Walter Rhett

“Packaging Smoke:” Reconstructing Goldman’s Role

In Perlo on April 29, 2010 at 8:59 pm

As a historian, I love first person sources; as a writer, I love close readings of a text to find meaning and the truth of experience; as a citizen I love progressive social action. So this week’s Senate hearings, streamed on the internet by CBS and Bloomberg, caught my eye and I listened to the entire 11 hours. Than I went online and dove into the released e-mails related to the hearing, and found interesting bits of truth and meaning which I’ll share.

It’s telling that the Senate committee’s staff at this week’s Senate hearing had done more homework than the firm being questioned under its guns. The Senate’s Permanent Subcommittee on Investigations rigorously examined the role of Goldman Sachs, Wall Street’s most profitable firm, in the recent financial crisis that caused a collapse in the housing market that triggered a global recession–and a loss of 11 million US jobs.

The committee’s staff examined more than a million emails and documents in the last 18 months.

 Goldman’s Chairman and CEO, Lloyd Blankfein, who this year received a $9 million bonus, seemed to be unfamiliar with many of the e-mails that outlined his firms frantic strategies and directives to trade billions of dollars daily, to protect Goldman’s finances even as the firm used its knowledge and assessment of its clients needs and positions to gain market position for its own needs.

 An e-mail from February 2007, affirms this, stating: “That is good for us [Goldman] position-wise, but bad for accounts who wrote that protection.” The accounts that wrote “that protection” included Harvard, a leading American university. The e-mail concluded that this might “hurt our CDO pipeline position as C Dos will be harder to do.”

 On another day in February 2007, an e-mail directed, “we need to buy back $1 billion of the single names and $2 billion of the stuff below—today. You can do it, pay through the market, whatever, to get it done. Show the ability to listen and execute the firm’s directives.” The e-mail added, “It’s a great time to do it, bad news on HPA, originators pulling out, recent upticks in unemployment, originator pain.” (Emphasis mine.)

 Unemployment, bad news, and the pain of market originators were simply positive or plus factors in Goldman’s assessment of its own positions and needs. Their strategy is completely divorced from the meaning of the factors in the larger picture: that the signs that made the moment precipitous for Goldman were harbingers of a broader market collapse that even Goldman in its own perilous grasp would be unable to escape.

 And when another February e-mail called for Goldman, “to focused on the credit of the originators we buy loans from and sell to,” the firm obviously ignored its own advice.

 Characterized repeatedly as “sophisticated, the e-mails tell a very different story. One key employee readily admits in an intimate moment to being in the dark.

 A Goldman employee wrote in an January 2007 e-mail to his girl friend, that he was “standing in the middle of levered, exotic trades without necessarily understanding all of the implications of monstruosities [sic] !!! not feeling to guilty about it, amazing how good I am in convincing myself.”

This same employee reports in another e-mail of being warned by a senior banker who wrote him to say he had never seen in the leveraged credit market “anything quite like what is currently going on. Market participants have loss all memory of what risk is and are behaving as if the so-called wall of liquidity will last indefinitely and that volatility is a thing of the past.”

The banker cited his own experience in offering this assessment: “I don’t think there has ever been a time in history when such a large proportion of the riskiest credit assets have been owned by such financially weak institutions with very limited capacity to withstand adverse credit events and market downturns.”

But as the Goldman employee remarked in his e-mail, most “players” hoped that “problems will not arise until after the next bonus round.”

In his 5 hour appearance before the Senate Banking Committee the Goldman Sachs Chairman described his investors and market makers as “sophisticated” but really, from their appearance and answers before the Senate Banking committee that were quite average people handling enormous amounts of money.

Goldman touts itself as a market maker, adding liquidity to markets though its transactions and reallocating risks, but really it is “packaging smoke” (Maureen Dowd’s phrase), and rather than “sophisticated,” its traders were shamans whose ruse was to convince others that its trading tricks were real. The obvious logical fallacy is there is no reallocation of risk because there is nothing there, no underlying value or real assets, except risk.

Senator Carl Levin’s questions, tough, aggressive, showed masterful preparation and the high skills of this one time prosecutor who continually pointed to Goldman’s dismissal and disdain for the public’s interest of ethical fair play when trading billions of dollars daily. The Senator revealed by citing large and small details, by quoting language and viewing financial charts the continued themes that Goldman ignored in their testimony–that Goldman ignored all but its own drive to greed and profit at any cost–no different than the behavior in crack dens of “sophisticated” users and addict.

Oh, what about Fannie Mae and Freddie Mac, the 2 quasi-government mortgage underwriters whose policies many Republicans and conservatives love to cite as the cause of the US financial markets collapse? Both have real assessments backing their bundles of mortgages offered on the market. Default is secured by a real house. Derivatives were far removed from the type of mortgage bundles offered by F & F. CDO derivatives were not backed by any real or underlying assets. They were simply bets on risk rated by crooked ratings company.

To blame Fannie and Freddie for the implosion of the capital markets is like blaming rebate programs and zero financing at GM and Ford for New York City car thefts.

Bottom line: Goldman’s methodology was amoral and almost burned.

Goldman Sachs headquarters in Jersey City, NJ, the tallest building in the state.

(Photo: Goldman headquarters, 30 Hudson St. Jersey City, NJ;
the tallest building in New Jersey. Google images, used under fair use

Stir the Perlo, leave a comment!

  1. Do you have the rights to the photo of the GS building?

    If so could I use it in my project?

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