Goldman Sachs and the art of making money during bubbles

I had blogged earlier about the special ability of Goldman Sachs to make money even in a bust and about the fact that they have emerged as easily the biggest winner out of the sub-prime crisis! With the economy still on its knees, Goldman has announced massive profits accompanied by huge bonus and executive compensation payouts to its executives and traders. The irony, bordering on fraud, inherent in these huge profits is brilliantly illuminated and analyzed in two excellent articles.

In the first, Eric J.Fry raises several interesting questions, including the role played by the then US Treasury Secretary and ex-Goldman CEO, Hank Paulson, in setting the stage for Goldman's conquest and vanquishing of its Wall Street competitors. In well publicised back-room coups, Treasury Secretary enabled some financial firms to survive, forced others into the arms of unwilling saviors and allowed others to fall into bankruptcy.

Riasing sceptical eyebrows about the "capricious responses" of decision makers at the height of the crisis, which "enabled some financial firms to survive, forced others into the arms of unwilling saviors and allowed others to fall into bankruptcy", he writes,

"AIG survived, for example, and it promptly paid millions of dollars to Goldman Sachs to settle counterparty transactions. Lehman Brothers, on the other hand, died. Lehman’s elimination from the marketplace as a competitor bestowed an immediate and direct benefit to Goldman Sachs... the decision to let Lehman fail and to bailout AIG both emerged from the same closed-door meeting between Hank Paulson and various finance company CEO’s, including Goldman CEO, Lloyd Blankfein."

Since Bear Stearns and Lehman Brothers are gone, while Bank of America/Merrill Lynch, Citigroup, AIG and many other financial firms remain hobbled by their crippled balance sheets, all of Goldman’s former competitors are in no condition to compete. This has left the entire market open for Goldman's to conquer!

In an eviscerating and breathtakingly brilliant account of Goldman Sach's modus operandi, Matt Taibi (and here), writing in the Rolling Stone describes the world's premier investment bank as a "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money". Describing Goldman as the best representative of modern day capitalism where "organized greed always defeats disorganized democracy", he writes,

"The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They've been pulling this same stunt over and over since the 1920s — and now they're preparing to do it again, creating what may be the biggest and most audacious bubble yet."

About its overarching reach, Taibi has this to say, "Goldman has its alumni pushing its views from the pulpit of the U.S. Treasury, the NYSE, the World Bank, and numerous other important posts; it also has former players fronting major TV shows. They have the ear of the president if they want it". He writes,

"The bank's unprecedented reach and power have enabled it to turn all of America into a giant pumpanddump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere — high gas prices, rising consumercredit rates, halfeaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you're losing, it's going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it's going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth — pure profit for rich individuals."

Taibi brilliantly explains (and here) the series of bubbles that Goldman has ridden on its way to profitting at the expense of everyone else. The list of other's misfortunes from which Goldman has profitted is impressive - Great Depression, tech stock boom of late nineties, housing bubble of early this decade, and the $4 a gallon oil of last year. And Taibi even prophesizes the next bubble waiting to happen (in the footsteps of the oil and commodities trading market) and one that Goldman has already rigged - carbon-credit market (thanks to the recently released draft bill on cap and trade)!

Even the devil has its defenders. Free Exchange makes a spirited defence of Goldman here and here.

Update 1
Janet Tavakoli writes,

"The biggest crime on the American economy may go unpunished with no consequences to the perpetrators. The biggest crime was not predatory lending, but predatory securitizations, packages of loans that did not deserve the ratings or prices at the time they were sold. They ballooned what should have been a relatively small problem into a global crisis.

Wall Street owes the American public for its key role in bringing the global economy -- and in particular, the U.S. economy -- to its knees. Goldman is not alone in owing the American public. It is not the worst of all of the Wall Street firms. But among all of Wall Street's offenders, it is the most well-connected, and Goldman was the firm that cleaned up the most as the result of government bailouts."

Update 2
Though Goldman benefitted greatly from the government's actions during the peak of the financial market crisis - removal of two of its biggest rivals, Lehman and Bear Sterans; the $13 billion in taxpayer money received as a result of the AIG bailout; federal debt guarantees; $ 10 bn TARP assistance (now returned); and permission at the height of the crisis to convert from an investment firm to a deposit taking national bank, giving it easier access to federal financing in the event it came under greater financial pressure - it is now claiming that it did not gain anything from the Government bailouts.

NYT as this excellent article analyzing the conflicts of interest facing Hank Paulson when he took major one-off decisions that benefitted Goldman.

Update 3
William Cohan has this list of Goldman executives who sold large chunks of stock in the dark days of 2008 in anticipation of a collapse in Goladman equity price.