Goldman's Golden Fleecing

This article is written as a follow-up to the book titled, “The Nearly Perfect Storm: An American Financial and Social Failure,” available online and local bookstores. This piece discusses recent legal settlements that represent aftermaths of the 2008 financial meltdown. I begin with excerpts from the book about the issue.

First, a definition: proprietary trading (in say, the stock market) is a broker buying or selling something on the broker’s behalf but not that of a customer, perhaps to the detriment of the customer. Second, this article’s focus is on institutions that trade in securities (bonds), specifically investment banks, but not necessarily commercial banks.

Quotes from The Nearly Perfect Storm.

To gain a sense of the unhealthy nature that proprietary trading took on, the vaunted investment bank Goldman Sachs bet against (shorted) the very securities it sold to its customers.

[The bank] built a large number of proprietary positions to bet against the mortgage market. …In 2006, Goldman Sachs decided to reverse course [from betting on the mortgage market]…to betting against the mortgage market. In some cases, Goldman Sachs took positions that paid off only when some of its clients lost money on the very securities that Goldman Sachs had sold to them and then bet against. [Yes, you read the last sentence correctly.]

In 2007, Goldman made $1.1 billion from these activities.

Later, this firm was given a $10 billion taxpayer bailout under the auspices of a government program as well as tens of billions of dollars in support through accessing a Federal Reserve facility to assist (only) large financial institutions. As stated in Wall Street and the Financial Crisis, U.S. Senate, Permanent Subcommittee on Investigations, April 13, 2011, p. 35-36. “Goldman and other investment banks received billions more in indirect support to ensure their continued existence.”

Note: For the readers of this article who own (or formerly owned) small businesses, you were too small to matter. Solution? Get big and you are home free. As examples, see the large insurance company: AIG, the government-sponsored agency: Fannie Mae, General Motors, Chrysler, etc. …but not you.

Fleeced by Investment Banks

Once again, the American citizen is fleeced by the large investment banks, in this situation, aided by the federal government. Last week, in a settlement with the Department of Justice, Goldman Sachs was fined $5.06 billion for selling flawed securities containing mortgages (called mortgage-backed securities) to investors. Goldman knew the securities contained poor mortgages (later, called toxic mortgages), but did not disclose this information to its customers.

Goldman sold these financial instruments to trusting and gullible clients. Its profits (from other forms of business, as well) led to bonuses to its employees. In 2006, Goldman Sachs set aside an average of $542,000 per employee in a bonus pool, over fifteen times the annual income of an average American. The bonus money was tacked onto salaries.

During the financial meltdown, Goldman decreased bonuses. But not for long. While the figures vary, it is uncontested that salaries and bonuses at investment banks are approaching all-time highs. Meanwhile, the increasingly disenfranchised (and resentful) American middle and lower classes are questioning why their spending income is decreasing.

The answer is simple: America’s wealth pie is not being cut in any way that remotely resembles (a) fairness, (b) the doctrine of free market capitalism, and (c) the relationship of the contribution of investment banks to America’s prosperity.

Full Employment! Why is a Citizen Complaining?

Also last week, the PBS weekly business program reported that employment was as high as it has been since 1974. The commentators were genuinely puzzled why polls indicated that a very substantial number of American workers were unhappy. The news pundits’ view was: They have a job! What’s the problem?

Simple: the typical American family income (relative to cost of living) is far below the peak set in 1999, according to http://money.cnn.com/2015/09/16/news/economy/census-poverty-income/. “That’s a major reason why so many Americans are still gloomy about the economy six years into the recovery.”

Goldman’s Getaway

Reading the quotes from The Nearly Perfect Storm above, it is obvious high level employees at Goldman knew the company was deceiving its customers. Wrongful deception for the purpose of financial gain is called fraud. What do you think?

Are these people being fined as individuals? No. Are they being indicted? No. Are they opening up their wallets and purses to pay the fine? No. Who is? The stockholder.

Will they continue to receive compensation for hawking instruments (see synthetic CDOs as one example) that have nothing to do with their worth to America? Yes. Plans are underway to offer another form of this empty security, which contains nothing but wagers for or against other instruments. They create absolutely nothing that has anything to do with America’s infrastructure.

They are doing their dealings behind corporate shields. Those very corporations were granted by the U.S. Supreme Court the right of free speech (and virtually limitless influence-peddling money) via Citizens United v. Federal Election Commission in 2010.

A spokesman for Goldman Sachs said, “…[the company] was pleased to put the legacy matters behind us. Since the financial crisis, we have taken significant steps to strengthen our culture, reinforce [the] commitment to our clients, and ensure our governance processes are robust.”

Legacy? The word refers to heritage, birthright, or inheritance. Apparently the spokesman believes Goldman Sachs had some sort of birthright to short its customers of profits while it increased its own earnings.

What does the Goldman Sachs pitchman mean by putting “the legacy matters behind us.” My view of Goldman’s comments: “We’ve shut the gate! Granted, a lot of sheep got out of the pen before the gate was closed; a gate that we ourselves opened. Too bad, but those sheep weren’t ours. We kept the sheep with the best wool. Golden! if you will. Those that we let out of the gate were ready for fleecing. So were the sheeps’ owners.

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Uyless Black spent part of his career as senior vice president at the Federal Reserve Bank of Dallas. He also served as ombudsman for the Federal Reserve Board in Washington, D.C. While at the Fed, he wrote the first program that simulated America’s money supply.