THE From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression — and they’re about to do it again -~&~- By MATT TAIBBI fiE FIRST THING YOU NEED TO KNOW about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells li~e money. In fact, the history of the re~~:!t financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled-dry American empire, reads like a Who’s Who of Goldman Sachs graduates. By now, most of us knowtbe major players. As George Bush’s lastTreasurysecretary, former Goldman CEO Henry Paulson was the architect ofthe bailout, a suspiciously self·serving plan to funnel trillions ofYour Dollars to a. handful ofbis old friends on Wan Street. Robert Rubin, Bill Clinton’s former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citi~ group – which in turn got a $300 billion taxpayer bailout from Paulson. There’s John Thain, the asshole chief of Merrill Lynch who bought an $87,000 area rugfoT his office as his company was imploding; a former GoIdm”n banker, Thain enjoyed a multibillion-dollar handout from Paulwn, who used billions in taxpayerfunds to help Bank ofAmerica rescue Thain’s sorry company. And Robert Steel, the former Goldmanite head ofWachovia, scored himself and his fellow executives $225 million in goldenparachute payments as his bank was self-destructing. There’s Joshua Bolten, Bush’s chief of staffduring the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyistjust a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, wbich forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange. the last two heads of the ILLUSTRATIONS BY VICTOR JUHASZ S2· ROLI.ING STONll, JUI.Y 9-23.2009 Federal Reserve Bank of New York – which, incidentally, is now in charge ofoverseeing Goldman – not to mention … Eut then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain – an extremely unfortunate loophole in tbe system of Western democratic capitalism, which never foresaw that in a Society governed passivelyby free markets and free elections, orga~ nized greed always defeats disorganized democracy. The bank’s unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump 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 consumer-credit rates, halfeaten pension funds, mass layoffs, future taxes to payoff hailouts. 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. They achieve this using the same playbook over and over again. The Cannula is relatively simple: Goldman positions itselfin the middle of a. specula.tive bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lowedloors ofsocietywith the aid ofa crippled and cormptstate that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when il 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 lend ing us back our own money at interest, selIingthemselves as men above greed,just a bunch ofreally 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. Ifyou want to understand how we got into this financial crisis, you have to first understand where all the money went – and in order to understand that, you need to understand what Goldman has already gotten away with. It is a history exactly five bubbles long – including last year’s strange and seemingly inexplicable spike in the price of oi!. There were a lot oflosers in each ofthose bubbles, and in the bailout that followed. But Goldman wasn’t one ofthem. IF AMERICA IS NOW CIRCLING THE DRAIN, GOLDMAN SACHS HAS FOUND A WAY TO BE THAT DRAIN. BUBBLE #1 THE GREAT DEPRESSION G OLDMAN WASN’T ALWAYS A TOO-BIG-TO-I’AIL Wall Street behemoth, the rulhless face of killor-be-killed capitalism on steroids – just almost always. The bank was actually founded in 1869 by a German immigrant named Marcus Goldman, who built it up with his son-in-law Samuel Sachs. They were pioneers in lhe use of commercial paper, 64′ ROLLING STONB, JULY 9-23, 1009 which is just a fancy way of saying they made money lending out short-term IOUs to small-time vendors in downtown Manhattan. You can probably guess the basic plotline of Goldman’s first 100 years in business: plucky, immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes shit10ads of money. In that ancient history there’s really only one episode that bears scrutiny now, in light of more recent events: Goldman’s disastrous foray into the speculative mania of pre-crash Wall Street in the late 19208, This great Hindenburg of financial history has a few features that might sound familiar. Eack then, the main financial tool used to bilk investors was called an ~investment trust.” Similar to modern mutual funds, the trusts took the cash of investors large and small and (theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the securities and amounts were often kept bidden from the public. So a regular guy could invest $10 or $100 in a trust and feel like he was a big player. Much as in the 19905, when new vehicles like day trading and e-trading attracted reams of new suckers from the sticks who wanted to feel like big shots, investment trusts roped a new’ generation of regula.r-guy investors into the speculation game. Beginning a pattern that would repeat itself over and over aga.in, Goldman got into the investmenttrust game late, then jumped in with both feet and went hog-wild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold go percent of them to the bungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part ofits holdings and sponsored a new trust, the Shenan~ doah Corporation, issuing millions more in shares in that fund – which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldma.n hiding behind Goldman hiding behind Goldma.n. Ofthe 7,250,000 initial shares of Elue Ridge, 6,250,000 were actually owned by Shenandoah – which, ofcourse, was in large part owned by Goldman Trading. The end result (ask yourself if this sounds familiar) was· a daisy chain ofborrowed money, one exquisitely vulnerable to a decline in perfonnance anywhere along the line. The basic idea isn’t hard to follow. You take a dollar and borrow nine against it; then you take that $10 fund and borrow $90; then you take your $100 fund and, so long as the public is still lending, borrow and invest $900. If the last fund in the line starts to lose value, you no longer have the money to pa.y back your investors, and everyone gets massacred. In a chapter from The Great Crash, 1929 titled ~In Goldman Sachs We Trust,~ the famed economist Jobn Kenneth Galbraith held up the Blue Ridge and Shenandoah trusts as classic examples of the insanity of leverage-based investment. The trusts, he wrote, were a major cause of the market’s historic crash; in today’s dollars, the losses the hank suffered totaled $475 billion. -It is difficult not to marvel at the imagination which was implicit in this gargantuan inslUlity,” Galbraith observed, sounding like Keith Olbermann in an ascot. -Ifthere must be madness, something may be said for having it on a heroic scale,’” BUBBLE #2 TECH STOCKS F AST-PORWARD ABOUT 65 YEARS. GOLDMAN NOT only survived the crash tha.t wiped out so many of the investors it duped, it Wellt on to become the chief underwriter to the country’s wealthiest and most powerful corporations. Thanks to Sidney Weinberg. who rose from the rank ofjanitor’s assistant to head the firm, Goldman became the pioneer of the initia.l public offering, one of the principal and most lucrative means by which companies raise money. During the 1970s and 1980s, Goldman may not have been the planet,eating Death Star ofpolitical influence it is today, but it was a. top-drawer firm that had a reputation for attracting the very smartest talent on the Street. It also, oddly enough, had a reputation for relatively solid ethics and a patient approach to investment that shunned the fast buck; its executives were trained to adopt the firm’s mantra, “long-term greedy’- One former Goldman ban ker who left the firm in the early Nineties recalls seeing his superiors give up a very profitable deal on the grounds that it was a long-term loser. “We gave back money to ‘grownup’ corporate cli.ellts who had made bad deals with us.~ he says. “Everything we did was legal and fair – but ‘Iong-teon greedy’ said we didn’t want to make such a profit at the clients’ collective expense that we spoiled the marketplace. But then, something happened. It’s hard to say what it was exactly; it might have been the fact that Goldman’s cochairman in the early Nineties, Robert Rubin, followed Bill Clinton to the White House, where he directed the National &0nomic Council and eventually became Treasury secretary. While the American media fell in love with the story line of a pair of baby-boomer, Sixties-child, Fleetwood Mac yuppies nesting in the White House, it also nursed an undisguised crush on Rubin, who was hyped as without a. doubt the smartest person ever to walk the face ofthe Earth, with Newton, Einstein. Mozart and Kant running far behind. Rubin was the prototypica.l Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short ofan apology for being so much smarter than you, and he ex-uded a Spack-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. It became almost a national cliche that whatever Rubin thought was best for the economy – a phenomenon that reached its apex in 1999, when Rubin appeared on the cover of Time with his Treasury deputy, Larry Summers, and Fed chiefAlan Greenspan under the headline THE COMMITTEE TO SAVE TaE WORLD. And “what Rubin thought,~ mostly, was that the AmericlUl economy, and in particular the financial markets, were over-regulated and needed to be set free. During his tenure at Treasury, the Clinton White House ll made a series of moves that would have drastic consequences for the global economy – beginning with Rubin’s complete and total failure to regulate his old tirm during its first mad dash for obscene short-term profits. The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. CQmpanieg that weren’t much more than pot-fueled i.deas scrawled on napkins by up-too-Iate bongsmokers were taken public via {POs, hyped in the media and sold to the public for megamillions. It was as if hanks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only ifyou took your money out before the melon hit the pavement. It sounds obvious now, but what the average investor didn’t know at the time was that the banks had changed the rules ofthe game, making the deals look better than they actua1\ywere. They did this by setting up what was, in reality, a two-tiered investment system – one for the insiders who knew the real numbers. and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrationa.1. While Goldman’s later pattern would be to capitalize on changes in the regulatory environment, its key innovation in thelnternet years was to abandon its own industry’s standards of quality control. “Since the Depression, there wet”e strict underwriting guidelines that Wall Street adhered to when takiDg a company public,” says one prominent hedge-fund manager. “The company had to be in business fol’ a minimum of five years, and it had to show profitability for three consecutive years. But Wall Street took these guidelines and threw them in the trash. Goldman completed the snow job by pumping up the sham stocks: “Their analysts were out there say~ ing BulIshit.com is worth $100 a share.” The problem was, nobody t£lld investors that the rules had changed. ·Everyone on the inside knew,~ the manager says. 4Bob Rubin sure as hen knew what the underwriting standards were. They’d been intact since the 1930s.” Jay Ritter, a professor of finance at the University of Florida who specializes in IPOs, says banks like Goldman knew full well that many of the public offerings they were touting would never make a dime. 4In the early Eighties. the major underwriters insisted on three years ofprofitability. Then it was one year, then it was a quarter. By the time of the Internet bubble, they were not even requiring profitability in the foreseeable future.” Goldman has denied that it changed its underwriting standards during the Internet years, but its own statistics belie the claim. Just as it did with the investment trust in the 1920s, Goldman started slow and finished crazy in the Internet years. After it took a little-known company with weak financials called Yahoo! public in 1996, once the tech boom had already begun, Goldman quickly became the IPO king ofthe Internet era. Ofthe 240 companies it took public in 1997. a third were losing money at the time ofthe IPO. In 1999, at the height ofthe boom, it took 47 compall 56 • ROLLING STONE. JULY 9-:13, 2009 nies public, iTlcluding stillborns like Webvan and eToys, investment offerings that were in many ways the modern equivalents of Blue Ridge and Shenandoah. The following year, it underwrote 18 companies in the first four months, 140 of which were money losers at the time. Ai; a leading underwriter of Internet stocks during the boom, Goldman provMed profits far more volatile than those ofits competitors: In 1999, the average Goldman IPO leapt 281 percent above its offering price, compared to the Wall Street average ofI81 percent. How did Goldman achieve such extraordinary results? One answer is that they used a practice called “laddering,U which is just a fancy way of saying they manipulated the share price of new offerings. Here’s how it works: Say you’re Goldman Sachs, and Bullshit.com comes to you and asks you to take their company public. You agree on the usual tenns: You’ll price the stock, determine how many shares should be released and take the Bullshit.com CEO on a “road show~ to schmooze investors, all in exchange for a substantial fee (typically six to seven percent of the amount raised). You then promise your best clients the right to buy big chunks of the IPO at the low offering price -let’s say Bullshit.com’s starting share price is $15 – in exchange for a promise that they will buy more shares later on the open market. That seemingly simple demand gives you inside knowledge of the IPO’s future, knowledge that wasn’t disclosed to the day-trader schmucks who only had the prospec~ tus to go by: You know that certain of your clients who bought X amount of slJares at $15 are also going to buy Y more shares at $20 or $25, virtually guaranteeing that the price is going to go to $25 and beyond. In this way, Goldman could artificially jack up the new company’s price, which of course was to the bank’s benefit – a six percent fee of a $500 million IPO is serious money. Goldman was repeatedly sued by shareholders for engaging in laddering in a variety ofInternet IPOs, including Webvan and Net2ero. The deceptive practices also caught the attention of Nicholas Maier, the syndicate manager ofCramer & Co., the hedge fund run at the time by the now-famous chattering television asshole Jim Cramer, himself a Goldman alum. Maier told the SEC that while working for Cramer between 1996 and 1998, he was repeatedly forced to engage in laddering practices during IPO deals with Goldman. “Goldman, from what I witnessed, they were the worst perpetrator,” Maier said. “Theytotally fueled the bubble. And it’s specifi· callythat kind ofbehavior that has caused the market crash. They built these stocks upon an illegal foundation – manipulated up and ultimately, it really was the small person who ended up buying in.” In 2005, Goldman agreed’to pay $40 million for its laddering violations – a puny penalty relative to the enormous profits it made. (Goldman, which has denied wrongdoing in all o(the cases it has settled, refused to respond to questions (or this story.) Another practice Goldman engaged in during the Internet boom was “spinning,” better known as bribery. Here the investment bank wouLd offer the executives ofthe newly public company shares at extra-low prices, in exchange for future underwriting business. Banks that engaged ill spinning would then undervalue the initial offering price – ensuring that those “hot~ openingprice shares it had handed out to insiders would be more likely to rise quickly, supplying bigger first-day rewards for the chosen few. So instead of Bullsrul.com opening at $20, the bank would approach the Bullshit.com CEO and offer him a million shares 58 • ROLLI NO STONlI, J UL>’ 9-’13, 2009 GOLDMAN SCAMM’ED HOUSING INVESTORS BY BETTING AGAINST ITS OWN CRAPPY MORTGAGES. of his own company at $18 in exchange for future business effectively robbing all of Bullshit’s new shareholders by diverting cash that should ha.ve gone to the company’s bottom line into the private bank account of the company’s CEO. In one case, Goldman allegedly gave a multimillion-dollar special offering to eBay CEO Meg Whitman, who later joined Goldman’s board, in exchange for future i-banking business. According to a report by the House Financial Services Committee in 2002, GoldmaTl gave special stock offerings to executives in 21 companies that it took public, including Yahoo! co-founder Jerry Yang and two of the great slithering villains of the financial-scandal a.ge – ‘!Yco’s Dennis Kozlowski and Enron’s Ken Lay. Goldman angrily denounced the report as ~an egregious distortion of the facts” – shortly before paying $110 million to settle an investigation into spinning and other manipulations launched by New York state regulators. ”The spinning of hot IPO shares was not a harmless corporate perk,” then-attorney general Eliot Spitzer said at the time. “Instead, it was an integral part of a fraudulent scheme to win new investment-banking business. Such practices conspired to tum the Internet bubble into one of the greatest financial disasters in world history: Some $5 trillion of wealth was wiped out on the NASDAQ. alone. But the real problem wasn’t the money that was lost by shareholders, it was the money gained by investment bankers. who received hefty bonuses for tamperiTlg with the market. Instead of teaching Wall Street a lesson that bubbles always deflate, the Internet years demonstrated to bankers that in the age offreely flowing capital and