I have been tracking the slowly unraveling story of alleged fraud at Goldman Sachs in earlier columns, focusing on the investment bank’s 2007 behavior in short-selling mortgage securities specifically designed for GS by John Paulson to fail in a collapsing housing market, while GS simultaneously recommended those securities to its clients. A politically-divided SEC voted 3:2 (Democrats versus Republicans) to indict GS for civil fraud on this issue. The Senate Permanent Sub-Committee on Investigation grilled 7 GS senior executives, including CEO Lloyd Blankfein, at a day-long hearing on April 27, 2010, about this alleged civil fraud. On this occasion, Lloyd Blankfein played a bit role. Fabrice Tourre, the trader at the heart of the GS fraud case, was center-stage, ducking and weaving before the (almost certainly) feigned wrath of Committee Chairman, Senator Carl Levin.
Public choice repeatedly warns any scholar who seeks to understand what is really happening behind the veil of words that emanate from such political confrontations, to follow the money. Money, after all, is the mother’s milk of politics, as any long-term survivor of the political sausage factory, such as Carl Levin, surely comprehends. Public choice also warns that companies that confront new regulations, and bitterly oppose them in public, may actually be lobbying for such rules in the dark passageways of Congress. They may do so because said regulations will cripple less swift-footed rivals more than they will themselves. And especially will this be the case if regulatory loopholes are crafted specifically with this in mind. Public choice also advises that those who fall lightly on the tip of a sword to provide a helping hand to an unscrupulous President will expect to receive a helping hand or two from said President should some future opportunity arise. Of course, if said President turns out to be yet more unscrupulous than rationally expected, the sacrifice may go unrewarded. But decisions are made under uncertainty in matters political and one does not become CEO of Goldman Sachs unless one has demonstrated a strong preference for risk-taking.
Inevitably, one cannot speak with certainty about such murky state capitalist interactions, because they are surely never defined with full transparency. However, a process of carefully following the money, in this instance, assists us enormously in unraveling a complex pattern of events.
In a column full of public choice insight, Terrence Scanlon (The Washington Times April 27, 2010) exposes Obama’s Goldman Game with the following pregnant words:
“Needless to say, if Goldman loses the SEC suit, it can afford to pay hefty fines. To Goldman, this is just a cost of doing business. With high-profile Goldman serving as villain, the president might get the public relations boost he needs to ram his unneeded Wall Street reforms through Congress. What’s a little play fight between friends? Is this a case of the Obama administration hanging the capitalists with the rope that the capitalists sold them, or is there more here than meets the eye?”
Let me share with you the fruits of Scanlon’s ’follow-the-money’ investigation. According to the Center for Responsive Politics, Goldman employees gave Barack Obama $994,795 to support his 2008 election campaign – donations incidentally that Obama refuses to return following the fraud indictment of the company. This sum exceeded the entire Goldman contributions to every Republican running for President, House and Senate in that election cycle.
In the current election cycle, Goldman’s political action committee and employees already have outlayed $693,675 in political contributions, with 70 per cent of the total going to Democrats. Only Republican recipients, to date, have returned any of these contributions. Lloyd Blankfein has visited Obama’s White House on at least four occasions, and there is no evidence that these were occasions for a private flogging.
Goldman is ‘a creature of the political left’ (Scanlon) and a natural ally of the Democratic Party. It is a big-government- loving bank, that moves easily in and out of politics through front as well as back doors, and that fares much better under state than under laissez-faire capitalism. Goldman hack, Henry Paulson, as Treasury Secretary in 2008, crafted a $700 billion- plus taxpayer bail-out, from which he quickly carved a succulent $10 billion slice for the Goldman Sachs’ dinner table. Goldman and its employees are now so accustomed to stuffing themselves at the groaning public trough that they would surely starve to death if they had to eat from their own pantry.
Goldman stands to come out well ahead, if President Obama’s financial regulatory super-agency is created. It is far more adept then its major rivals at backroom dealing and profiteering from regulations that will have been purpose-designed by its own craftsmen. Goldman undoubtedly is salivating at the permanent $4 trillion bailout fund written into the House version of the bill, and the juices must be literally running down Lloyd Blankfein’s jowls at the thought of the Senate version, which places no dollar limit on the bailout opportunity.
Goldman has also positioned itself to make a killing out of any cap-and-trade emissions control legislation that may be rammed through the Congress by President Obama (here is one of the expected payoffs for falling on the sword). In 2006, Goldman paid $23 million to purchase a 10 per cent interest in the Chicago Climate Exchange, the only U.S. exchange that conducts trading in carbon offsets. By the end of 2007, Goldman had committed at least $1 billion to ‘carbon assets’ alternative energy projects. Experts predict that by 2020 the U.S. carbon-emissions market could be worth $1 trillion per annum, with enormous profits from trading in carbon offsets, if the federal government should mandate such a system. Surprise, surprise, Goldman publicly (and no doubt ‘privately’) supports mandatory limits on carbon emissions!
Of course, tracking the money does not take us all the way to the revealed truth of the Goldman Sachs story. If President Obama considers himself unfairly treated by this column, he has recourse to one measure that would significantly establish for him a reputation for transparency and honest dealing:
Mr. President: If you truly are working to clean up Wall Street, why not ask the SEC to withdraw the civil fraud indictment of Goldman Sachs and to replace it with a criminal indictment, that embraces Lloyd Blankfein, the entire Board of Directors of GS, and the allegedly rogue trader, Fabrice Tourre? If the criminal case goes well, not only will you remove a gang of alleged miscreants from the capitalist system, but you will provide Bernie Madoff with some worthy company for the rest of his (and their) natural lives.
Of course, Lloyd Blankfein may be far less willing to fall on a presidential sword if his own life and liberty, rather than taxpayers’ bailout out subsidies, are on the line! When thieves fall out…