by John M. Curtis
(310) 204-8700

Copyright Aug 9, 2009
All Rights Reserved.

      Exposing an incestuous relationship between the government and Goldman Sachs, new documents obtained by the New York Times under the Freedom of Information Act reveal an inappropriate relationship.  Former Treasury Secretary Hank Paulson, a former CEO of Goldman Sachs, spoke extensively over two dozen times with Manhattan’s last remaining investment bank.  Paulson spoke numerous times with Goldman CEO Lloyd Blankfein, his hand picked successor.  While Paulson worked hard to salvage Bear Stearns with a fire sale to J.P. Morgan Chase March 14, 2008, he threw rival Lehman Brothers under the bus Sept.15, 2008.   Lehman Bros.' failure—the largest bankruptcy in U.S. history—was one key factor causing the 1929-like collapse of U.S. financial markets.  When Goldman Sachs received a $13 billion payout from American International Group eyebrows raised.

            Goldman Sachs created and sold complex mortgage-backed securities known as “derivatives,” risky profit-making investments during the real estate bubble.  They allowed AIG to insure the investments in what’s known as “credit default swaps,” a type of insurance contract for risky investments.  A change in banking laws in 1999 under the Clinton administration called the Gramm-Leach-Biley Act, in effect, repealed the 1933 Depression-era Glass-Steagall Act, that created the Federal Deposit Insurance Corporation and barred bank holding companies, i.e., depository institutions, from engaging in risky stock market investing. It took 66 years for history to repeat itself, watching the collapse of the U.S. banking industry.  Because AIG insured derivatives worldwide, Federal Reserve Chairman Ben S. Bernanke and Paulson bailed them out for $185 billion.

            At the time of AIG’s whopping bailout, President and CEO Edward M. Liddy was on the board of Goldman Sachs, urging Bernanke and Paulson to rescue the cash-strapped insurance company.  Paulson miscalculated pulling the plug on Lehman Bros., doing the right thing capitalizing J.P. Morgan to save Bear Stearns.  Bernanke and Paulson had no qualms about saving AIG, especially because both were close friends with Liddy, still on the Goldman Sachs Board.  Liddy resigned from the board oa May 21, two months after AIG received its whopping bailout.   Goldman Sachs received a 13 billion payment March 21, despite AIG’s claim of insolvency.  It’s no accident that Paulson spoke dozens of times to AIG, arranging a sweetheart deal, while he threw Lehman Bros.to the wolves.  No one doubts AIG was too big to fail but Paulson’s incestuous involvement went over the top.

            Only $1.5 trillion was approved by Congress during former George W. Bush’s Toxic Assets Relief Program and now President Barack Obma’s Economic Recovery and Reinvestment Act..  At least $2 trillion more remains unaccounted for, apparently ordered by the Fed and printed by the Treasury’s Office of Printing and Engraving.  Neither the Fed nor the Treasury can account on the their books for the missing $2 trillion.  Current Treasury Secretary Timothy Geithner, who spoke frequently to Paulson while head of the New York Fed, refuses to release a complete list of institutions and state governments receiving bailout cash.  Bernanke and Geithner both insist that naming names could hurt already weakened financial markets.  Regardless of the Fed or Treasury’s involvement, Goldman Sachs seems to be at the center of the decision-making chain of who gets what and how much.

            Goldman Sachs has a lot of explaining to do especially, why, when their stock retained much of its market value during the latest market meltdown, they insisted in taking $13 billion in AIG’s bailout money.  “Following Lehman’s failure and the acquisition of Merrill Lynch [by Bank of America] that prevented its failure, officials feared the same crisis of confidence might spread to the remaining investment banks, Morgan Stanley and Goldman Sachs,” said Paulson’s spokeswoman Michele Davis.  BofA CEO Ken Lewis knew the Merrill Lynch’s acquisition left an otherwise solvent bank into a takeover target nearing insolvency.  BofA added trillions in debt to their balance sheet, nearly driving its stock into oblivion.  While BofA stock has staged a remarkable comeback, its long-term value still has to contend with Merrill Lynch’s trillions in unfunded liabilities.

            Goldma Sach’s relationship to the Fed and U.S. Treasury warrants more scrutiny.  Paulson tried to distance himself from what looked like egregious confilicts-of-interests, granting AIG’s CEO, former Goldman Sach’s executive Edward Liddy, $185 billion, paying Goldman Sach’s $13 billion while he sat on Goldman Sach’s board.  Apart from the incestuous management of government bailout funds, Goldman Sachs must answer questions about how their firm sets programmed buy-and-sell signals to Wall Street’s biggest investment funds.  With the Fed and Treasury arbitrarily printing and allocating trillions of dollars, Goldman Sachs must account for how and why they assign bailouts to various institutions.  Paulsom must also answer why he let Lehaman Bros. go down while rescuing Bear Stearns.  One investment bank, no matter how powerful, shouldn’t control the entire market 

 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.