All That Glitters Is Goldman Sachs

[Joanne98]

by Robert Zevin
28 May 2009

When I told a friend who runs a program in community economic development the subtitle of my talk, “A Primer on Skullduggery in High Finance,” he replied “Isn’t that redundant?” Of course it is and apparently always has been. It seems that Jesus thought so, and Buddha, not to mention John Adams and Thomas Jefferson whose view of bankers and stockbrokers closely resembled my grandmother’s distrust of clergymen of all faiths and actors of both genders. The common element being that they were all trying to sell you something that was apparently much more for their benefit than for yours.

But perhaps a primer on this subject is redundant in still more ways. After all just about any grade school student will tell you-now anyway-that bankers and investment managers are a bunch of thieves if not worse. So perhaps this is a primer for the too sufficiently educated? But, yet another redundancy: here in this room are a sizable number of very well educated people, many with advanced degrees in economics, who have always understood how our economy functions and how it hides those functions behind a wall of mathematized ideological dogma. And we are here to celebrate and sustain the effort they make writing and editing a magazine and list of current books, which are themselves, primers on the skullduggery of the entire economic system, including its financial components.

So do not be surprised if your only satisfaction from these remarks is to confirm what you already know. Now to the business at hand. I am going to follow some advice I read many years ago in a primer on public speaking. First, say what you are going to say. Then say it. Then reprise it. What I am going to say is excellently expressed in a piece called “The New-New Gettysburg Address,” by a Wall Street blogger named Jeff Matthews:

The New-New Gettysburg Address

Four or five years ago our Investment Bankers helped bring forth on this continent, and around the world, a new banking system, conceived in Leverage, and dedicated to the proposition that all persons working for Investment Banks can create enormous Wealth for themselves with almost no Risk except to Taxpayers.

Now we the Investment Bankers of Goldman Sachs are engaged in a great Scam, testing whether that Nation of Bankers can get paid without Tipping Off the Taxpayers to that Scam.

We have come to cash our checks.

It is altogether fitting and proper that we should do this, for we have Houses in the Hamptons requiring upkeep.

But, in a check-clearing sense, we can not Cash Our Checks so long as AIG cannot make good on the credit default swaps we purchased to Hedge our Leverage. Thankfully, the brave men of Goldman who struggled to Attain Positions of Power in Treasury and the White House have consecrated it, far above Barney Frank’s poor power to detract from our AIG Contracts.

The Small Investor will little note, nor long remember, how completely screwed He got, but we the Investment Bank of Goldman Sachs can never forget what they did to provide us this cash. We thank them for the $8 billion Their Government is paying to AIG in order to Make Us Whole.

We here highly resolve that The Little Investor shall not have died in vain-that this nation, under Goldman Sachs, shall have a new birth of Leverage Without Risk-and that government of Goldman, by Goldman, and for Goldman, shall not perish from the earth.

Mr. Matthews, who usually ends his blog posts with the expression “No, I am not making this up,” departs unnecessarily from form in this case by saying “Well, Yes, I Am Making This One Up”. While there are a few small errors, notably the idea that Goldman had purchased Credit Default Swaps to hedge its leverage rather than increase it, for the most part this is more accurate than any stories you might find in the New York Times or the Wall Street Journal.

In a recent article in the New York Review of Books, Bob Solow quotes a passage from a book he is reviewing by the ultra-conservative jurist, Richard Posner:

As far as I know, no one has a clear sense of the social value of our deregulated financial industry, with its free-wheeling banks and hedge funds and private equity funds and all the rest.

Solow observes that Posner apparently thinks this social value “is limited.” It is hard not to enthusiastically agree with that conclusion. Starting with my own “industry”, the investment management business whose usefulness is defended in economics text books because it contributes to the rational allocation of capital to the best social uses and attacked by Marx and others as a purely parasitic attachment to the truly productive parts of the economy. I would have to hand the prize to Marx. In my industry the median professional investment adviser, or bank trust department or mutual fund, has consistently, unfailingly done worse than a simple index fund over any ten-year period for as long as records exist. Why? The answer extends to all the rest of the finance sector; the managers consistently put their own interest ahead of the clients. Combined with compensation arrangements that award unusually good short term results far more than they penalize mediocre long term results, this causes managers to take more risks with their clients money than the clients would for themselves. In a market where human nature and professional incentives both lead to excessive risk taking, risk is overpriced and risk taking loses, just as betting on lottery tickets or roulette loses, occasional jackpots not withstanding.

When I first went to work for a small commercial bank in Boston in the 1970’s-combining my investment management business with theirs-banking was at an historic turning point. A high point for those who think banks should essentially be regulated public utilities, and a low point for those who think the beneficence of capitalism is necessarily and sufficiently advanced by maximizing the gains to all shareholders, including those who own public utilities and banks. The latter had begun their long march to total victory led by Citibank and it’s president, John Reed. He invented, and immediately began to issue, negotiable certificates of deposit, an early example of securitization (of deposits in this case), which the Fed stared at glumly but declined to ban. Citi and other big banks also initiated the Eurodollar market, which is essentially a banking system with no regulator and no reserve requirements that nonetheless uses the names and regulated status of its participants to increase investor confidence, a now all-too-familiar model. Again the Fed did not, and still has not attempted to, regulate this machine for printing dollars off shore.

For little banks like mine, John Reed had these messages: create a bank holding company which can own your bank, buy other banks that your bank couldn’t buy-at the time most states and federal law restricted the scope of banks to one state, one county in Massachussetts, even one branch in Illinois. And, by the way, the holding company, not being a regulated depository institution itself, but only an owner of such banks, could sell debt, implicitly guaranteed by the banks it owned, without Fed approval. In sum, grow by acquisition, lend all of your deposits at the highest possible rates, increase leverage every way possible. The consolation prize, if you couldn’t pull this off? Some other acquisitive bank would buy you out at a big premium to your stock market price. The number of banks in the United States went from over 22,000 at the start of the 1970’s to about 8,000 today and still falling fast. Needless to say the size of Citi, Bank of America, and the other largest banks has increased dramatically faster than the size of the entire bank system, the five largest now accounting for about 40% of the total.

The evidence is quite clear, and has been all along, that big banks with exposure to many cities, states, and countries are not safer, not more efficient, and not more profitable than smaller banks. They are the opposite. They do have some monopoly pricing power; but approximately all of it is expropriated by the mafia-size tributes extracted by management, directors, and other insiders. Returns on equity are higher only because of the debt-leverage. And, of course, they are too big to fail. (In addition, as Tom Ferguson and Robert Johnson have argued recently, they may also be too big to bail.) In any case the final triumph in all of this was the merger eleven years ago of Citibank with Travelers’ Insurance, one of the largest in the nation, and the owner of Salomon Smith Barney, a recently merged large brokerage house. At the time, the Glass-Steagall Act, which was passed in 1933 for the explicit purpose of keeping regulated and deposit-insured banks out of other financial businesses like insurance and the stock market, had been substantially mutilated but not repealed. The merger was clearly in violation of the Act. But the Best Congress That Money Can Buy responded to this problem obligingly the next year, 1999, by simply repealing the entire Act. The repeal received overwhelming bi-partisan approval, including our own Barney Frank, who had been riding the bank-deregulation horse since he sat in the legislature in the 1970’s, and also I believe by the entire Massachusetts delegation, and the likes of Christopher Dodd and Charles Schumer, true friends all of the working banker. The Clinton White House had strongly backed the measure and issued a celebratory statement claiming that it had calculated the annual savings to consumers from this legislation at eighteen billion dollars a year! ... a number no doubt certified by then Secretary of the Treasury, Chief Mathematical Wizard and self-proclaimed Infallible Authority on Everything, Larry Summers, who had recently replaced Robert Rubin, former head of Goldman Sachs. Rubin had become one of the three ruling executives of the illegally combined Citigroup just a month before the repeal of the now offending sixty-six year old legislation.

Continued>>>
http://www.oid-ido.org/article.php3?id_article=960

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