Into The Belly Of The Beast (Part I – How Goldman Sachs Became The Most Hated Bank On Earth)

Goldman Sachs is the bank everyone loves to hate. In the first of the two-part investigation into the bank, all of us ask why they become the biggest winners in the economic crisis. We also look at how they lobbied the US Government to reduce banking regulations, the way they acquired massive fortunes by selling sub-prime mortgages, and how they deceived their clients by betting against the products they offered.

Don't Forget To Read The Second Part Of Our Feature: Into The Belly Of The Beast (Component II – Goldman Sachs & The European Crisis)

Goldman Sachs wasn’t always the investment bank everyone affects to despise. It’s bankers were once named “billionaire boy scouts” because of their expertise for making fortunes while maintaining a guilt-free, cherubic image.

But Goldman’s bankers are actually far more likely to be compared to squids compared to boy scouts and have become the favourite target of anti-bank protestors. A week before Christmas, 300 protesters in the Occupy Movement dressed up in squid costumes and carried a giant puppet squid on the march to Goldman Sachs’ offices within New York.

The action was influenced by a Rolling Stone article which in comparison Goldman Sachs to: “a great vampire squid, wrapped round the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”. The protesters shouted: “We fry calamari”, as well as “everyone pays their taxes. Everyone, but Goldman Sachs.”

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Public hatred of Goldman, fuelled by modern media, has intensified, but it could be naive to believe the banks’ personality has fundamentally changed. Although there was nothing on the same scale as its nefarious role within the 2007 Financial Crisis, Goldman has been involved in controversy ever since it was founded by the German-born Jew Marcus Goldman in 1869. In 1929 for example, Goldman backed a pyramid scheme concealed as a mutual fund, which collapsed causing 42,000 investors to lose US$300 million. Then, within 1970, came the Penn Central catastrophe in which a default upon short-term paper marketed by Goldman created damage claims exceeding the actual bank’s net worth. In the late 1980s, Goldman’s head of risk arbitrage, Robert Freeman, was delivered to jail for insider buying and selling. And during the same period, Goldman was implicated in an illegal plan to prop up insolvent companies operated by the corrupt Czech-born newspaper tycoon Robert Maxwell.

“The reality is the firm has been in and out of trouble throughout its whole existence and has constantly been pushing the edge of the envelope,” said William D. Cohan, an old investment banker and the writer of Money and Power: How Goldman Sachs Came to Rule The World.

Cohan marvels at the hypocrisy embedded in Goldman Sachs’ 14 Company Principles, which were codified in the 1970s and are still being drummed into programmed employees’ heads today.

“They make everyone think they believe in them, however the most important principle is ‘placing the client first’, whereas the reality is they are in business to make money and will get it done any way they have to,” he said.

Cohan thinks the 14 principles are at the heart of what he calls Goldman’s ‘holier-than-thou attitude’.

“At Merrill Lynch, we had principles scratched into the wall, however never gave them a moment’s thought. But from Goldman they write them down, distribute them and reinforce them regularly. There’s some ‘drinking the Kool-Aid’ when you sign up for Goldman and most of them fall for the brainwashing. They get people youthful so they can mould their thinking. “

“To give an example of the Goldman mindset, I was giving a speak recently to 250 New Yorkers and a Goldman Sachs banker stood upward and loudly berated me with regard to daring to suggest they were not all saints.”

Suzanne McGee, a journalist as well as author of Chasing Goldman Sachs, believes there was a change in the bank’s standing in the 1970s.

“For most of its 200-year history Goldman wasn’t the pressure it is today. It transformed itself in the 1970s, which was a turbulent period when some firms thrived yet others withered on the vine. Goldman was probably the most innovative banks and by the actual mid-1980s it was positioned to be a energy house,” she said.

“What pursuits me historically is how Goldman altered from being the firm everybody might not like, but admires, to the firm everyone affects to despise. Up to the 1990s, their own reputation was very high. In that period, if an IPO had been underwritten by Goldman Sachs that was akin to Good Housekeeping’s sales approval. They were believed to have the X-factor, which meant they could outperform everyone else in every way. This reputation was so strong that in the late 1990s their bankers were prohibited from carrying bags with Goldman Sachs logos on when they required flights to conferences. The actual bosses were afraid they’deb tip off rival traders.”

“But that mainly good reputation has gone since the economic crisis. Goldman Sachs’ workers still don’t have bags with logos, but now it’s because they might get beers poured on their heads, or someone might pick a fight with them!”

While McGee expresses a grudging admiration for the financial acumen of the Goldman elite, she is under absolutely no illusion that they follow the ‘do what’s best for the client’ theory to the letter.

“Someone from another bank said that when Goldman comes with a deal the first question you ask should not be ‘will they mess me’? It should be ‘in which way can they try to screw me’? Other banking institutions are the same, but Goldman is far better at it than anyone else”.

Just how much better became evident in 07, when the US housing bubble burst and the nation had been plunged into its greatest financial crisis since the Great Depression. The fall-out for America’s financial sector was huge. Lehman Brothers filed for bankruptcy, IndyMac bank flattened, Bear Stearns was acquired through JP Morgan Chase, Merrill Lynch was sold in order to Bank of America, and mortgage giants Fannie Mae and Freddie Mac had been put under government manage. Meanwhile, although Goldman helped to provoke the crisis, it made billions of dollars out of it by taking away huge bets that the mortgage market was about to crash. The firm went on to earn US$11.6 billion in 2007, more than Morgan Stanley, Lehman Brothers, Bear Stearns as well as Citigroup combined. Merrill Lynch lost US$7.8 million that year.

The United States Senate’utes 2011 Levin–Coburn Report found:

“The actual crisis was not a natural catastrophe, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the marketplace itself to rein in the excesses of Wall Street.”

Goldman Sachs CEO Lloyd Blankfein even apologized in 2008 for his bank’s role. “We participated in stuff that were clearly wrong and also have reason to regret,” he confessed.

But the apology was meaningless, according to William K. Dark, an American lawyer, author as well as former bank regulator, who has testified against the banks. Black believes Goldman knew precisely what it was performing and was operating based on a well-known formula in the financial world. If he had his way, Black says he would send Goldman’s bankers in to the fourth circle of Hell – which is reserved for the avaricious — in Dante’s inferno.

 “Goldman, and other investment banks, behaved fraudulently in order to generate massive amounts of money,” Dark said. “There were four components in their foolproof fraud recipe. 1. Grow like crazy. 2. Help to make really crappy loans confined yield. 3. Have remarkable leverage. 4. Make virtually no allowances for future losses.”

“If you do those four issues, you are virtually guaranteed to statement record off-the-chart short-term profits. We’ve recognized this in economics since a 1993 paper by Akerlof and Rohmer called Looting The Economic Underworld associated with Bankruptcy for Profit. Even if a firm fails, the CEO and all sorts of other folks will walk away wealthy. It’s maths; a certain thing!”

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The first two elements of the actual formula, Black says, are related. A bank grows like crazy by making “crappy loans”. Good financial loans would not work because a financial institution would have to buy market share, reducing its yields.

“But there are tens of millions in the US that cannot afford to repay a loan to purchase a house. Precisely because they can’t, the bankers can charge reasonably limited yield and can grow such as crazy. Into the teeth of this flood, they created the largest bubble in the history of the world.”

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