Gary
Rivlin, Michael Hudson
Part
5 - THE VAMPIRE SQUID
Goldman
Sachs repaid repaid its $10 billion bailout partway through 2009,
less than 12 months after the loan was made. Other banks in the U.S.
and abroad were still struggling but not Goldman, which reported a
record $19.8 billion in pre-tax profits that year, and $12.9 billion
the next. Gary Cohn went without a bonus in 2008, left to scrape by
on his $600,000 salary. Once free of government interference, the
Goldman board (which included Cohn himself) paid him a $9 million
bonus in 2009 and an $18 million bonus in 2010.
Yet the once
venerated firm was now the subject of jokes on the late-night talk
shows. David Letterman broadcast a “Goldman Sachs Top 10 Excuses”
list (No. 9: “You’re saying ‘fraud’ like it’s a bad
thing.”). Rolling Stone’s Matt Taibbi described the bank as “a
great vampire squid wrapped around the face of humanity, relentlessly
jamming its blood funnel into anything that smells like money,”
a devastating moniker that followed Goldman into the business pages.
After news leaked that the firm might pay its people a record $16.7
billion in bonuses in 2009, even President Barack Obama, for whom the
firm had been a top campaign donor, began to turn against Goldman,
telling “60 Minutes,” “I did not run for office to be
helping out a bunch of fat-cat bankers on Wall Street.”
“They’re
still puzzled why is it that people are mad at the banks,”
Obama said. “Well, let’s see. You guys are drawing down $10,
$20 million bonuses after America went through the worst economic
year that it’s gone through in decades, and you guys caused the
problem.”
Goldman was
also facing an onslaught of investigations and lawsuits over behavior
that had helped precipitate the financial crisis. Class actions and
other lawsuits filed by pension funds and other investors accused
Goldman of abusing their trust, making “false and misleading
statements,” and failing to conduct basic due diligence on the
loans underlying the products it peddled. At least 25 of these suits
named Cohn as a defendant.
State and
federal regulators joined the fray. The SEC accused Goldman of
deception in its marketing of opaque investments called “synthetic
collateralized debt obligations,” the values of which were tied to
bundles of actual mortgages. These were the deals Goldman had
arranged in 2006 on behalf of John Paulson so he could short the U.S.
housing market. Goldman, it turned out, had allowed Paulson to
cherry-pick poor-quality loans at the greatest risk of defaulting —
a fact Goldman did not share with potential investors. “Goldman
wrongly permitted a client that was betting against the mortgage
market to heavily influence which mortgage securities to include in
an investment portfolio,” the SEC’s enforcement director at
the time said, “telling other investors that the securities were
selected by an independent, objective third party.”
Suddenly,
Cohn and other Goldman officials were downplaying the big short. In
June 2010, Cohn testified before the Financial Crisis Inquiry
Commission, created by Congress to investigate the causes of the
nation’s worst economic collapse since the Great Depression. Cohn
asked the commissioners how anyone could claim the firm had bet
against its clients when “during the two years of the financial
crisis, Goldman Sachs lost $1.2 billion in its residential
mortgage-related business”? His statement was technically true,
but Cohn failed to mention the billions of dollars the firm pocketed
by betting the mortgage market would collapse. Senate investigators
later calculated that, at its peak, Goldman had $13.9 billion in
short positions that would only pay off in the event of a steep drop
in the mortgage market, positions that produced a record $3.7 billion
in profits.
Two weeks
after Cohn’s testimony, Goldman agreed to pay the SEC $550 million
to settle charges of securities fraud — then the largest penalty
assessed against a financial services firm in the agency’s history.
Goldman admitted no wrongdoing, acknowledging only that its marketing
materials “contained incomplete information.” Goldman paid $60
million in fines and restitution to settle an investigation by the
Massachusetts attorney general into the financial backing the firm
had offered to predatory mortgage lenders. The bank set aside another
$330 million to assist people who lost their homes thanks to
questionable foreclosure practices at a Goldman loan-servicing
subsidiary. Goldman agreed to billions of dollars in additional
settlements with state and federal agencies relating to its sale of
dicey mortgage-backed securities. The firm finally acknowledged that
it had failed to conduct basic due diligence on the loans its was
selling customers and, once it became aware of the hazards, did not
disclose them.
In the final
report produced by the Senate’s Permanent Subcommittee on
Investigations, Goldman Sachs was mentioned an extraordinary 2,495
times, and Gary Cohn 89 times. A Goldman Sachs representative
declined to respond to queries on the record.
The
investigations and fines were a blow to Goldman’s reputation and
its bottom line, but the regulatory reforms being debated had the
potential to threaten Goldman’s entire business model. Even before
the 2008 crash, the firm’s lobbying spending had grown under Lloyd
Blankfein and Cohn. By 2010, the year financial reforms were being
drafted, Goldman spent $4.6 million for the services of 49 lobbyists.
Their ranks included some of the most well-connected figures in
Washington, including Democrat Richard Gephardt, a former House
majority leader, and Republican Trent Lott, a former Senate majority
leader, who had stepped down from the Senate two years earlier.
Despite all
those lobbyists on the payroll, Goldman made its case primarily
through proxies during the debate over financial reform. “The
name Goldman Sachs was so radioactive it worked to their disadvantage
to be tied to an issue,” said Marcus Stanley, then a staffer
for Democratic Sen. Barbara Boxer and now policy director of
Americans for Financial Reform. Instead, Goldman lobbied through
industry groups.
Goldman’s
people likely knew that all of Wall Street’s lobbying might could
not stop the passage of the sprawling 2010 legislative package dubbed
the Dodd-Frank Wall Street Reform and Consumer Protection Act. Obama
was putting his muscle behind reform — “We simply cannot
accept a system in which hedge funds or private equity firms inside
banks can place huge, risky bets that are subsidized by taxpayers,”
he said in one speech — and the Democrats enjoyed majorities in
both houses of Congress. “For Goldman Sachs, the battle was over
the final language,” said Dennis Kelleher of Better Markets, a
Washington, D.C., lobby group that pushes for tighter financial
reforms. “That way they at least had a fighting chance in the
next round, when everyone turned their attention to the regulators.”
There was a
lot for Goldman Sachs to dislike about Dodd-Frank. There were small
annoyances, such as “say on pay,” which ordered companies to give
shareholders input on executive compensation, a source of potential
embarrassment to a company that gave out $73 million in compensation
for a single year’s work — as Goldman paid Cohn in 2007. There
were large annoyances, such as the requirement that financial
institutions deemed too big to fail, like Goldman, create a wind-down
plan in case of disaster. There were the measures that would
interfere with Goldman’s core businesses, such as a provision
instructing the Commodity Futures Trading Commission to regulate the
trading of derivatives. And yet nothing mattered to Goldman quite
like the Volcker Rule, which would protect banks’ solvency by
limiting their freedom to make speculative trades with their own
money. Unless Goldman could initiate what Stanley called the
“complexity two-step” — win a carve-out so a new rule wouldn’t
interfere with legitimate business and then use that carve-out to
render a rule toothless — Volcker would slam the door shut on the
entire direction in which Blankfein and Cohn had taken Goldman.
It was 5:30
a.m. on Friday, June 25, 2010, when a joint House-Senate conference
committee approved the final language of Dodd-Frank. By Sunday, an
industry attorney named Annette Nazareth — a former top SEC
official whose firm counts Goldman Sachs among its clients — had
already sent off a heavily annotated copy of the 848-page bill to
colleagues at her old agency. It was just the first salvo in a
lobbying juggernaut.
Within a few
months, Cohn himself was in Washington to meet with a governor of the
Federal Reserve, one of the key agencies charged with implementing
Volcker. The visitors log at the CFTC, the agency Dodd-Frank put in
charge of derivatives reform, shows that Cohn traveled to D.C. to
personally meet with CFTC staffers at least six times between 2010
and 2016. Cohn also came to the capital for meetings at the SEC,
another agency responsible for the Volcker Rule. There, he met with
SEC chair Mary Jo White and other commissioners. “I seem to be
in Washington every week trying to explain to them the unintended
consequences of overregulation,” Cohn said in a talk he gave to
business students at Sacred Heart University in 2015.
“Gary
was the tip of the spear for Goldman to beat back regulatory reform,”
said Kelleher, the financial reform lobbyist. “I used to pass
him going into different agencies. They brought him in when they
wanted the big gun to finish off, to kill the wounded.”
Democrats
lost their majority in the House that November, and Goldman threw its
weight behind the spate of Republican bills that followed, aimed at
taking apart Dodd-Frank piece by piece. Goldman spent more than $4
million for the services of 45 lobbyists in 2011 and $3.5 million a
year in 2012 and 2013. Its lobbying spending was nearly as high in
the years after passage of Dodd-Frank as it was the year the bill was
introduced.
Goldman
lobbyists dug in on a range of issues that would become top
priorities for Republicans in the wake of Donald Trump’s electoral
victory. Records from the Center for Responsive Politics show that
Goldman lobbyists worked to promote corporate tax cuts, such as
on the Tax Increase Prevention Act of 2014 and Senate legislation
aimed at extending some $200 billion in tax cuts for individuals and
businesses. Goldman lobbied for a bill to fund economically critical
infrastructure projects, presumably on behalf of its Public Sector
and Infrastructure group. Goldman had seven lobbyists working on the
JOBS Act, which would make it easier for companies to go public,
another bottom-line issue to a company that underwrote $27 billion in
IPOs last year. In 2016, Goldman had eight lobbyists dedicated to the
Financial CHOICE Act, which would have undone most of Dodd-Frank in
one fell swoop — a bill the House revived in April.
Yet
defanging the Volcker Rule remained the firm’s top priority.
Promoted by former Fed Chair Paul Volcker, the rule would prohibit
banks from committing more than 3 percent of their core assets to
in-house private equity and hedge funds in the business of buying up
properties and businesses with the goal of selling them at a profit.
One harbinger of the financial crisis had been the collapse in the
summer of 2007 of a pair of Bear Stearns hedge funds that had
invested heavily in subprime loans. That 3 percent cap would have had
a big impact on Goldman, which maintained a separate private equity
group and operated its own internal hedge funds. But it was the
restrictions Volcker placed on proprietary trading that most
threatened Goldman.
Prop trading
was a profit center inside many large banks, but nowhere was it as
critical as at Goldman. A 2011 report by one Wall Street analyst
revealed that prop trading accounted for an 8 percent share of
JPMorgan Chase’s annual revenues, 9 percent of Bank of America’s,
and 27 percent of Morgan Stanley’s. But prop trading made up 48
percent of Goldman’s. By one estimate, the Volcker Rule could cost
Goldman Sachs $3.7 billion in revenue a year.
When
regulators finalized a new Volcker Rule in 2013, Better Markets
declared it a “major defeat for Wall Street.” Yet the
victory for reformers was precarious. “Just changing a few words
could dramatically change the scope of the rule — to the tune of
billions of dollars for some firms,” said former Senate staffer
Tyler Gellasch, who helped write the rule. Volcker gave banks until
July 2015 — the five-year anniversary of Dodd-Frank — to bring
themselves into compliance. Yet apparently the Volcker Rule had been
written for other financial institutions, not elite firms like
Goldman Sachs. “Goldman Sachs has been on a shopping spree with
its own money,” began a New York Times article in January 2015.
The bank used its own funds to buy a mall in Utah, apartments in
Spain, and a European ink company. Paul Volcker expressed
disappointment that banks were still making big proprietary bets, as
did the two senators most responsible for writing the rule into law.
That June, Cohn appeared to reassure investors that Goldman would
find a workaround. Speaking at an investor conference, he said
Goldman was “transforming our equity investing activities to
continue to meet client needs while complying with Volcker.”
Goldman had
five years to prepare for some version of a Volcker Rule. Yet a
loophole granted banks sufficient time to dispose of “illiquid
assets” without causing undue harm — a loophole that might even
cover the assets Goldman had only recently purchased, despite the
impending compliance deadline. The Fed nonetheless granted the firm
additional time to sell illiquid investments worth billions of
dollars. “Goldman is brilliant at exercising access and
influence without fingerprints,” Kelleher said.
By mid-2016,
Goldman, along with Morgan Stanley and JPMorgan Chase, was
petitioning the Fed for an additional five years to comply with
Volcker — which would take the banks well into a new
administration. All Blankfein and Cohn had to do was wait for a
new Congress and a new president who might back their efforts to
flush all of Dodd-Frank. Then Goldman could continue the risky and
lucrative habits it had adopted since traders like Cohn had taken
over the firm — the financial crisis be damned — and continue
raking in billions in profits each year.
Goldman’s
political giving changed in the wake of Dodd-Frank. Dating back to at
least 1990, according to the Center for Responsive Politics, people
associated with the firm and its political action committees
contributed more to Democrats than Republicans. Yet in the years
since financial reform, Goldman, once Obama’s second-largest
political donor, shifted its campaign contributions to Republicans.
During the 2008 election cycle, for instance, Goldman’s people
and PACs contributed $4.8 million to Democrats and $1.7 million to
Republicans. By the 2012 cycle, the opposite happened, with Goldman
giving $5.6 million to Republicans and $1.8 million to Democrats.
Cohn’s personal giving followed the same path. Cohn gave
$26,700 to the Democratic Senatorial Campaign Committee in 2006 and
$55,500 during the 2008 election cycle, and none to its GOP
equivalent. But Cohn donated $30,800 to the National Republican
Senatorial Committee in 2012 and another $33,400 to the National
Republican Congressional Committee in 2015, without contributing a
dime to the DSCC. Cohn gave $5,000 to Massachusetts Republican Scott
Brown weeks after news broke that Elizabeth Warren — an outspoken
critic of Goldman and other Wall Street players — might try to
capture his U.S. Senate seat, which she did in 2012.
Goldman
Sachs, under Cohn and Blankfein, was hardly chastened, continuing to
play fast and loose with existing rules even as it plunged millions
of dollars into fending off new ones. In 2010, the SEC ran a sting
operation looking for banks willing to trade favorable assessments by
its stock analysts for a piece of a Toys R Us IPO if the company went
public. Goldman took the bait, for which they would pay a $5 million
fine. An employee working out of Goldman’s Boston office drafted
speeches, vetted a running mate, and negotiated campaign contracts
for the state treasurer during his run for Massachusetts governor in
2010, despite a rule forbidding municipal bond dealers from making
significant political contributions to officials who can award them
business. According to the SEC, Goldman had underwritten $9 billion
in bonds for Massachusetts in the previous two years, generating $7.5
million in fees. Goldman paid $12 million to settle the matter in
2012.
Just two
years later, Goldman officials were again summoned by the Senate
Permanent Subcommittee on Investigations to address charges that the
bank under Cohn and Blankfein had boosted its profits by building a
“virtual monopoly” in order to inflate aluminum prices by as much
as $3 billion.
The last few
years have brought more unwanted attention. In 2015, the U.S. Justice
Department launched an investigation into Goldman’s role in the
alleged theft of billions of dollars from a development fund the firm
had helped create for the government of Malaysia. Federal regulators
in New York state fined Goldman $50 million because its leaders
failed to effectively supervise a banker who leaked stolen
confidential government information from the Fed, which hit the firm
with another $36.3 million in penalties. In December, the CFTC fined
Goldman $120 million for trying to rig interest rates to profit the
firm.
Politically,
2016 would prove a strange year for Goldman. Bernie Sanders clobbered
Hillary Clinton for pocketing hundreds of thousands of dollars in
speaking fees from Goldman, while Trump attacked Ted Cruz for being
“in bed with” Goldman Sachs. (Cruz’s wife Heidi was a managing
director in Goldman’s Houston office until she took leave to work
on her husband’s presidential campaign.) Goldman would have “total
control” over Clinton, Trump said at a February 2016 rally, a point
his campaign reinforced in a two-minute ad that ran the weekend
before Election Day. An image of Blankfein flashed across the screen
as Trump warned about the global forces that “robbed our working
class.”
Goldman’s
giving in the presidential race appears to reflect polls predicting a
Clinton win and the firm’s desire for a political restart on
deregulation. People who identified themselves as Goldman Sachs
employees gave less than $5,000 to the Trump campaign compared to the
$341,000 that the firm’s people and PACs contributed to Clinton.
Goldman Sachs is relatively small compared to retail banking giants.
Yet,
according to the Center for Responsive Politics, no bank outspent
Goldman Sachs during the 2016 political cycle. Its PACs and people
associated with the firm made $5.6 million in political contributions
in 2015 and 2016. Even including all donations to Clinton, 62 percent
of Goldman’s giving ended up in the coffers of Republican
candidates, parties, or conservative outside groups.
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