public relations people must be feeling more than a little down.  The firm’s lawyers are still breathing fire, Lloyd Blankfein trod the fine line between not being apologetic and actually saying “it’s capitalism, stupid”, and the more junior executives interrogated today did not say anything blatantly incriminating.  But the public image of the firm around the world – including with finance ministers and pension funds – has taken a severe beating.

In the interests of finding a more positive and cooperative way forward, here are three suggestions for the PR team to take up with senior management – once they are in mood to think long-term about their “franchise value” again.

  1. Come out in support of some form of financial reform.  The really clever move would be to support something that is not likely to pass, such as size restriction on the biggest banks – keeping in mind that this would hinder JP Morgan Chase and Citigroup much more than Goldman (which was a much safer size not so long ago).  Almost as smart would be to endorse the consumer protection agency for financial products – given that Goldman does not deal with many retail investors.  In any case, surprise us with support for something that the administration in general or Mr. Volcker in particular is proposing.
  2. Create a corporate pledge not to use “astro turf”/fake grass-roots organizations to spread disinformation, then invite other leading firms to sign on.  The current leading fraud in this area is incredibly embarrassing for the financial sector; in the language of Jamie Dimon, it self-demonizes the entire industry.  Why would you, Goldman Sachs, want this?  This is not a good trade and it is getting worse; the traditional deniability claims will not help against the coming backlash.  Close the position – and make sure you get maximum public relations points for doing so.
  3. Settle the SEC case as soon as possible.  Pay whatever it takes.  Agree to change the nature of your business, if necessary.  You know that the next crazy boom will take a different form in any case.  All the feds really want to do is to bolt the stable door after the horse is long gone; at least allow them that face-saving measure.

Goldman Sachs is at a crossroads.  Either they can significantly change their image in our society or they can face the consequences.  All the senators I saw at the hearing today were angry, with good reason, with one or more (or all) of Wall Street’s practices. 

Senator Ted Kaufman is not a lonely voice any more.  He has brought a lot of smart, motivated, and focused mainstream people with him.  Goldman should get out of ahead of this curve as quickly as possible – and the other big players on Wall Street should do the same.  If the megabanks do not take major steps towards making amends (and themselves safer, in a deep structural sense), we are heading for a long and painful (for the banks and their employees) period of confrontation.  It is all so unnecessary.

The Wall Street temptation, of course, will be to just increase campaign contributions – and I’m sure we will see some of that.  But remember that Goldman has already become toxic in some European quarters.  Politicians would be well advised not to accept their donations at this time; and Goldman would do much better to find more positive, pro-society ways to address the Senate’s legitimate concerns about their behavior.

86 responses to “Three Modest Proposals For Goldman Sachs

  1. Or they could just keep going the way they are going, and everybody will forget and move on to the next celebrity sex scandal in a few weeks.

  2. Lloyd sounds like Pres Obama without his teleprompter. Can’t finish a sentence/thought. I realize that he has lawyered and PRed up big-time. Who runs this firm? If I were Warren Buffet, I’d be very nervous about my money in GS.

  3. Hafta be honest, Simon: What you write now sounds like the consumate insider who’s more concerned about “public relations” and “positive image” for Wall Street than doing the right thing.
    Changing one’s “image” has nothing to do with changing one’s behavior. Nada. Zippo. The big zero.

    Perhaps…you really don’t “get it” after all. You were on such a “roll” lately. But what you write now. Wow. Am really rather shocked. Such a reversal of where you’ve been.

    As for your advice re: settle early, pay a fine (wrist slap), then go about your business because, heck, “the next crazy boom will take a different form…”

    What happened to you, Simon?

  4. Mr. Lloyd Blankfein, in his testimony today, hit a home run. If you sell something, you’re short in the market; if you buy, you’re long in the market and visa versa (these are the two sides of offsetting risks in a financial transaction). Goldman Sachs gets a risk premium for creating a position that its clients can buy (sale-side) or for a acquiring a position its client wish to sell (buy-side)–that is the essence of market making.

    Various Senators tried so hard to link Goldman with “selling short” that they missed the real banking crisis: failure to account for off balance sheet transactions; these instruments and securities are at the heart of systemic risk to the U.S. and global markets. Fear of counter-party default.

    Dr. Coburn was really the only Senator to get the gist of what is happening with capital markets, investment banking and systemic risk. The recession has been exasperated not only by the housing market bubble but also by the slow shift of capital from productive investment to speculative investment.

    Financial services has moved away from providing working capital and shifted into lucrative but socially harmful speculative capital (casino capitalism). There is less direct investment today because productive investment cannot offer the potential return (against complete loss) of “market opportunity” mismatches. As a result, the world has moved from “struggling capital,” with reasonable expectation of return to all or nothing, black and white “bet capital.”

    Beyond the taxpayer bailouts, the biggest societal damage of “casino capital” is that, unlike gambling profits, which are taxed as ordinary income, casino capital is taxed as unearned income. So the gambling gets societal priority without providing the benefit that gave rise to its special tax treatment. To check investment banking, change the tax structure so that the revenues are at least socially neutral.

  5. Are you talking about the same PR tean who have made two multiBILLION dollar bonus announcements in the last 5 months??? I agree with Nemo: these oligarchs are unreachable and they know it. Stiff upper lip and wait for the peasants to forget. Why not? Works for presidents and members of Congress.

  6. The Derivative Project agrees with you, that Goldman has already become “toxic in some European quarters.” This squares with The Derivative Project’s response—it is mainly from the international community. It is not just Goldman, it is our financial community overall that has breached their fiduciary duty with overseas corporations and governments, from Germany to Milan. The United States reputation has been tarnished. Congress doesn’t seem to realize how critical it is to the future of our country to get this reform right, on a timely basis. Please Republicans, no more stalling. Please work together, starting tomorrow, to restore America’s international reputation, with appropriate reform on derivatives.

  7. SJ reminds me of the Democrat talking heads who go on the talk shows and give advice to the Republicans, and vice versa. Always leaves me scratching my head wondering why they are aiding and abetting the enemy.

    GS execs and ex-execs can afford to pay a forturne for advice. Don’t give it away for free.

  8. If you understand the subject matter, I don’t think Lloyd came off too badly. Harried, but not unsympathetic. But trying very, very hard as the lawyers have counseled him not to give Levin the sound bite. If you don’t understand it, you see a guy hemming and hawing while the big, bad Senator keeps asking, “now what about this crap you’re selling?”

    Most of the Senators, though, I can’t say I think more highly of them after this exhibition. Few seemed to have sufficient grasp of the subject matter – not that it is important for the puprpose. Off topic, but McCain, the sad demise of a pretty good American, and he is ruining his reputation in his reelection bid. Second How do you think Palin feels now? She would be months away from becoming Commander-in-Chief. God save America.

  9. All this pimping for the book doesn’t seem to leave any time for substance. Perhaps SJ and Yves should just take their acts to the comedy channel?

  10. What has haunted me since hearing the “This American Life” piece on Magnetar was the willingness of bankers to put together financial instruments that were intended to fail and then to have them buy swaps against the financial products. From the bits and pieces of the Goldman Sachs testimony,I heard the notion that they were not responsible to act in their clients’ interest. In other words they had no obligation to reveal the risk involved in the CDOs.

    Now, given that they had put together the CDOs, they fully knew the risk. The term that comes to my mind is “merchantability” or the suitability of the product to be placed on the market. If the corner store sold me a defective toaster, I can return it because it will not do what it was intended to do. It carries an implied warranty. The store owner, if he were smart, would not knowingly sell a defective product.

    They call this shorting, betting against the market. But what if you are the one putting the defective product on the market, that’s not shorting but fraud. I need to tell the purchaser the inherent risk. It’s a rather stupid, short term strategy. Who will ever buy another product from you? Somehow, if Goldman Sachs goes down, I will not weep.

  11. I must say I am a bit confused. I thought this blog was about what should be done… and not limited to the politics of what can be done. With this, would Simon Johnson be content?

    For instance, to me, a much more important issue than what Goldman Sachs may or may not have done, is the way the financial system has fallen into the hands of some quite inept financial regulators operating with not much transparency at all from a distant place in something called the Basel Committee.

    Should the Basel Committee set the capital requirements for Goldman Sachs as approved explicitly in the SEC meeting of April 28 2004? http://bit.ly/993jQB

  12. SolidBaseline

    Regarding Simon Johnson analyzing the excessive and “unbridled” (imho) political influence of large economic players:

    I am not only grateful that Johnson is doing this important task (that may not come naturally to him as a non-politician) but have meant for a while to compliment him on how sophisticated he has become on this topic during his time on the blog.

    As Johnson’s understanding spreads to his readers, it can only help in making useful reforms happen.

  13. readerOfTeaLeaves

    It really feels as if something shifted today.
    The lack of any sense that economic activity has social ramifications makes GS look like a lumbering Frankenstein crashing its way through the world leaving a trail of wreckage.

    I’ve watched a number of Senate hearings online, but I have never, ever seen the kind of dynamics that I witnessed today.

    It’s hard to believe that GS can come to grips with how badly they looked today.

  14. Wonderful 3 min video clip on the BBC here http://news.bbc.co.uk/2/hi/business/8645945.stm underlining just what you said.

  15. markets.aurelius

    Sen. Levin was brilliant! A complete command of the material, and a firm moral compass. Until the end of today’s hearings, it looked like Lloyd would carry the day — his interlocutors were obviously out of their depth, until Sen. Levin came along. He whipped thru the evidence with absolute familiarity of the evidence and the logic of the deals underlying the flood of toxic waste unleashed on the global economy by these banks.

    Lloyd, and, for that matter, his interlocutors, seemed to be in a dream world in which GS is still an investment bank and not a ward of the state. He even managed the same cocksure grin from the pre-2008 days when GS was an investment bank. Now GS more resembles an old dowager, gone in the tooth, slathered in cheap make-up demanding the awe-struck reverence she commanded was when she was young and lithe.

  16. I haven’t been so gripped by a hearing since the Watergate hearings — about impeachment, not a banking system. My rating of Congress has gone up. Several senators mentioned “four or five” (CEO’s of other banks) should be there with you. Blankfein (and before that, his team) were being described as NOT atypical in their practices. Indeed, Blankfein said more or less, please regulate; GS had to do what they did because everybody else was.
    Karl Levin said the senate bill would be amended/changed to cover conflict of interest (ratings agencies), conflicts as to proprietary trading (where GS treats itself as its own client, numero uno), and a few other things. He seemed to have the entire subcommittee on board, and if the senate holds up until Levin and his staff know exactly what to do, I’ll wait. I’ll wait till everyone hears from Europe and Japan etc., make sure it’ll fly internationally (huh?).
    I heard good questions. The betting model seems to be the only viable one for America in a global economy. We do synthetic “deals,” nothing productive. Houses were the closest thing to productive we could come up with. That’s the big problem. Starting a new economy is not real profitable in the beginning, I suppose. I’d let all the big banks fold; don’t trust them anymore. Start your own credit union. Their credibility is caput.

  17. Here’s a suggestion. How about the truth? To highlight a perfect example of what I referred to previously with Eisenhower’s statement to be aware the shadow government, was this beauty that came out during Senator Levin’s questioning of Blankfein.

    The question asked was who decided that Goldman would be paid 2.5 billion from AIG? Blanfein stated that if government ( the tax payer ) didn’t make the payment, that Goldman’s own insurance company would pay it.

    Dumb question #1. Who was Goldman’s insurance company is this matter with AIG?

    Dumb question #2. Who within our government decided that the US tax payer should step in rather than Goldman’s own insurance carrier to pay the 2.5 billion that Goldman would have lost if AIG had failed?

    As usual, the questioner never did get any type of credible answer. My question again is who exactly is it that works behind the scenes who would prefer to run fast and lose with our tax dollars, rather than allow the private insurance carrier to take the hit? While just a guess on my part, Could one of Warren Buffett’s insurance companies have been on the hook for that one?

    These hearing exposed only one thing and accomplished little. There is a connection between government and the private sector that is incredibly corrupt and relies on US tax payer bailouts to keep this ponzi scheme going. This was a CYA session like none other that I have ever experienced. It also further led to the belief that many in Congress have little idea what is actually going on in the world of banking that has been turned into nothing more than a wild west casino.

  18. Re: @ Nemo,…Bingo!

  19. mondo pinion

    Why? Some people are fundamentally invested in being smart — and that trumps their political values. Universities are full of such folks. It’s not a bad thing really –

  20. I want Paulson up there. Hank, that is. Why did you give your former company a Bank Charter?

  21. Barbara, it seemed like a torture session where we’ll be a “good cop” till we extract the information (i.e., not ask who the private insurer was who would pay the $2.5 billion if AIG didn’t pass on what it owed GS in TARP money from the taxpayers – but they pointed a lot at “someone in the Treasury Department you talked to about this?”). And what no one mentions is: If we let loose our dogs, we can sue you and all your ilk right out of existence.
    I saw the whole ROW of lawyers behind Blankfein. But then there is the issue of campaign shenanigans. I’d like to think the senate gets its bearings and realizes the game is up; the banks are not the winners anymore, 60 percent of the GNP or otherwise. They are master manipulators who need to move out of the way.

  22. SolidBaseline

    What Our SENATORS MISSED (from the audio portion I heard) As Their Bullets Bounced Harmlessly Off Goldman Sach’s Neutral-Facilitator Defense:

    Core to GS’s defense is that the CDO had to have bad stuff in it to make it “risky enough” for those who wanted to be long risk. I.e. The parties on the other side of the trade of the Paulson hedge fund. Those buyers-to-be wanted a perceived higher risk in order to obtain a higher nominal return.

    Per GS, having John Paulson standing in the shadows stuffing the CDO with nominally risky components was only carrying out what was necessary to appeal to the buyers looking for risk.

    Flaw?
    Paulson, as an adversary to the buyers, had an incentive to add, not merely
    “bad stuff” but to attempt
    “bad stuff that is worse than it looks”.

    Analogy:

    A financial adviser is told to choose long positions for your portfolio from the advice of a long specialist and balance with short positions from the advice of a short specialist.
    The Goldman-Paulson fiasco is like if your financial adviser intentionally swaps the long and short recommendations without your knowledge.

    Regardless of the outcome (and I don’t necessarily think it would matter to portfolio performance), this has the same kind damaging incentives as the GS-Paulson case. Each of the money managers is working hard to oppose your interests (though in the analogy only, it is unbeknownst to them).

  23. Re: @ Black Thumb____In all honesty,I like the guy alot more now, after hearing his candid not-so-contrite (the guys got a set of go-nad’s) testimony,which in my humble opinion aquitted himself today. I believe as a CEO there’s alot underneath that gets by the CEO. Reference: Ken (deceased) Lay @ ENRON ,and the shill (Shilling) that did him in!PS. GS will settle,and get on with the business they were born to do “Investment Banking”,and remember there’s no more money to be made on the housing crises,other than a dead cat bounce. (They should flatline @ $125)

  24. The peasants are not going to forget but they will do the next best thing: vote Republican. Many Tea Party types leave comments on articles like “wait until 2010″ implying that their vote for Republicans will make things better. McConnell knows this and that is why he is acting like a 2010 version of Andrei Gromyko, aka Mr. No. The Republicans only have to delay things for a few more months and then they will be back in power. Forget about Wall Street reform; Obama screwed the pooch by not making Wall Street reform his highest priority.

  25. Simon, excellent writing as usual. America must be very proud of Senator Carl Levin, he hit the ball of the park today. He reminded me the Rabbis who educated me when I was a young boy. May God bless him for eternity!

  26. One senator asked, did you (Blankfein) think of the ramifications to the economy (of creating this sort of house of cards)? No. “But we are a philanthropic organization,” and he went on to give examples (money for community colleges etc.) Did you consider that some, such as universitie, must only invest in Triple A instruments? No. Blankfein had never thought of that.
    There must be some legal reason for a bank of any size to have an official state that it does not consider the society at large (ramifications to the economy) or the particular clients (universities and so on. Any thinking CEO would think of (a) the economy and (b) the client. What does GS think of instead? Just the profit and loss statements, I believe he said.
    The alternative to using the mathematical algorithms that computers enable and that led to the style of capitalism we have, that is Simon Johnson’s question, or Karl Levin’s question, and I don’t think any of those testifying today had ANY CLUE what should happen instead.

  27. I was just totally pissed that Levin would have dropped the ball on the AIG question. We the people should demand names and hold people to account. Without accountability, there is NO moving forward from here other than a total whitewash and a return to business as usual.

  28. Re: @ Barbyrah____C’mon,…Simon’s a realist,and in his corner am I also. You can’t expect Mr. Johnson,and Mr. Kwak to take on the financial world by themselves. Can you? They explained precisely how things would unfold,but with much thought,and reason. The fights not over by no means. The House will take it up soon, and Mr Barney Frank (my hero,so watch out what you say,..I lived in Fall River,and on Cape Cod mind you) has a few good ideas up his sleeves. PS. No ,I don’t want to talk about GSE’s,too tired. :^)

  29. Simon Johnson wrote:

    “Settle the SEC case as soon as possible.”

    SEC’s Porn Problem Was Rampant, According To Reports

    http://tinyurl.com/ybopakx

  30. mondo pinion

    “It’s capitalism, stupid.” Love that.

    So .. we have nature’s Darwinism, and we humans are top dog. Then we have social darwinism, and the US elite is world heavyweight that way too. And then we have financial darwinism, the investors’ game, at which good old GS excels. And if we stop playing these darwin games, all our bills will come due. ALL of them. So how do we discipline GS? “Tis a problem . .

  31. mondo pinion

    we-the-people ?

  32. Re: @ saucymugwump____Now what makes you think that? They are now labelled as obstructionist, and as this legislation plays itself out the “Big Media Players” will tune,and capitalize. Why? It’s starting to resonate,…soon reaching critical mass (mucho dollars)! The democrates are on the right side of the issue. PS. Independents will rule the day on Nov.2,2010.

  33. Or they could….

    1) tell some of the Senators to shut the ‘f’ up; “All the senators I saw at the hearing today were angry…”

    2) Take ‘ownership’ of the economy (without the surprises).

    3) Leverage no more than 3x economic rents: “help against the coming backlash…[and] maximum public relations points for doing so.”

    4) To the contrary, Mr. Blankfein is one smart cookie: “…brought us the truth from Lloyd Blankfein himself: “We’re not that smart.”

    5) And for the last time, the president says he is tired of all the gawd-dam lies because there is nothing funny, nor pretty about it!

    http://dyn.politico.com/printstory.cfm?uuid=3CE30C63-18FE-70B2-A8D7E5633DE08B87

  34. mondo pinion

    You are so right. The whole US financial establishment could become toxic if the corruption is not controlled. Especially if there is a shift away from US dollars to an international monetary unit. Don’t know why this is not being mentioned.

  35. Re: @ whess___If the financial crises never occured, but for only one big bank going belly-up,all this talk about dirivatives would have been flushed down the toilet as quid pro quo. The gamblers playing with the casino’s will find another outlet to shake their money-maker’s-dice, but to no avail.

  36. Simon, your suggestions are just plain common sense. But, has any true plutarch/oligarch ever admitted anything to any one? Never!! It is a baseline principle to these folks. Obfuscate — done brilliantly (or not so, for those of us who are informed). I was amazed to hear the amazingly bizarre responses given to simple questions. If it weren’t such a serious matter, we could laugh at the absurd nature of their testamony. They are either stupid (to either believe what they say, or to believe that they mean it or even believe it), or, more logically, wisely know (like Dick Nixon) if you keep insisting on your own version of the “truth,” not only do you believe it, but don’t understand how others don’t. Wow, what a miscalculation!! We get it already, even those (unlike most of your bloggers) who don’t understand how they artfully manipulated derivatives and gamed the system. The Big Short, and many others, have made it clear that everyone on Wall Street believed that they could go on forever bilking borrowers and betting on the bilking results. We also know that at some point many of them decided that (in their gut) they had to do what in testamony they called Risk Management. Actually that dignifies, improperly, the way in which Goldman, and others who saw the big fall coming, played the system for all they were worth, literally.

    It won’t work. We wouldn’t even believe it if they announced being in favor of parts of the new regulation. They want (and expect) that all casino tables will stay where they are. Oh, there might be a few new wrinkles, but nothing their millions and legal beagles won’t enable them to continue to game.

  37. Re: @ 1 Kings____Sorry,but they passed em out like “Pearl Necklaces” at the Mardi Gra. Come one ,come all. PS. Check out how selective,and deviate GS’s was,you’ll be amazed at their little house on the prairie?.

  38. Re: @ William___Okey-doke,whatever?

  39. Re: @ Bayard____They bankster’s talk the same language as the Congress,.. aka.gangsters

  40. I didn’t watch all of the testamony today, but did anyone ask Goldman about its relationship with the ratings bureaus? I hear a rather tangential approach to this question. We also should know how much stock they own (and have sold) in Moddy’s and Standard and Poors. That would be a bit more than telling. After all, much of what they sold as AAA was patently either BBB or junk. And, I haven’t heard anything about dealing with the co-conspiratorial ratings agencies. At the very least, their fees should not be paid by the very folks who use those ratings to sell their products. That’s like the manufacturing community paying a fee directly to the CPSC to rate their products. And we all know how many deaths that would cause. We’d still have lead in all paint!!!

  41. Several senators asked about the relationship with the rating agencies. In fact, in the opening by Levin, he spoke about that (as well as in his closing).
    What I thought I heard at the start was that this is the third hearing of this subcommittee, and the first or second hearing involved the rating agencies. This surprised me, since I thought the senate bill would have something corrective in it by now, and apparently not. I noticed last week on a network evening newscast, a person from Moody’s was answering some reporter, and that person looked totally deflated, and I thought — well, apparently transparency wasn’t delivering, but something had happened.
    The answers to the senators in re rating agencies seemed to me pretty damning. It seems to me that the regulators the government seems to want to put in place (clearinghouses etc) would include “socialist” (federal employee) raters/regulators, putting Moody’s out of business.
    If you listened to the whole hearing, you would hear what you would expect: lots of room for deniability, but lots of room for coziness investors would be appalled by.

  42. it was an entertaining hearing today, but surely if Congress wanted to get to the bottom of the SEC matter, wouldn’t they have called Paulson, ACA, ABN and IKB as well to appear – though perhaps they did not think that would help the finreg reform case?

  43. I watched or listened to most of the testimony today. I’m sorry that I didn’t get to see LB testify. I did think the committee wasted precious time establishing long/short positions (so GS managed their risk better than the street. We know that already. That is not the issue). Not enough time was spent on conflict of interest issues & whether the higher standard of fiduciary duty should be employed when servicing clients. Also, systemic risk needs more attention including leverage and absolute/relative size/market concentration. Keep hammering away Simon.

  44. Buffett is over-rated. I don’t know if senility has finally set in or what, but take a look at Wells Fargo folks. This guy is human, he’s not freaking King Solomon for crying out loud.

  45. Jesse’s Cafe Americain (4/27/’10) describes the nature of fraud committed by GS and other mega banks, much more eloquently than I can describe. There is a good likelihood that the hearings will end in false hope for the Americans and the next collapse will wham the world harder.

    ‘Control frauds are by their very nature conspiratorial in that they involve the suborning of regulators, ratings agencies, exchanges, the media, and legislators to ignore and facilitate misrepresentation that enable white collar crime. They are difficult to prosecute because by their nature they involve twisting the legal into the extra-legal on a broad basis to achieve a particular financial effect, while limiting many specific aspects to the letter of the law, or at least the gray areas.

    Professor William Black published a paper in the Scoial Science Research Network (SSRN) titled ‘Epidemics of ‘Control Fraud’ Lead to Recurrent, Intensifying Bubbles and Crises’

    Indeed the finance sector may have morphed into a terminal cancer for the US – too malignant to operate on but would kill the society unless risk the operation for a slim chance.

  46. Fraud and Greed of Trusted Rating Agencies Helped Spread the Credit Crisis

    Dec 19, 2008 – Money Morning – excerpt

    “Underlying the credit crisis gripping the U.S. and world economies is a crisis of confidence. Blame has been laid at the feet of the U.S. Federal Reserve, and an investment bankers’ brew of toxic financial products. Ultimately, however, it was the supposedly trustworthy rating agencies that got everyone to drink the poisoned Kool-Aid.

    The sheer fraud and greed of rating agency analysts and executives is staggering. That no one has gone to jail, and none of the agencies have been shut down is a travesty of justice on an infinitely larger scale than Bernie Madoff’s Ponzi scheme.

    Until depositors, bankers and investors regain confidence in the quality of ratings we rely upon to measure financial stability and creditworthiness, the tremors that underlie the credit crisis will drag on indefinitely.

    Letter and number ratings – such as AAA, Aa1, BBB and Caa1 – are financial shorthand for the due diligence supposedly done by rating agencies after they’ve examined an issuer or a security’s financial structure, and evaluated the likelihood of its being able to pay interest and principal at maturity. Investors rely on the objectivity and fiduciary responsibility of the rating agencies to publish fair, accurate and uncompromised assessments.

    By law, certain investors must rely on the ratings of a handful of Securities and Exchange Commission designated “Nationally Recognized Statistical Rating Organizations” (NRSROs). For example, most state insurance regulators require that only assets rated in the top four ratings categories by NRSROs are eligible investments. Similarly, money market funds can only invest in securities with the highest NRSRO ratings. In fact, innumerable institutions – public and private, and domestic and international – mandate asset quality levels predicated on the major rating agencies’ due diligence.

    Standard & Poor’s Ratings Services, Moody’s Investors Service (MCO) and Fitch Ratings Inc. are all SEC-designated NRSROs. They are the largest, best-known and most-profitable ratings firms in the tiny, $5 billion-a-year universe of ratings firms. S&P is a part of The McGraw-Hill Cos. Inc. (MHP), while Fitch is a subsidiary of France’s Fimalac SA.

    Moody’s was spun out of financial publisher Dun & Bradstreet Corp. (DNB) as a public company in 2000. Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B), apparently having spotted a diamond in the rough, bought into D&B before the divestiture, and ended up with a hefty 19% stake in Moody’s after the spin-off was completed.

    The problem with the business of rating the issuers of securities, and rating the securities they issue – such as mortgage-backed securities and collateralized mortgage-backed obligations – is that the rating agencies are paid by the issuers to rate them. Objectivity aside, ratings firms are in business not to rate but to make money for themselves by rating issuers and their securities. It’s like all the contestants in the Miss World pageant paying the judges with country funds … who’s not going to be judged beautiful?

    What was even more problematic in the scheme of the ratings business model was that analysts didn’t understand how to analyze and rate the very complex cash flow structures of these new collateralized mortgage-backed securities. Not wanting to lose business to their competitors, who were all in the same boat, they used the same rating model structures that they used to rate corporate bonds, though the two different securities had nothing in common.

    It was like asking your local car mechanic to certify your Citation V jet – just before you take off for a transatlantic flight to London. God help you if there’s a problem.

    Have any heads rolled? No.

    Have any fines been levied or any firms closed down? No.

    The SEC apparently went back to sleep………”

    http://tinyurl.com/2ddzbhm

  47. How much was this set up originally by Henry Paulson? Did he greenlight these trading tactics when he was CEO? Did he help to make it easier to do so while in the Bush administration? Why was Blankfein in that Fed governors meeting in NY when it came crashing down? Was the $700 billion Paulson handed out a smokescreen just to temporarily secure GS until Tim backstopped AIG, which basically permanently backstopped GS?

    Seriously, when did conflict of interest become the norm? And why am I paying for it?

  48. What I loved was when Y.S. was whining about her book deadlines everyday. Write the book or don’t, quit crying about it.

  49. I think GS reflects a total lack of ethics. However those angry Senators are just as guilty. They passed the laws which allow such reprehensible corporate behavior to go unmonitored and to avoid appropriate consequences.

  50. feefoiegras wrote:

    “How much was this set up originally by Henry Paulson? Did he greenlight these trading tactics when he was CEO.”

    “And, let us not forget that Henry Paulson was chief executive at Goldman Sachs while all these derivatives (so-called securities) were being traded and sold.”

    http://tinyurl.com/2vr6cyh

  51. I’ve read much on this financial mess over the last 18 months. This blog is certainly the most informative. However I have to say that the Op-Ed by Bethany McLean in the NYT (http://www.nytimes.com/2010/04/27/opinion/27mclean.html) is the most complete and factual statement of what has occurred. It is also the shortest statement that paints the most accurate picture. McLean makes a very cogent point when she states: “None of this excuses Goldman … [but] … shouldn’t Congress have its turn on the hot seat as well? Seeing Goldman executives get their comeuppance may make us all feel better in the short term. But today’s spectacle shouldn’t provide our government with a convenient way to deflect the blame it so richly deserves.”

  52. Honest question, Mr. Taibbi, what is the source of you apparently irrational hatred for Goldman?

  53. 4. have GS become a private partnership once again.
    taking their bank holding status.
    They can go back to being hedge fund.

    Only reason 4 won’t happen is that government needs GS to do its dirty work to finance the bonds, municipalities are in the same predicament where populace has to pay rich people because most don’t want to pay for things in advance instead interest is paid for 30 years making something cost twice as much.

    No Economist, not even Mr. Johnson is going to advocate it.

  54. So When is Mr. Johnson going to have blog post about Mr. Buffett’s derivatives and blocking of reform.
    I am waiting.

  55. Would you consider this a half-satisfactory substitute for Professor Johnson’s as yet post you requested??
    http://grahambrokethemold.blogspot.com/2010/01/does-warren-buffett-condone-bad.html

  56. You do realize, that anything containing the phrase “modest proposal” is meant as satire? At least Simon is not advocating eating children . . .

  57. good observation:
    Financial services has moved away from providing working capital and shifted into lucrative but socially harmful speculative capital (casino capitalism). There is less direct investment today because productive investment cannot offer the potential return (against complete loss) of “market opportunity” mismatches. As a result, the world has moved from “struggling capital,” with reasonable expectation of return to all or nothing, black and white “bet capital.”

    i believe you need o make speculative capitial more expensive. I like the transaction tax. pushes the invesment bank into a more stable potition. you want them to lean against bubbles and buy when prices are good. in theory this should move the way of thinking away from algo hft to Long term value. the current system promotes “trading”, not stability

    the second thing I noticed from the hearing was that the firm justified what it did in terms of market making. well that’s why you can’t have all these functions under one firm. have market makers seperate. not all functions under one roof. there are too many conflicts. the firm gets away with actions becuas of it’s role as a market maker. well, take away the prop desk, don’t sell products to clients, act as a pure market maker. the system as structured is designed with conflicts, and that’s bad.
    prop desk, seller, originator, market maker, liquidity provider, dark pool operator. the firm will always be able to defend actions becuase of some of these roles. I believe this is a mojor reason they want the cover of a financial supermarket.

    investment funds should never benefit from access to the discount window. that is intended for commercial olending activity, not stock trading. the idea thst these funds borrow for zero and effectively have unlimited fire power to buy as much as they want at no cost is a disaster.

    so they borrow for nothing, and instead of providing productive working capitial (the intent of monetary policy) they speculate. in fact by not helping out the credit situation they keep the economy slow and therefore keep their cost of speculative capitial low. the incentive is to screw main street and increase their trading profits. this is a huge econflict and must end.

    the fact that bernanke cn’t see that this destroys the effective transmission of monetary policy shows why he doesn’t belong in his job. he may be “academic” smart, but he is devoid of the common sense we need to have at the head of the fed.

  58. Brad Thrasher

    Given that public policy is “privatize profit, socialize loss” along with free or negative interest paper money, it seems to me there has never been a better time to be a banker.

    And you say the bankers have a PR problem? Oh my…was that a U.S. Senator wagging his finger and sayin, “Now don’t you cost the taxpayers $24 trillion again.”

  59. @jk… “The recession has been exasperated not only by the housing market bubble but also by the slow shift of capital from productive investment to speculative investment.”

    I agree with this entirely. This point cannot be stated enough. Certainly a major problem. The Congressional witch hunt will go on, as it should. But getting capital invested onto Main Street instead of in the global casino is at least as important as “making them pay for the damage.” Investing in Main Street is the only way we will move out of this recession. Not being well-versed in economics and finance, I don’t know how this would be accomplished. Can anyone tell me how this might be accomplished? Is this something Congress would need to legislate or is this ball solely in the administration’s court? Is this a result of Geithner/Summers policy? Is it time for Obama to jettison Geithner, Summers, and Rubin? Is changing the tax structure the only solution to this problem of “the shift of capital from productive investment to speculative investment?”

  60. Hafta be honest, Simon: What you write now sounds like the consumate insider who’s more concerned about “public relations” and “positive image” for Wall Street than doing the right thing.

    We all know that GS will never do the right thing because it’s the right thing. So Simon’s speculating on how their Machiavellianism should be functioning right now to at least advocate the “right thing” only out of self-interest.

    But I agree that’s probably quixotic, since by now Wall St is so psychopathic that they’re incapable of any longer-term point of view, including their own self-interest. They can think of nothing further than short-term looting. (Indeed, people say it was Blankfein’s ascendance which marked the end of the vaunted “long-term greedy” mindset at GS itself, to whatever extent that was ever more than a slogan.)

  61. Aargh! Enron!

    Enron was the prototype for our economy over the last few years. It looks to me that the banks liked what they saw in the Enron strategy so well, they adopted it. Many on Wall Street helped implement and innovate Enron and learned well.

    At least some of the Enron leaders went to jail, died, or killed themselves. I’d really like to see the banksters emulate that part too. I guess with their bigger political connections, into the twisted mess we call a government, they are too big to fry.

  62. Re: “take their acts to the comedy channel”

    Why not? Jon Stewart usually gets to the meat of what is really going on way better than most of the other media.

  63. “In the last three weeks, we have finally done a half-baked investigation, mind you. Not — nothing like we did in the Savings & Loan days — of Washington Mutual (WaMu), Citicorp, Lehman, and Goldman. And we have found strong evidence of fraud at all four places.

    And we have looked previously at Fannie and Freddie and found the same thing. So the only six places we’ve looked, at really elite institutions, we’ve found strong evidence of fraud. So where are the other investigations? Why are there no arrests? Why are there no convictions?”

    William F. Black on the Bill Moyers Journal

  64. As Jimmy Paige once wrote – or was it Robert Plant? – “It makes me wonder”. I wonder what defect it is in the psychological makeup of a group of human beings that would have them putting the health and well being of millions of other human beings behind the private profit of a very few. Most of these lawmakers who live in the pockets of the Plutocracy call themselves “Christians”. Have they ever made a serious study of the books? You know! – Matthew, Mark, Luke and John? – Those guys! How do they justify their actions? How do they sleep at night? We’re talkin’ major hypocrisy here! That’s what makes them so much fun to watch! I always get a certain twisted delight in watching their fake piety. Imagine Wendy O. Williams being cast as Bernadette of Lourdes; or Marilyn Manson as Mahatma Gandhi. It’s kind of the same thing.

    Sooner or later our right wing friends, within the Congress and without, are going to be forced to admit that the era of anything goes deregulation was a really stupid idea. You can only sit calmly in a burning house, ignoring the flames all about you, for just so long. Sooner or later you’ll be forced to flee for your life. After making your escape, if you still refuse to acknowledge that the house is indeed on fire, you’re beyond the point where you can make rational decisions on your own. You’ve entered Librium Country, hombre!

    http://www.tomdegan.blogspot.com

    Tom Degan

  65. Hmm, not give a sound bite.

    Doesn’t “we’re not that smart” directly contradict the entire ideology of “talent” and “bonus”, and concede that we must eradicate the practice of that ideology?

  66. Yes the SEC went to sleep, but mainly because on April 28, 2004, the SEC seems, for bad or for worse, they delegated much of its powers into the Basel Committee. http://bit.ly/993jQB

  67. You’ve been reading this blog and you still think Simon’s not a politician?

  68. Goldman Sachs has let down people. We had so much faith they did not care for and let us down. it is just sad.

  69. Rajeev Upadhyay

    What can one say when firm like Goldman Sachs make such faults. one can just shout on self only. nothing else is possible

  70. Anybody here seen Tom Coburn’s questioning? He asked some good questions about systemic risk. But at the end he gets all angry and questions Blankfein about releasing the e-mails of Tourre. What the hell was that? How can you get angry at them for releasing e-mails which really show the mindset of these people? Is he just openly saying the public should not be informed? I found it bizarre quite frankly.

  71. I saw at least two senators asking why Tourre’s e-mails were released, but not those of others. I didn’t hear any questioner say who they thought or knew had released the e-mails, but it was clear to me they suspected there is a rift in the team, and someone might have been set up (the youngest, Tourre? with the least baggage, the least in the know?) and divided off from “the team.” I thought the SEC might be interested to see how a line might be emerging. But no one who was asked (at least two were asked) would say why those e-mails were released and not anyone else’s. Nor did anyone deny that the e-mails of others wouldn’t also display the sort of, um, playfulness that Tourre’s did. As I recall, Levin toward the end was saying (parenthetically) “however your alliances may be,” or something like that, pointing out he noticed. A fall-guy scenario might be useful to any bank these days.

  72. “…without his teleprompter.”

    BZZZZZZZZZZZZZZT!

    Thanks for playing “I’m a lying republican wh*reson!”.
    You’re entry, “I’m mad at the guy who whipped the entire GOP congress in a stand-up debate” was OK, but not much more.

    You *do* win a lifetime supply of TurtleWax, though!

  73. Lagamorphile

    Actually I think Simon is attempting to be diplomatic at times, but no I don’t believe he is a politician. Frankly I’d rather have Simon in Tiny Tim’s place who is the consumate politician (didn’t even pay his taxes until he was caught).

  74. Lagamorphile

    Levin and the rest of the subcommittee were grandstanding for the Nov elections. Period. The issues here include the fact that Frank, Dodd and Clinton master-minded subprimes and the government then promoted them shamelessly – through Fanny & Freddie and other channels. GS and its ilke are Market Makers – as they said. You don’t like what they are making markets with, then deal with that. You want to make market making illegal, then deal with that. GS and Wall Street are just doing what they have always done and the materials for the toys they play with come directly from the government. Let’s call a spade a spade.

    Levin, by the way, could not seem to understand that GS was paid by AIG because the government (which Levin represents far more than he does his constituencies) decided it should not default. Did GS have something to do with that? Possibly – but how is that new? Wall Street and the government are joined at the hip. And Levin’s insistance that GS was paid by taxpayer dollars is ridiculous – that money was PRINTED, it was not taken from taxpayers.

  75. Re: @ dcb___Nice read. The original Glass-Steagall Act prevented all this as you subtly mention. So why not bring back the original format,and shorten {condense the Dodd Bill to a more coherent thesis/law – actually targeting critical arenas of ambiguity ie.)KISS} this crossed-dressed “Federal Income Tax Code” aberration of bureaucracies stubborness,and futility too duplicate? PS. Dirivative are way out of alignment with any law-abiding actuaries model,and must be scrubbed! I mean get the skulduggerty out (setting stringent parameters where the line is solidly drawn – no grey areas) of todays business model’s straddling the fence.

  76. Blankfein looks like the fall guy is this story. Paulson had GS very long in RRE, then skipped to DC. And Blankfein’s a working class kid with a couple of Harvard degrees.

    Same with Bernanke now left holding the bag for Greenspan’s mess.

    The former thought he had come a long way from the Bronx, but will go down in history as Blankenstein and Blankfied. The other will replace Hoover as synonymous with Depression.

    BTW, the two come from the same class and house at Harvard. Interesting coincidence.

  77. Simon,if I didn’t know better (and maybe I don’t) I’d say you’re pandering here for a consultancy. Such good ideas: come out in support of financial reform; create a corporate pledge not to use fake grass-roots organizations to spread info; close the position and maximum pr points for doing so; settle the SEC cause ASAP; pay whatever it takes (the devil’s due), get ahead of the curve on this one; don’t just increase campaign contributions (they’re turning toxic), guilt by association, etcetera…sounds like a pitch session in Edward Bernays’ office with Ayn Rand for lunch. Let us know if you get an envelope in the mail from Goldman, just for kicks.
    Regards,
    Jerry Mazza, a fan,
    “The Six Big banks are shorting the American Dream.”

    It sounds

  78. A couple of thoughts:
    1) The U.S. needs credit reform. An undocumented consequence of the boom and bust cycle has been the destruction of many American’s credit worthiness. This destruction has resulted in a situation where American zombie banks are borrowing at the discount window (at 0-0.25%) and re-lending this money to consumers at outrageous rates as high as 39%. This is government sanctioned loan sharking and is a punitive sanction against the poor and middle class that pay a disproportionate share of this regressive, indirect tax.
    2) Long-term capital gains tax rules need to be re-written to encourage real long-term investment. Today, a bank can make a large number of small bets over the long-term investment period and receive preferential tax treatment of the [casino] gains.
    3) Eliminate the discount window subsidy. Liquidity can be viewed as a “bankroll.” When you have your money in your pocket, it is on the side line of the casino, earning much less than it could if it were invested. By becoming a bank holding company, Goldman Sachs has access to the Fed discount window without having to pay a premium for the benefit of instant and virtually unlimited liquidity. This is a nifty subsidy: it allows Goldman to make more bets (with the profits taxed as unearned income), pocket the profits and, if a big bet fails, to call upon the government shift the loss to the tax payer.

  79. Congress clearing misunderstands the role of the rating agency in the capitalism casino. They certify only that the terms and conditions of a bet are clear and balanced not that the commercial or economic value of a particular bet. The latter is left to the “adults” who make the wager to determine. To put this in perspective, imagine Goldman asserts in a financial instrument, “Based upon historical data, there is a 75% chance of this dog do being worthless; for this consideration, we paying investors 4:1 if this dog do is worth more than nothing.” The rating agencies would give such a proposition a AAA rating because there is no ambiguity: the security is underwriting dog do and it clearly says so. The decay of the proxy into dog do itself is not a factor in receiving the rating.

  80. Re: @ Jerry Mazza____For those of us that aren’t so well informed,please good sir, elaborate on the internecine,and pulillanimous query. Yours truly…a pen-pal albeit fan of Simon.

  81. Matt Taibbi has this to say:
    “In the Randian ethos, called objectivism, the only real morality is self-interest, and society is divided into groups who are efficiently self-interested (ie, the rich) and the “parasites” and “moochers” who wish to take their earnings through taxes, which are an unjust use of force in Randian politics. Rand believed government had virtually no natural role in society. She conceded that police were necessary, but was such a fervent believer in laissez-faire capitalism she refused to accept any need for economic regulation – which is a fancy way of saying we only need law enforcement for unsophisticated criminals.”

    You can read the whole piece here:
    http://www.alternet.org/story/146611/taibbi%3A_the_lunatics_who_made_a_religion_out_of_greed_and_wrecked_the_economy__/?page=entire

  82. Re: @ Gloppie____Hmmm,…A nice dish of anarchy ,served cold. Sounds like she’s been sampling the classic, amiable feline alchemist dish of contrite disillusional enlightment,and doesn’t know whether to swollow, or not.

  83. RE: @ RickK_____Really good stuff. Let’s peel this onion back alittle more? The McGraw-Hill Co.,Inc. {MHP = S$P Rating(MCO) Agency} is a wholely owned subsidiary of the Rothschild’s Family “British” Holding Company. Fitch Rating Agency (Insurance only)is a subsidiary of France’s Fimalac SA,is partially owned by the Rothschild Family “French” Bank. Lastly, Moody’s Rating Agency spun off by Dunn $ Bradstreet (DNB)Corp.- majority is owned by the Rothschild’s Family “British” Holding Company. Please note that every year…Clinton,Kissinger,Buffett,Gates,Soros,Schwartznegger,Albright,etc.,etc.,…and other dignitaries – all invited to the annual “Bilderberg Group”-“New World Order Symposium”….all answer, one way or another too the “British, Rothschild Family”!

  84. Im not from the left or the right. I’ve crawled out of the woodwork because I watched Simon on book T.V.(c-span2) and I believe for the first time I saw a honest evaluation of what needs to be done politicaly for financial crisis from getting worse. other then the obvious plugs for the book (that I will be reading)..public opinion will weigh in heavy on Greedy corps..We had enough…