Goldman and the Sacking of Capitalism

They called themselves Masters of the Universe. What we’re learning is that they didn’t live in the same universe as the rest of us.

Not only were they in a place alien to those without a Wall Street address, they didn’t, and still don’t, speak the same language.

I just sat through an eternity of grilling of Goldman Sachs’ executives who couldn’t understand simple questions of ethics, morality, or duty to trusting clients. The senators who questioned them were exasperated, accusing them of what on the surface seemed like stonewalling. After a while you realized it wasn’t so much stonewalling as a failure to communicate.

The Goldman people just couldn’t see anything wrong with hyping mortgage related products to their clients as good investments and then betting that those same products would fail.

Daniel Sparks, the former head of Goldman’s mortgage department, was asked that specific question: shouldn’t you have disclosed that Goldman believed the market was about to tank and was betting against it? After a number of attempts at trying to understand the question he said “no.”

When asked whether he thought this type of trading should be regulated, Joshua Birnbaum, who managed the trading process for Goldman during the go-go years prior to the crash, responded only that it was an “interesting” idea.

Twelve times Committee Chairman Senator Carl Levin referred to an internal Goldman memo calling one its mortgage packages a “shitty deal,” and tried in vain to get any of the witnesses to admit that pushing the Goldman sales force to sell it might have been unethical.

A couple of weeks ago I sat through a similar performance by no less than Alan Greenspan, former Treasury Secretary and Citibank Chairman Robert Rubin, and key Citigroup executives. Far from apologizing for anything they might have done to contribute to the meltdown they professed little understanding of why they might even have been considered suspects.

At the Goldman hearing Missouri Senator Clair McCaskill kept referring to the markets made by Goldman as “gambling casinos” and the people who managed them as “bookies.” A day earlier, Banking Chairman Chris Dodd gave an impassioned floor speech equating the situation as a robbery during which people coming back from a trip found they had lost everything.

But I think the alternative universe analogy is much closer to what we’re really up against.

This alternative universe is far larger and more dangerous than a few clueless investment bankers. It really involves much of present day capitalism itself, along with academic, government and media enablers.

For many years MBA schools have been pumping out the best and brightest with singular ambitions to go to Wall Street and make fast fortunes. The idea was to use modern tools to create “instruments” that would accelerate profits.

One of those “instruments”—-in fact, the most widely used of those instruments prior to the market collapse—was euphemistically called a “synthetic” credit default swap. In plain English, this was a bet on whether the market would go up or down. It provided no capital for mortgages, no financing for business, no useful purpose of any kind. It was, pure and simple, a bet.

At the time of the market collapse the amount of money bet in the “synthetic” market was ten times or more the amount backing mortgages themselves. And it got worse. Bettors took out “insurance” that their bets would win. Who insured those bets? Most notably companies like AIG. Who was placing the bets? Banks. Pension funds. Cities and states and whole countries looking to pick up more return on their loose cash than they could get from traditional investments.

All of this created an alternative universe, where greed replaced good sense and wealth that might have gone to any number of useful purposes was diverted into streams that lacked even elementary transparency.

And that warped the outlook of so many of those playing at those tables. Otherwise rational people who worked for Lehman Brothers moved money off their books at the end of the financial reporting quarter and put it back a few days later so the company’s losses wouldn’t show. People who ran venerable institutions like the Royal Bank of Scotland decided to gamble with others’ money attracted by the lure of bigger profits. And so on.

What can you say about an investment bank, Goldman, that sells bundles of mortgages, most of which were issued to people who only “stated” their incomes, with no verification. What can you say about the fools who buy them? Billions of dollars of them.

Go backward in time, and not too far. It wasn’t long ago that Enron was being exalted in business schools as the ideal company, even as it was twisting itself in knots with unfathomable off book subsidiaries to keep what amounted to a multi-billion dollar Ponzi scheme going.

Or go to 1999, when a Democratic president and more than 90 U.S. senators convinced themselves that unregulated markets could be trusted not to succumb to an orgy of greed. That, despite the $200 billion+ taxpayer bailout triggered by the savings and loan crisis just a few years earlier.

All along most of the business press and popular publications cheered on the excesses and overlooked the dangers.

Capitalism is markets and competition. Finance is an efficient way to pool money for useful private and public purposes. But in recent years the normal blood cells of those systems have mutated into a cancerous body that has become a mortal risk to itself.

The people from Goldman Sachs have been living in that diseased world so long they think it’s normal. No one is going to change their minds, or the minds or behavior of those still managing Wall Street.

It’s going to take some powerful outside medicine to do that.

Probably a heavier dose than the prescription that Congress is even now trying to administer.

(Joe Rothstein can be contacted at


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