Goldman Sachs' Crooked Casino

by John M. Curtis
(310) 204-8700

Copyright April 27, 2010
All Rights Reserved.                                

                Throwing 31-year-old French derivative trader Fabrice Tourre under the bus, Goldman Sachs executives faced a grilling by Sen. Carl Levin’s (D-Mich.) Permanent Select Committee on Investigations, examining recent Security and Exchange Committee civil fraud suit against the venerable Wall Street investment bank.  Under Tourre’s direction, Goldman Sachs arranged purchases of select mortgage-backed securities for client Paulson & Co., specifically to short the market in 2007.  Paulson made $20 billion shorting toxic securities during 2007, while Goldman’s derivative investments plummeted to zero value.  Televised on global TV, the world was treated to an ugly peak into the inner workings of Wall Street more concerned about profits and managing its own risks than selling toxic securities to unsuspecting clients, personifying “caveat emptor,” let the buyer beware.

            When former Nasdaq president and “fund” manager Bernard Madoff went to prison for a $60 billion Ponzi scheme, Wall Street reacted harshly to the fraud—at least until now.  Unlike Madoff who made up phony trades, borrowing from Peter to pay Paul and returning 10% to investors, Goldman engaged in trading practices amounting the same tactics.  While they packaged and sold exotic mortgage-backed securities, Goldman executives continued selling products based on toxic mortgages, harming long-term investors and enriching short-sellers like Paulson.  You are the bookie, you are the house,” said Sen. Claire McKaskill (D-Mo.), comparing the 141-year-old Wall Street firm to crooked Las Vegas casino.  “You had less oversight than a pit boss in Las Vegas,” publicly flogging Goldman’s executives.  Congress wants answers for the nation’s 2007-08 financial collapse.

            Sen. Levin focused on a June 2007 e-mail from Thomas Montag, former head of Goldman’s sales and trading the Americas, calling the investments “shitty.”  “Does that bother you at all?” asked Levin of Daniel Sparks, head of Goldman’s mortgage unit.  Calling the investments “one shitty deal,” Montag exposed the ugly side of the investments business, where one’s man’s poison is another man’s feast.  “I don’t recall selling hundreds-of-millions of that deal after that,” said Sparks, interpreting Montag’s statements to reflect his performance, not deteriorated derivative investments.  Senate investigators are trying to figure out how much Goldman Sachs’ sales of toxic mortgage-backed securities, together with its short-selling clients, contributed the collapse of the U.S.  housing market.  Goldman officials denied they did anything illegal, unethical, improper or out of the usual.

            Levin’s Senate panel acted like the irresistible force hitting Blankfein’s immovable object, denying any kind of impropriety.  Working in Wall Street’s casino-like atmosphere makes it difficult for its key players to recognize any ethical, moral or legal lapses.  If, under the current circumstances, there are so few rules policing the street, then it’s difficult for trading firms to recognize improprieties.  Moral relativism over the unbridled profit-motive drives firms to structure all transactions to benefit the house.  “Unfortunately, the housing market went south very quickly,” said Blankfein, denying that irresponsible derivatives trading, specifically shorting-selling, brought down the market.  “So people lost money in it,” admitted Blankfein, ignoring Levin’s contention that Goldman Sachs’ profited from the housing collapse.  Blankfein accepts no responsibility for misleading investors. 

            Blankfein’s defense perpetuates the illusion that Goldman Sachs looks out for all its clients.  “We do hundreds of thousands, if not millions of transactions a day, as a market maker,” denying that he set up certain clients to fail and others to win.   When the SEC brought civil fraud charges against Goldman, it opened up a can of worms.  Whether Blakfein admits it or not, his firm’s brand has been damaged.  Like Tiger Woods recent image problems, Goldman Sachs also has a credibility problem.  Blankfein’s incredulous denials cause further damage to Goldman’s image and reputation.   His arrogance and sense of entitlement is now a poster boy of Wall Street greed and manipulation.  “There’s something unseemly about Goldman betting against the housing market at the same time as it is selling to its clients mortgage-backed securities containing toxic loans,” said Sen. Susan Collins (R-Maine.)

            Goldman’s credibility problems stem from the public getting too much unwanted information.  In the old days, when Richard A. Grasso ran the New York Stock Exchange like his own piggy bank, the public was more easily duped.  Today’s Internet age exposes Wall Street to far more scrutiny, requiring companies like Goldman Sachs to show more discretion.  Fleecing clients and playing both sides against the middle no longer works for old-timers like Blankfein, now caught red handed in what amounts to Wall Street business as usual.  Blankfein’s denials stem not only from his attorney’s advice but from the systemic game-playing and corruption all too common on Wall Street.  More public exposure to Goldman’s shenanigans only hurts U.S. economic global credibility.  When Congress gets around to financial reform, companies like Goldman Sachs must learn to play by the rules.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.