How Does Goldman End Up Golden?
As one of his first actions as President, Barack Obama issued ethics rules applicable to White House officials.
The Executive Order on Ethics Commitments by Executive Branch Personnel requires that lobbyists who become members of Obama administration will not be able to work on matters they lobbied on for two years, or in the agencies they lobbied during the previous two years. Anyone who leaves the Obama administration will not be able to lobby his administration. The orders also instituted a ban on gifts by lobbyists to members of the administration.
Obama’s ethics edict is a good thing, at the right time. But does it go far enough? Apparently, Obama has already issued a waiver for Deputy Secretary of Defense William Lynn (Lynn was a registered lobbyist for the defense contractor Raytheon.) But putting that aside, the problematic “revolving door” in Washington refers not only to lobbyists for corporations, but to executives of the corporations too. And, even more importantly, for executives of financial institutions.
Obama should address these latter aspects more pointedly. The influence of private finance in Washington has grown to astounding and intolerable levels. One powerful example is Goldman Sachs. Time and again, Goldman seems to come up smelling rosy. In the recent financial turmoil Goldman was able mysteriously to convert into a bank holding company, unscathed, and seemed immune from the rumor mills that suffocated Bear Stearns and Lehman. Why? According to many, it’s not because Goldman made better financial decisions or had a sounder balance sheet. It’s because Goldman has the most influence in Washington. Its footprints are all over town.
Treasury Secretary Paulson–the man ultimately empowered to determine the fate of the investment banking industry–was a CEO at Goldman for a quarter century prior to his appointment in Washington. His replacement, Tim Geithner, counts as his chief advisors a few Goldman executives, including John Thain, Goldman’s former co-president. Neel Kashkari, who was tapped to oversee the $700 billion TARP, was vice president at Goldman. Of course, there’s also Robert Rubin, who spent 26 years at Goldman before serving as Clinton’s Treasury Secretary. After his governmental service Rubin jumped into bed with Citigroup and proceeded to steer the company into a period of illusory growth which ended recently with a devastating bang. Eventually, Rubin was fired.
On the foreign front, former Goldman executive Mario Draghi is leading the E.U.’s response to the economic crisis.
Goldman’s reach into the industry is also remarkably deep. Many executives at other major financial institutions have significant connections with Goldman. Robert Steel, Wachovia’s chief, used to be Goldman vice-chairman. So too was Ed Liddy, now CEO of AIG. Robert Zoellick, World Bank’s president, was a managing director at Goldman. John Thain, Merrill’s CEO who was recently fired (but he’ll be back), used to be Goldman’s co-President.
Over the last 20 years, Goldman has been among the top five U.S. political donors in the world, contributing a total of over $30 million to campaigns and politicians, by far the highest of any financial institution.
Goldman was also the second highest contributor to the Obama campaign.
Goldman’s network of industry and political connections shaped the way government has responded to the economic crisis. For example, Merrill CEO John Thain’s Goldman credibility caused Secretary Paulson and Geithner to help coordinate a quick sale of Merrill to Bank of America for a handsome premium, on the same weekend they let Lehman Brothers, which did not have Goldman’s strong connections in Washington, fail. Many say that Paulson and Geithner permitted Lehman to implode in order to eliminate one of Goldman’s significant competitors.
When it came to AIG, however, Paulson and Geithner were a little kinder. They extended AIG an $85 billion loan, which was later increased to $123 billion, to ensure that the insurance giant did not collapse. Interestingly, Loyd Blankfien, Goldman’s CEO, was the only investment banker at a crucial deal meeting. And top it all off with a tasty cherry, Paulson installed Goldman vice-chairman, Ed Liddy, as CEO of AIG.
Paulson and Geithner also helped their friend Robert Rubin, a 26-year veteran at Goldman Sachs who use to play golf with Paulson and mentor Geithner, out of a jam when Citigroup, whose disasterous financial situation was of Rubin’s own making, began to teeter. The Feds threw $45 billion in total at Citi, and agreed to insure the company’s losses in excess of $29 billion.
Goldman’s fate was uncertain as the crisis progressed. It took some profitable short positions in the Summer of 2007. But it had huge mortgage related holdings and, after Lehman’s first quarter 2008 PR turned out to be rubbish many suspected that Goldman would also eventually falter under pressure. Ultimately, however, Goldman was permitted, in the midst of the crisis and in very short order, to convert into a bank holding company so that it could take deposits insured by the FDIC; and avoid mark-to-market valuation which was squeezing firms, like Goldman, with toxic assets for which there was no colorable market. This, along with the fact that Goldman received $10 billion in the bailout (despite its relatively small paper write-downs), allowed Goldman to survive. Lehman, on the other hand, expressed interest in making this conversion, but ultimately did not apply for it having been discouraged by the Fed. Only after Lehman failed did Paulson okay the change for Goldman.
Finally, despite the fact that a rash of manipulative “naked” short-selling–selling shares without first actually borrowing them–substantially contributed to the demise of both Lehman and Bear Stearns, SEC commissioner Chris Cox did not do a thing. Until Goldman started to feel the pinch. After both Lehman and Bear had failed, and after Goldman’s stock took major losses over a three day period, the SEC finally enacted a short-selling ban.
As a former Lehman trader said, “They [Goldman] were a lot more connected in government than Fuld was. At the end of the day, that cost Lehman.”
UPDATE:
Secretary of Treasury Tim Geithner has chosen Mark Patterson to be his chief of staff. Patternson is an ex-lobbyist from Goldman Sachs who while lobbying for the firm worked on matters that he will inevitably be called on to address as Geithner’s main squeeze. Goldman has benefited from $10 billion in government bailouts in the current recession. Many bloggers are criticizing the appointment, as they should.
Comments
By JaneRadriges on June 13th, 2009 at 9:22 am
The article is usefull for me. I’ll be coming back to your blog.
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