President Obama and Goldman Sachs: A Quid Pro Quo?

U.S. President Obama nominated Timothy Geithner to be Secretary of the Treasury. While president of the New York Federal Reserve Bank, he had played a key role in forcing AIG to pay Goldman Sachs’ claims dollar for dollar. Put another way, Geithner, as well as Henry Paulson, Goldman’s ex-CEO serving as Secretary of the Treasury as the financial crisis unfolded, stopped AIG from using the leverage in its bankrupt condition to pay claimants much less than full value. At Treasury, Mark Patterson was Geithner’s chief of staff. Patterson had been a lobbyist for Goldman Sachs. It would seem that the "real change" president put together a Wall-Street administration.

The full essay is at "President Obama and Goldman Sachs."

Goldman Sachs' Revolving Door: Regulatory Capture

In July 2012, Andrew Williams, a former spokesman for U.S. Treasury Secretary Timothy Geithner, announced plans to head over to Goldman Sachs at the end of that month.[1] Williams was the second of the Secretary’s spokesmen to head to theWall Street bank. Such moves may reflect a standing policy at the bank to have a revolving door. The previous U.S. Treasury Secretary, Henry Paulson, had been the CEO at Goldman. This suggests that the revolving door was to include populating high offices in government, presumably not out of a sense of civic duty, but, rather, to see that Goldman's interests would be protected and even promoted through public policy. Hence President Obama was said to have had a Wall Street government with respect to positions bearing on Wall Street. I submit that deconstructing such a revolving door would be very difficult. 

The full essay is at "Goldman Sachs' Revolving Door."

1. Bonnie Kavoussi, “Andrew Williams, Ex-Treasury Spokesman,Headed to Goldman Sachs,” The Huffington Post, July 12, 2012. 

President Obama Took Care of Wall Street below a Public Persona of Reform

In April, 2010, President Obama gave a speech in New York City to counter what he called “the furious efforts of industry lobbyists” geared to weakening or stopping the new financial regulations that Obama claimed would be needed to stave off a second Great Depression.[1]  It is telling that the banks that had contributed to the financial crisis of 2008 were trying to diminish or block any new regulation. The very legitimacy of industry calls for deregulation in the wake of a market failure caused in part by the industry flies in the face of the rationale for regulation. In short, the rationale for government regulation has to do with market failures, which includes fraud and over-zealous profit-taking at the expense of the public good. The root of the rationale is the difference between the interests of an organization and society (i.e., the public good). 

The full essay is at "Obama Took Care of Wall Street."

1. Peter Baker, "Obama Issues Sharp Call for Reforms on Wall Street," The New York Times, April 22, 2010.

An Institutional Conflict of Interest in Corporate Governance: The Case of Goldman Sachs

In September 2011, a pension fund representing U.S. government employees filed a shareholder proposal to strip Goldman Sachs CEO Lloyd Blankfein of his other post as chairman of the board. According to Reuters, “The pension plan of the American Federation of State, County & Municipal Employees said on Wednesday an independent chairman would provide checks and balances in the power structure at the largest U.S. investment bank. AFSCME said splitting the roles of CEO and chairman might have prevented Goldman from getting into trouble for its actions leading up to the financial crisis and will improve its stock performance going forward. ‘A strong, independent Board chair would focus Goldman on generating long-term value for its shareholders,’ AFSCME President Gerald McEntee said in a statement.” Goldman spokesman Stephen Cohen responded, “We think we have a robust governance structure in place, with a very effective independent lead director. We always listen to our shareholders, so it is disappointing that AFSCME decided to go to the media before raising the issue with us.”[1]

Analysis is at "An Institutional Conflict of Interest in Corporate Governance: The Case of Goldman Sachs."

1. “Goldman Should Strip Blankfein of Chairmanship, Pension Fund Says,” Reuters, September 14, 2011. 

President Obama and Goldman Sachs: A Quid Pro Quo?

Wall Street and the White House may be closer than the typical American thinks. One way this is accomplished is for a bank to contribute heavily to both presidential campaigns so as to be able to hedge political risk by getting ex-managers into strategic posts in the executive arm of the U.S. Government. This can be the case even when one of the candidates has campaigned on holding Wall Street accountable, such as after the financial crisis of 2008. There is the campaign slogan, and there is the political-economic reality underneath. 

The full essay is at "Obama and Wall Street."

Getting More For Doing Less: Bank Board Directors

Executive compensation is an art rather than a science. It is not as if numbers are fed into a computer and the correct compensation pops out. More discretion is involved than meets the eye. “Since the financial crisis,” The New York Times reported in 2013, “compensation for the directors of [America’s] biggest banks has continued to rise even as the banks themselves, facing difficult markets and regulatory pressures, are reining in bonuses and pay.” [1] Just five years after the financial crisis, it is interesting how the banks' respective managements decided to spend the TARP money from Congress and even more money from the Federal Reserve Bank. Also of note, board and upper management compensations seemed to be going in different directions in spite of both being presumably tied to the same firm performance. Even a performance-incentive approach tied to firm-performance can accommodate a lot of latitude, such that banks differ in how much they pay their respective boards. The discretion permits inside collusion and even outlandish demands by "celebrity" members whose advice does not necessarily come up to celebrity status. 

The full essay is at "Bank Boards Getting More for Doing Less."

1. Susanne Craig, “At Banks, Board Pay Soars Amid Cutbacks,” The New York Times, April 1, 2013.

Regulating Wall Street after a Financial Crisis

On Columbus Day 2011, The New York Times observed that the regulations known as the Volcker rule, “intended to limit trading when the bank's money is at risk, a sweet spot for banks, is seen as a centerpiece of the sprawling financial overhaul of the Dodd-Frank Act of 2010. In anticipation, the nation's biggest banks, like Goldman Sachs and Bank of America, have already shut down their stand-alone proprietary trading desks.”[1] Even so, the long and tortuous route by which any regulation is written was leaving its own mark in the sense that promising loopholes were finding their way into the rule. In other words, the regulated would have a disproportionate influence on the writing of the regulations. This conflict of interest is dangerous from the standpoint of not being vulnerable to another financial crisis in which the greed on Wall Street knows no bounds. 

The full essay is at "Regulating Wall Street after a Financial Crisis."

On the Various Causes of the Financial Crisis of 2008: Have We Learned Anything?

In January, 2011, the Financial Crisis Commission announced its findings. The usual suspects were not much of a surprise; what is particularly notable is how little had changed on Wall Street since the crisis in September of 2008. According to The New York Times, "The report examined the risky mortgage loans that helped build the housing bubble; the packaging of those loans into exotic securities that were sold to investors; and the heedless placement of giant bets on those investments." In spite of the Dodd-Frank Financial Reform Act of 2010 and the panel's report, The New York Times reported that "little on Wall Street has changed." One commissioner, Byron S. Georgiou, a Nevada lawyer, said the financial system was “not really very different” in 2010 from before the crisis. “In fact," he went on, "the concentration of financial assets in the largest commercial and investment banks is really significantly higher today than it was in the run-up to the crisis, as a result of the evisceration of some of the institutions, and the consolidation and merger of others into larger institutions.” Richard Baker, the president of the Managed Funds Association, told The Financial Times, "The most recent financial crisis was caused by institutions that didn't know how to adequately manage risk and were over-leveraged. And I worry that if there is another crisis, it will be because the same institutions have failed to learn from the mistakes of the past." From the testimonies of managers of some of those institutions, one might surmise that the lack of learning in the two years after the crisis was due to a refusal to admit to even a partial role in crisis.  In other words, there appears to have been a crisis of mentality, which, as it contains intractable assumptions and ideological beliefs, as well as stubborn defensiveness, is not easy to dislodge such that legislation past Dodd-Frank could ever be passed.

Lehman was a particularly inept player leading up to the crisis.     Zambio

The full essay is at "Causes of the Financial Crisis."

Was Goldman Sachs Really Politically Impotent amid Public Scrutiny in the Wake of the Financial Crisis?

If the American financial houses on Wall Street are among the most powerful forces in American politics-- powers, as it were, behind the throne--does it make sense that the strongest bank would be politically impotent?  In other words, can a public blemish nullify the power of all that capital?

The full essay is at "Goldman Sachs: Politically Impotent?"

See also "Essays on the Financial Crisis," available at Amazon. 

Mr. Goldman Goes to Washington

After watching hours of the US House Government Affairs committee on Investigations’ hearing on Goldman Sachs in 2010,  I concluded--totally contrary to the disavowals by the Goldman managers who testified--that there was indeed a conflict of interest between Goldman’s proprietary and market-making functions.  By proprietary, I mean a bank trading on its own books beyond simply being the counter-party in its market-making transactions. In their testimony, Goldman managers presumed that all of the bank’s proprietary transactions are part of its market-making role. However, I contend that the bank has been both a market-maker and a player in those markets, and furthermore that the latter function has affected the former in ways that are intended to benefit the bank. That is to say, Goldman Sachs’ financial interest has been put before that of its customers. In some cases, Goldman’s employees refused clients’ requests for shorts related to the housing market so Goldman’s own profits in shorting the market  could be preserved. Sen. Susan Collins (R-ME) said, “There is something unseemly about Goldman betting against the housing market as it is selling housing-related products to its customers.” Sen. Conrad, a more conservative Republican, echoed this sentiment.  The fact that Republicans on the subcommittee joined with Democrats rather than joined in Goldman’s paradigm points to a major disconnect between Wall Street “speak” and the discourse of the general public.  In other words, the financial managers and the politicians were largely talking past each other.  Even so, the two “worlds” can be translated into a common language that nonetheless finds Goldman culpable, while acknowledging some of the managers’ points.  In what follows, I discuss a number of the points raised in the hearing to bear out my contentions here.

The full essay is at "Essays on the Financial Crisis," available at Amazon. 

God's Gold through the Centuries

In the wake of the financial crisis that came to a head in September of 2008, people might have been wondering if sufficient moral constraints on the greed on Wall Street are available, even possible. The ability of traders to create complex derivative securities that are difficult for regulators to regulate, much less understand, may have people looking for ethical or even religious constraints. It would be only natural to ask if such “soft” restraint mechanisms really do have the puissance to do the trick. Here’s the rub: the tricksters are typically the last to avail themselves of ethical or religious systems, and they the wrongdoers are the ones in need of the restraint. Blankfein said of his bank, Goldman Sachs, that it had been doing God’s work. About a week after saying that, he had to walk his statement back and admit that the bankers had does some things that were morally wrong. Although divine omnipotence is by definition not limited by human ethical systems, it is hard to imagine a divine decree telling bankers to tell their clients one thing (buy subprime mortgage derivatives) while taking the opposite position on the bank’s proprietary position (shorting the derivatives, beyond being a counterparty to clients). Divine duplicity seems to represent an oxymoron on a megascale rather than a justification for greed. As the crisis erupted and was subsequently managed by public officials in government and new managers brought in to salvage AIG, I was researching the history of Christian thought on profit-seeking and wealth. I have since published an academic text and a nonfiction book, which develops further on the treatise on the topic. As the book is too recondite for sane people (i.e., outside of academia), I am writing a non-fiction book on the topic for a broader readership. To whet the appetites of those of you who are waiting for something more readable than a recondite thesis, I present a brief account of my original research on the topic here. 

For the full essay, see "God's Gold through the Centuries."

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See related essay: "Religious Sources of Business Ethics"

The academic treatise: Godliness and Greed: Shifting Christian Thought on Profit and Wealth 

The non-fiction book: God's Gold: Beneath the Shifting Sands of Christian Thought on Profit-Seeking and Wealth.

Unnecessary Systemic Risk: Banks' Price-Fixing and Racketeering in Side Businesses

A lawsuit filed in a Florida district-court in 2013 alleged that JPMorgan, Goldman Sachs, and the London Metal Exchange (LME) artificially inflated aluminum prices.  The plaintiffs accused the companies of anti-trust practices and racketeering, including the “manipulation of the aluminum market through supply price fixing.”[1] This sounds like what had led to the forced break-up of Rockefeller’s Standard Oil Company, though in that case exactly a century before, the restraint of trade had to do with the company’s main line of business (i.e., oil). In the case of the banks, however, owning commodity assets such as storage facilities and trading in raw materials do not constitute banking. This point triggers a larger question involving the repeal of the Glass-Steagal Act.

Should we allow banks to expand even beyond these functions to owning commodities and related real-estate? What does this do to the banks' systemic risk?    Image Source: salisburyareafoundation.org. 

The full essay is at "Unnecessary Systemic Risk in Banking."

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[1] Melanie Burton, “Glencore, JPMorgan Sued Over Warehouse Aluminium Prices,” Reuters, August 7, 2013.

A Trader Dreamed of Economic Collapse

Call it over-confident bravado or perhaps a lapse into utter transparency; trader Alessio Rastani’s comments on BBC give the rest of us a glimpse of the power behind the world’s thrones and how prone “the system” is to collapsing without a sufficient force geared to the viability of the system itself. In other words, it is amazing that the financial/governmental systems go on without more attention to them as systems rather than to micro self-interests. One might ask whether powerful self-interests are sufficient to keep the system from hitting the rocks. Apparently the answer is yes, though this is astonishing nonetheless. It is like a car somehow making its way down the street with one person in the car looking at pedal, another at the steering wheel, and still another at the speedometer. It is amazing if the car does not crash, yet somehow it managing to stay on the road.

The full essay is at "Economic Collapse."

Gary Cohn of Goldman Sachs in the White House: A Hidden Agenda?

Rex Tillerson, the U.S. Secretary of State fired by U.S. President Donald Trump and former CEO of Exxon, an international oil company based in the U.S., did not allow his difference with the president of tariffs on steel and aluminum to be a deal breaker. In this respect, the ex-CEO was not doing his company’s bidding. That is to say, he was not primarily in public service to serve the private interests of a multinational corporation. Unfortunately, this cannot be said of Gary Cohn, the ex-president of Goldman Sachs who quit as Trump’s chief economic advisor just after the tariffs were announced. Tariffs in general and especially to protect goods in another sector are not in the interests of a major American banks with substantial international business. If the former president of Goldman Sachs had taken the post in government to further Goldman’s interests, the question is whether public service is mere window-dressing at the highest levels of government—plutocracy being the real name of the game.

The full essay is at "Gary Cohn of Goldman Sachs."

Political Black Holes: On the Power Behind the Throne

Our galaxy, the Milky Way, has a black hole. If this is news to you, there is no need to go hide under a rock. It turns out our black hole is not the biggest by far, and it doesn't spew out a lot of excess energy that falls into it. Even so, it is ours, and we can be glad that we have one of our very own even if it isn't the biggest one on the block. In case you are interested in seeing it’s baleful look in a picture, I’ve got bad news for you; it is invisible. No light can bounce off it.  You are probably wondering how the scientists found it.  Well, they knew that black holes are in the center of galaxies, so the crafty lab coats used invisible light to find our center because there is too much gas there for much there to be visible to us.  The scientists noticed that the speed of stars speeds up around a certain point and posited the existence of a highly-dense black hole.

The full essay is at "Political Black Holes."

God's Gold on Wall St.: A Vaunted Self-Assessment of God's Work

A year after the financial crisis of 2008, Lloyd Blankfein, the CEO of Goldman Sachs,  found himself vilified for his firm’s quick return to risky trading in spite of its new bank holding company status. Populist resentment at the time was especially pitted against the hefty bonuses from the trades. Also, people were upset about the benefits that the bank had obtained from the decisions of its alums in the U.S. Government—specifically, in the U.S. Department of the Treatury. For instance, Goldman Sachs and other AIG counterparties got a the dollar-for-dollar payout from AIG thanks to an infusion of funds for that specific purpose by Treasury. Regardless, in an interview with the London Times, the highest-paid CEO (at least in the financial sector) dismissed such talk and defended his money-making machine and its compensation.  In addition to being the engine of economic recovery, according to Blankfein, Goldman Sachs provides a social function in making capital available to companies so they can expand. Stunningly, he adds, “I’m doing God’s work.”[1]  Such a claim is a far cry indeed from Thomas Jefferson’s warning that banking institutions are more dangerous to our liberties than standing armies.[2]  Perhaps God intends to undo our liberties by bailing out the banks.

The full essay is at "God's Gold on Wall St."
See related books: God's Gold and Essays on the Financial Crisis

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[1] John Arlidge, I’m doing ‘God’s work. Meet Mr. Goldman Sachs, The Sunday Times, 11/9/09.

[2] Thomas Jefferson to John Taylor, Monticello, May 28, 1816, in Paul L. Ford, ed., The Writings of Thomas Jefferson (New York: G.P. Putnam’s Sons, 1892-99),  XI, 533.

The Banking Lobby Amid Goldman Sachs' Culpability: A Danger to the Republic?

To simplify how Goldman Sachs got into trouble with the SEC: According to Annie Lowrey, the hedge fund Paulson & Co. handpicked mortgage-backed securities that were doomed to stop performing, being backed with subprime mortgages, and Goldman packaged them into a kind of bond. Paulson & Co. bet against the bond by buying short-sales, with Goldman acting as the broker. At the same time, Goldman sold the bond to other clients without disclosing that Paulson had engineered the bond to fail. The SEC filing notes that those other clients lost $1 billion. Goldman had no direct stake in the success or failure of the CDO. It made money either way. “This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another,” Chris Whalen, a bank analyst at Institutional Risk Analytics, said in a note to clients on April 16, 2010. Someone at Goldman said on the same day that “the SEC’s charges are completely unfounded in law and fact.” If the SEC charges hold up (and it is doubtful that the agency would bring such charges without supporting documentation; it is more apt to miss something than go overboard), I am astonished that the people at Goldman simply dismissed the matter out of hand. It might make sense as their legal defense, but if the bankers are convicted, those lying ought to be fired even if they were not a party to the scheme. It also appears that the bankers lied about whether they made money in betting against the housing market. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Senator Levin, chairman of the US Senate’s committee on investigations, said in a statement in April, 2010. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.” When a spokesperson for the bank says something in the future, a rational person will be wont not to trust him or her. Lying has (or ought to have) consequences rather than being dismissed as harmless PR or a legal defense. The bank’s credibility is at issue here. The SEC has accused Goldman of outright lying to customers in order to make money both ways on a deal. Even though this ought to reflect negatively on Goldman’s future business, bigger issues involved that ought to consume more of our attention than how Goldman fares.

The full essay is at "The Banking Lobby and Goldman Sachs."

The Volcker Rule: Taking in Water on Proprietary Trading

Under the Dodd-Frank financial reform law of 2010, Goldman Sachs had to break up its principal strategies group, the trading unit that had been very profitable. Goldman was considering several options, including moving the traders to another division or shutting the unit altogether. Morgan Stanley was considering ceding control of its $7 billion hedge fund firm, FrontPoint Partners. At Citigroup, executives had sold hedge fund and private equity businesses and were discussing reducing proprietary trading, which relies on a bank’s own capital to make bets in the financial markets. JPMorgan Chase had already begun dismantling its stand-alone proprietary trading desk and was modifying the structure of some investments of One Equity Partners, its internal private equity business. “This is the real stuff,” said Brad Hintz, an analyst at Sanford C. Bernstein & Company. “It shows that if you squeeze Wall Street, like a balloon it will come out somewhere else, and we really are squeezing Wall Street. Their business models are changing.”

The complete essay is at "The Volcker Rule."

When Corporate Governance Gets Cozy: Chair/CEO Combo as a Structural Conflict of Interest

Eric Jackson, an activist investor and hedge fund manager, charged Goldman’s board as being too cozy and too lacking in financial know-how to diligently oversee the top management. He claimed the board was packed with honchos who led companies that had paid large fees to Goldman. Allowing clients representation on a board is itself a structural conflict of interest because the client role is not in line with acting in the stockholders’ interest on the board. The hedge fund manager pointed to Indian steel magnate Lakshmi Mittal and former Fannie Mae chief James Johnson as cases in point. Related to the client orientation is an affinity to the management, whose managerial decisions bear on the clients. Indeed, Jackson noted that “these people seem to be favorably disposed to senior management’s way of thinking,” and are therefore unlikely to act as a check on CEO Lloyd Blankfein and his team.

The full essay is at Institutional Conflicts of Interest, available at Amazon.

Client-Centered Ethical Leadership: A Recipe for Trust at Goldman Sachs

With its incentive-structure that rewards a quick profit on the next trade even at the expense of advising clients in line with their long-term interests, Wall Street has its work cut out for itself even in maintaining trust, which, after all, is the basis of a market. On March 15, 2012, the New York Times reported that over all, “the percentage of people who have little or no faith in the fairness of investment companies rose to 41 percent in 2011 from 26 percent in 2008, according to Yankelovich Monitor 2011.” Even banks and insurance companies fared better, and household income played no role in the findings. At the time, Goldman Sachs was doing its industry no favors in terms of reputation. Indeed, the “best and the brightest” on Wall Street had created or enabled a rather narrow and self-serving corporate culture and a lack of ethical leadership that could otherwise turn around the bank by transforming its dysfunctional culture.

The full essay is at "Client-Centered Ethical Leadership."