The People vs. Goldman Sachs


A Senate committee has laid out the evidence.  Now the Justice Department should bring criminal charges.

Lloyd Blankfein, chairman and CEO of The Goldman Sachs
Group, is sworn in while testifying before the Senate Homeland Security and
Governmental Affairs Investigations Subcommittee on Capitol Hill on April 27,
2010 in Washington, DC.

They weren’t murderers or anything; they had merely stolen more money than
most people can rationally conceive of, from their own customers, in a few
blinks of an eye. But then they went one step further. They came to Washington,
took an oath before Congress, and lied about it.

Thanks to an extraordinary investigative effort by a Senate subcommittee that
unilaterally decided to take up the burden the criminal justice system has
repeatedly refused to shoulder, we now know exactly what Goldman Sachs
executives like Lloyd Blankfein and Daniel Sparks lied about. We know exactly
how they and other top Goldman executives, including David Viniar and Thomas
Montag, defrauded their clients. America has been waiting for a case to bring
against Wall Street. Here it is, and the evidence has been gift-wrapped and left
at the doorstep of federal prosecutors, evidence that doesn’t leave much doubt:
Goldman Sachs should stand trial.

The great and powerful Oz of Wall Street was not the only target of Wall
Street and the Financial Crisis: Anatomy of a Financial Collapse
, the
650-page report just released by the Senate Subcommittee on Investigations,
chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of
Oklahoma. Their unusually scathing bipartisan report also includes case studies
of Washington Mutual and Deutsche Bank, providing a panoramic portrait of a
bubble era that produced the most destructive crime spree in our history — “a
million fraud cases a year” is how one former regulator puts it. But the
mountain of evidence collected against Goldman by Levin’s small, 15-desk office
of investigators — details of gross, baldfaced fraud delivered up in such
quantities as to almost serve as a kind of sarcastic challenge to the curiously
impassive Justice Department — stands as the most important symbol of Wall
Street’s aristocratic impunity and prosecutorial immunity produced since the
crash of 2008.

To date, there has been only one successful prosecution of a financial big
fish from the mortgage bubble, and that was Lee Farkas, a Florida lender who was
just convicted on a smorgasbord of fraud charges and now faces life in prison.
But Farkas, sadly, is just an exception proving the rule: Like Bernie Madoff,
his comically excessive crime spree (which involved such lunacies as kiting
checks to his own bank and selling loans that didn’t exist) was almost
completely unconnected to the systematic corruption that led to the crisis.
What’s more, many of the earlier criminals in the chain of corruption — from
subprime lenders like Countrywide, who herded old ladies and ghetto families
into bad loans, to rapacious banks like Washington Mutual, who pawned off
fraudulent mortgages on investors — wound up going belly up, sunk by their own

But Goldman, as the Levin report makes clear, remains an ascendant company
precisely because it used its canny perception of an upcoming disaster (one
which it helped create, incidentally) as an opportunity to enrich itself, not
only at the expense of clients but ultimately, through the bailouts and the
collateral damage of the wrecked economy, at the expense of society. The bank
seemed to count on the unwillingness or inability of federal regulators to stop
them — and when called to Washington last year to explain their behavior,
Goldman executives brazenly misled Congress, apparently confident that their
perjury would carry no serious consequences. Thus, while much of the Levin
report describes past history, the Goldman section describes an
ongoing? crime — a powerful, well-connected firm, with the ear of the
president and the Treasury, that appears to have conquered the entire regulatory
structure and stands now on the precipice of officially getting away with one of
the biggest financial crimes in history.

Defenders of Goldman have been quick to insist that while the bank may have
had a few ethical slips here and there, its only real offense was being too good
at making money. We now know, unequivocally, that this is bullshit. Goldman
isn’t a pudgy housewife who broke her diet with a few Nilla Wafers between meals
— it’s an advanced-stage, 1,100-pound medical emergency who hasn’t left his
apartment in six years, and is found by paramedics buried up to his eyes in
cupcake wrappers and pizza boxes. If the evidence in the Levin report is
ignored, then Goldman will have achieved a kind of corrupt-enterprise nirvana.
Caught, but still free: above the law.

To fully grasp the case against Goldman, one first needs to understand that the financial crime wave described in the Levin report came on the heels of a decades-long lobbying campaign by Goldman and other titans of Wall Street, who pleaded over and over for the right to regulate themselves.

Before that campaign, banks were closely monitored by a host of federal
regulators, including the Office of the Comptroller of the Currency, the FDIC
and the Office of Thrift Supervision. These agencies had examiners poring over
loans and other transactions, probing for behavior that might put depositors or
the system at risk. When the examiners found illegal or suspicious behavior,
they built cases and referred them to criminal authorities like the Justice

This system of referrals was the backbone of financial law enforcement
through the early Nineties. William Black was senior deputy chief counsel at the
Office of Thrift Supervision in 1991 and 1992, the last years of the S&L
crisis, a disaster whose pansystemic nature was comparable to the mortgage
fiasco, albeit vastly smaller. Black describes the regulatory MO back then.
“Every year,” he says, “you had thousands of criminal referrals, maybe 500
enforcement actions, 150 civil suits and hundreds of convictions.”

But beginning in the mid-Nineties, when former Goldman co-chairman Bob Rubin
served as Bill Clinton’s senior economic-policy adviser, the government began
moving toward a regulatory system that relied almost exclusively on voluntary
compliance by the banks. Old-school criminal referrals disappeared down the
chute of history along with floppy disks and scripted television entertainment.
In 1995, according to an independent study, banking regulators filed 1,837
referrals. During the height of the financial crisis, between 2007 and 2010,
they averaged just 72 a year.

But spiking almost all criminal referrals wasn’t enough for Wall Street. In
2004, in an extraordinary sequence of regulatory rollbacks that helped pave the
way for the financial crisis, the top five investment banks — Goldman, Merrill
Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns — persuaded the
government to create a new, voluntary approach to regulation called Consolidated
Supervised Entities. CSE was the soft touch to end all soft touches. Here is how
the SEC’s inspector general described the program’s regulatory army: “The Office
of CSE Inspections has only two staff in Washington and five staff in the New
York regional office.”

Among the bankers who helped convince the SEC to go for this ludicrous
program was Hank Paulson, Goldman’s CEO at the time. And in exchange for
“submitting” to this new, voluntary regime of law enforcement, Goldman and other
banks won the right to lend in virtually unlimited amounts, regardless of their
cash reserves — a move that fueled the catastrophe of 2008, when banks like Bear
and Merrill were lending out 35 dollars for every one in their vaults.

Goldman’s chief financial officer then and now, a fellow named David Viniar,
wrote a letter in February 2004, commending the SEC for its efforts to develop
“a regulatory framework that will contribute to the safety and soundness of
financial institutions and markets by aligning regulatory capital requirements
more closely with well-developed internal risk-management practices.”
Translation: Thanks for letting us ignore all those pesky regulations while we
turn the staid underwriting business into a Charlie Sheen house party.

Goldman and the other banks argued that they didn’t need government
supervision for a very simple reason: Rooting out corruption and fraud was in
their own self-interest. In the event of financial wrongdoing, they insisted,
they would do their civic duty and protect the markets. But in late 2006, well
before many of the other players on Wall Street realized what was going on, the
top dogs at Goldman — including the aforementioned Viniar — started to fear they
were sitting on a time bomb of billions in toxic assets. Yet instead of sounding
the alarm, the very first thing Goldman did was tell no one. And the
second thing it did was figure out a way to make money on the knowledge
by screwing its own clients. So not only did Goldman throw a full-blown “bite
me” on its own self-righteous horseshit about “internal risk management,” it
more or less instantly sped way beyond inaction straight into craven

“This is the dog that didn’t bark,” says Eliot Spitzer, who tangled with
Goldman during his years as New York’s attorney general. “Their whole political
argument for a decade was ‘Leave us alone, trust us to regulate ourselves.’ They
not only abdicated that responsibility, they affirmatively traded against the
entire market.”

By the end of 2006, Goldman was sitting atop a $6 billion bet on American home loans. The bet was a byproduct of Goldman having helped create a new trading index called the ABX, through which it accumulated huge holdings in mortgage-related securities. But in December 2006, a series of top Goldman executives — including Viniar, mortgage chief
Daniel Sparks and senior executive Thomas Montag — came to the conclusion that
Goldman was overexposed to mortgages and should get out from under its huge bet
as quickly as possible. Internal memos indicate that the executives soon became
aware of the host of scams that would crater the global economy: home loans
awarded with no documentation, loans with little or no equity in them. On
December 14th, Viniar met with Sparks and other executives, and stressed the
need to get “closer to home” — i.e., to reduce the bank’s giant bet on

Sparks followed up that meeting with a seven-point memo laying out how to
unload the bank’s mortgages. Entry No. 2 is particularly noteworthy. “Distribute
as much as possible on bonds created from new loan securitizations,” Sparks
wrote, “and clean previous positions.” In other words, the bank needed to find
suckers to buy as much of its risky inventory as possible. Goldman was like a
car dealership that realized it had a whole lot full of cars with faulty brakes.
Instead of announcing a recall, it surged ahead with a two-fold plan to make a
fortune: first, by dumping the dangerous products on other people, and second,
by taking out life insurance against the fools who bought the deadly cars.

The day he received the Sparks memo, Viniar seconded the plan in a gleeful
cheerleading e-mail. “Let’s be aggressive distributing things,” he wrote,
“because there will be very good opportunities as the markets [go] into what is
likely to be even greater distress, and we want to be in a position to take
advantage of them.” Translation: Let’s find as many suckers as we can as fast as
we can, because we’ll only make more money as more and more shit hits the

By February 2007, two months after the Sparks memo, Goldman had gone from
betting $6 billion on mortgages to betting $10 billion against them — a
shift of $16 billion. Even CEO Lloyd “I’m doing God’s work” Blankfein wondered
aloud about the bank’s progress in “cleaning” its crap. “Could/should we have
cleaned up these books before,” Blankfein wrote in one e-mail, “and are we doing
enough right now to sell off cats and dogs in other books throughout the

How did Goldman sell off its “cats and dogs”? Easy: It assembled new batches
of risky mortgage bonds and dumped them on their clients, who took Goldman’s
word that they were buying a product the bank believed in. The names of the
deals Goldman used to “clean” its books — chief among them Hudson and Timberwolf
— are now notorious on Wall Street. Each of the deals appears to represent a
different and innovative brand of shamelessness and deceit.

In the marketing materials for the Hudson deal, Goldman claimed that its
interests were “aligned” with its clients because it bought a tiny, $6 million
slice of the riskiest portion of the offering. But what it left out is that it
had shorted the entire deal, to the tune of a $2 billion bet against its own
clients. The bank, in fact, had specifically designed Hudson to reduce its
exposure to the very types of mortgages it was selling — one of its creators,
trading chief Michael Swenson, later bragged about the “extraordinary profits”
he made shorting the housing market. All told, Goldman dumped $1.2 billion of
its own crappy “cats and dogs” into the deal — and then told clients that the
assets in Hudson had come not from its own inventory, but had been “sourced from
the Street.”

Hilariously, when Senate investigators asked Goldman to explain how it could
claim it had bought the Hudson assets from “the Street” when in fact it had
taken them from its own inventory, the bank’s head of CDO trading, David Lehman,
claimed it was accurate to say the assets came from “the Street” because Goldman
was part of the Street. “They were like, ‘We are the Street,'” laughs
one investigator.

Hudson lost massive amounts of money almost immediately after the sale was
completed. Goldman’s biggest client, Morgan Stanley, begged it to liquidate the
investment and get out while they could still salvage some value. But Goldman
refused, stalling for months as its clients roasted to death in a raging
conflagration of losses. At one point, John Pearce, the Morgan Stanley rep
dealing with Goldman, lost his temper at the bank’s refusal to sell, breaking
his phone in frustration. “One day I hope I get the real reason why you are
doing this to me,” he told a Goldman broker.

Goldman insists it was only required to liquidate the assets “in an orderly
fashion.” But the bank had an incentive to drag its feet: Goldman’s huge bet
against the deal meant that the worse Hudson performed, the more money Goldman
made. After all, the entire point of the transaction was to screw its own
clients so Goldman could “clean its books.” The crime was far from victimless:
Morgan Stanley alone lost nearly $960 million on the Hudson deal, which
admittedly doesn’t do much to tug the heartstrings. Except that quickly after
Goldman dumped this near-billion-dollar loss on Morgan Stanley, Morgan Stanley
turned around and dumped it on taxpayers, who within a year were spending $10
billion bailing out the sucker bank through the TARP program.

It is worth pointing out here that Goldman’s behavior in the Hudson scam
makes a mockery of standards in the underwriting business. Courts have held that
“the relationship between the underwriter and its customer implicitly involves a
favorable recommendation of the issued security.” The SEC, meanwhile, requires
that broker-dealers like Goldman disclose “material adverse facts,” which among
other things includes “adverse interests.” Former prosecutors and regulators I
interviewed point to these areas as potential avenues for prosecution; you can
judge for yourself if a $2 billion bet against clients qualifies as an “adverse
interest” that should have been disclosed.

But these “adverse interests” weren’t even the worst part of Hudson. Goldman
also used a complex pricing method to turn the deal into an impressive
triple screwing. Essentially, Goldman bought some of the mortgage
assets in the Hudson deal at a discount, resold them to clients at a higher
price and pocketed the difference. This is a little like getting an invoice from
an interior decorator who, in addition to his fee for services, charges you $170
a roll for brand-name wallpaper he’s actually buying off the back of a truck for

To recap: Goldman, to get $1.2 billion in crap off its books, dumps a huge
lot of deadly mortgages on its clients, lies about where that crap came from and
claims it believes in the product even as it’s betting $2 billion against it.
When its victims try to run out of the burning house, Goldman stands in the
doorway, blasts them all with gasoline before they can escape, and then has the
balls to send a bill overcharging its victims for the pleasure of getting

Matt Taibbi for Rolling Stone – Read The Rest