Government Favors And Politicians For Sale! Election Year Specials! Act Now! Goldman Sachs

On Wednesday we discussed the basic approaches our political class in Washington use to gain favors and enrichment for their careers and their net worth. Yesterday, we looked at the institutional approaches the political class has used to establish rules, laws, and exemptions so that they are not affected by felonious behavior that would put most every other American in jail.

Today, we will look at the curious relationship between the premier banking establishment in this country, Goldman Sachs and the Federal government. You decide at the end of this post whether this is all only a coincidence or it is incestuous corruption.

The genesis of this discussion comes from a recent Bloomberg Markets Magazine story from November 29, 2011, written by Richard Teitelbaum and entitled: "How Paulson Gave Hedge Funds Advance Word." As review, recall that Henry Paulson was Treasury Secretary when the economy and financial markets collapsed towards the end of the Bush administration. According to the article and Mr. Teitelbaum:

• On July 21, 2008, Mr. Paulson was meeting with members of the hedge fund, Eton Park Capital Management LP in New York City.
• Bear Sterns had collapsed four months earlier and its remaining assets had been sold at rock bottom prices to JP Morgan. The stock and financial markets were in turmoil.
• At the same time, home prices had been crashing, foreclosures were approaching record levels, and the stock market was getting real antsy about the mortgage giants, Fannie Mae and Freddie Mac.
• A New York Times article July 22, 2008 said that the Fed and Office of The Comptroller were looking into the finances of Fannie and Freddie and quoted Paulson as saying he believed this examination would give "a signal of confidence to the market."
• Attending the Eton Park meeting were about a dozen hedge fund managers and other Wall Street executives, and at least five of them were Goldman Sachs alumni. These included Eric Mindich, the founder of Eton Park, was a former chief strategy officer at Goldman Sachs,  Dinakar Singh who was the former head of the Goldman Sachs proprietary trading desk, Daniel Och who once was the co-head of the Goldman Sachs equity trading organization, Stephen Mandel who worked as a retail analyst at Goldman Sachs, and Frank Brosens who worked at Goldman Sachs as an arbitrageur. However, an official list of those attending the meeting is not available, this list being unofficially obtained from someone who was in the meeting themselves.
• Paulson was chief executive officer chairman of Goldman Sachs from 1999 to 2006.
• Paulson's book about the financial crisis, "On The Brink," makes no mention of the Eton Park meeting despite the  high powered hedge fund managers and others who attended.
• Despite his "signal of confidence"public quote in the Times article, Paulson told the assembled group of a scenario where Fannie and Freddie would be taken over by the Federal government and placed into "conservatorship," wiping out the common and preferred stock value of Fannie and Freddie stockholders. According to a witness at the meeting, no one in the room had any doubt that this was the actual federal government plan that was going to be implemented.

The article states that there is no evidence that those attending the meeting traded on this sensitive, valuable, and non-public information or shorted the stock of Fannie and Freddie. However, the article also does state it is impossible to track company specific short stock sales since this information is not available through public documents. Also, this does not mean those attending the meeting did not pass the information along to family and friends.

Obviously, this type of behavior just screams of insider trading violations and abuses. Consider the quotes from outside experts on Paulson's behavior:

1. William Black, associate professor of economics and law at the University of Missouri-Kansas City: "You just never ever do that as a government regulator - transmit nonpublic market information to market participants."
2. Janet Tavakoli, founder of the Chicago consulting firm Tavakoli Structured Finance: "What is this but crony capitalism?" Most people have had their fill of it."
3. Larry Ribstein, professor of law at the University of Illinois: "The optics are awful, there's no doubt about it. Everyone knows that insider trading is a huge issue."
4. Adam Zagorin, senior fellow at the Project on Government Oversight: "The bottom line is that senior level people in Washington, in the name of keeping in touch with their stakeholders, are tipping their hands. You can't prosecute them for insider trading if they didn't trade shares. You may not be able to even reprimand them. What the hell are the rules?"

Thus, although most knowledgeable people know this was atrocious insider trading behavior by the U.S. Secretary of the Treasury, it apparently happened anyway, according to the article. And what is the most common thread through all of the points discussed above? There is an obviously cozy Goldman Sachs connection between the highest levels of government and the highest levels of Goldman Sachs and those that used to work for Goldman Sachs.

Now, no one has been arrested or convicted relative to this meeting. However, as we have said many times in this blog, the appearance of conflict of interest is just as bad as the actual act of conflict of interest. Given everything else we have discussed over the past few days relative to corruption, this type of behavior just adds to the wretched smell of the political class.

But the Goldman Sachs/political class connection does not end with this disaster:

• Robert Rubin, who was also once the Secretary of the Treasury, worked at Goldman Sachs for 26 years, eventually serving as a member of the Board, and Co-Chairman from 1990-1992.
• Rajat Gupta, who was once a member of the Goldman Sachs board of directors, was indicted on October 26, 2011 for disclosing nonpublic information on Goldman Sachs and other companies.
• Goldman Sachs donated almost a million dollars to President Obama's 2008 Presidential election campaign, making it one of the biggest contributors to the campaign.
• According to the Center For Responsive Politics, Goldman Sachs employees have contributed almost $32 million to politicians' campaigns since 1989.
• Although the current Secretary of the Treasury, Timothy Geithner, never worked for Goldman Sachs, his chief of staff did.
• Jon Corzine is a former Goldman Sachs chairman, a former U.S. Senator, a former governor of New Jersey, and has recently presided over one of the biggest financial institution collapses in recent history, MF Global.
• Johusa Bolten is an ex-Goldman Sachs employee, he was the chief of staff for George W. Bush, and he was the one who recommended Henry Paulson, a former chairman of Goldman Sachs, be Secretary of the Treasury.
• According to the New American website, ex-Goldman Sachs employees Robert Hermats, Mark Petterson, Adam Storch, and Gary Gensler all hold high ranking positions in the Obama administration.

Again, I am not saying any of these people, Goldman Sachs, or any of these situations resulted in unethical or unlawful behavior. But I am also not saying that they did not. Given everything else we know, it just seems like there are too many coincidences and too many relationships for conflict of interest situations not to be going on left and right.

Adding insult to injury, the Goldman Sachs-related people have not performed in a stellar manner. As we discussed above, Corzine helped crash his company, MF Global, and there are several investigations underway into criminal activity at the firm. Henry Paulson apparently never foresaw the Great Recession until it was almost on top of him and the country, too late for any corrective action to be taken. I could not find an examples of an outstanding job being done by anyone from Goldman Sachs who worked for the Federal government (I would be more than happy to print one if anyone knows of such a case).


And why seemingly only Goldman Sachs? Aren't there competent people from JP Morgan, Bank Of America, Morgan  Stanley, Wells Fargo, or other big financial institutions, or anywhere else, that could serve the American people through the Federal government? Why does it seem that Goldman Sachs has a monopoly hold on the relationship on the American political class and the Federal government?

The answer to all of these questions is likely the same as the answer to all of the other corruption issues we discussed. Just follow the money and the campaigns for reelection that our politicians continually run. Money funds the campaigns and I would bet that Goldman Sachs is the best at leveraging the money it puts towards those reelection campaigns and leveraging the people it has gotten placed in the halls of government. Just ask the people at the Eton Park meeting.


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