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Shadow Elite: Goldman Sachs - Fraud Is Not the Scandal

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The last few "Shadow Elite" columns have examined the troubling expansion of executive powers in recent decades. The 2008 financial bailout delivered yet more unchecked authority to the executive branch. As Yale constitutional law expert Jack Balkin puts it, "the Treasury Secretary [took] over a sizable chunk of the nation's capital ... markets. Because [he] is effectively unreviewable, he [had the power to] make sweetheart deals with .... firms .... that got us into this mess." This week, a look at the influence of the firm that critics say landed one of those so-called sweetheart deals, and now faces charges of fraud for some of its own dealings: Goldman Sachs. -Janine R. Wedel

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Americans justifiably furious with Wall Street conduct, and the havoc it's caused, might be comforted by news that regulators are taking Goldman Sachs to court, alleging fraud. They shouldn't be. Even as President Obama speaks today about plans to get tough on Wall Street machinations, the public shouldn't lose sight of the bigger picture of Goldman, and its powerful alumni. As the New York Times said this week, this is "the bank at the center of more concentric circles of economic and political power than any other on Wall Street."

With just one Goldman employee actually named in that civil suit, the most insidious scandal has little to do with accusations of outright fraud by a few bad apples. Top Goldman officials, former officials, and their allies, have been thoroughly enmeshed in Washington financial decision-making for nearly two decades, moving back and forth in short order between Wall Street and White House positions of power in what has been called an "evolving door."

These power brokers have made fateful economic decisions in ways that defy our expectations of accountability, and in which their agendas are impossible to fully discern. The average citizen had no voice in these decisions, and no way to even understand how they were made. Barry Lynn, author of Cornered: The New Monopoly Capitalism and the Economics of Destruction, says America's political economy "..is run by a compact elite ....with almost complete freedom [to determine] who wins, who loses, and who pays."

Robert Rubin is at the red-hot center of this shadow scandal. Players like Rubin represent a new breed of nimble power-broker Janine calls in her book Shadow Elite "flexians." Flexians move seamlessly back and forth among venues of influence when a new opportunity arises, furthering their own (not-fully-revealed) agendas and those of their associates.

As Treasury Secretary under President Clinton, the former Goldman co-chairman bears considerable responsibility for repealing regulatory laws that allowed banks to expand into diverse new businesses, to get bigger and bigger, or, in today's parlance, "too big to fail." And he vigorously opposed regulating derivatives, the financial "innovation" that was the dynamite under the U.S financial system, waiting to blow. In the years that followed, Rubin would go on to enrich his next employer and himself as Citigroup's director, enjoying the benefits of the deregulatory environment he helped create, earning $126 million in his time there and departing with $33 million in stocks. Thus, the "regulator" and the "regulated" became, in a sense, one and the same.

Flexians also test both the rules of accountability of government and the codes of competition of business. Rubin, for instance, raised eyebrows when, at Citigroup in 2001, he contacted an acquaintance at the Treasury Department to asked if the department could convince bond-rating agencies not to downgrade the corporate debt of Enron, a debtor of Citigroup.

But even as his role in the economic collapse was starting to draw some scrutiny, Rubin found new opportunity once again, when President Obama came to power. (For the shadow elite, unlike the rest of us, failure is not a barrier to future success.)

He was named to Obama's Economic Transition Team and served as an unofficial advisor to the White House. President Obama named Rubin's proteges Timothy Geithner and Larry Summers, another foe of derivatives regulation, to the top two economic positions in the administration. Many members of Obama's economic team have done stints at Citigroup or Goldman Sachs.

Beyond Rubin, Goldman's fingerprints can be seen all over the fateful bailout meetings that handed hundreds of billions of taxpayer dollars over to distressed banks, including ... Goldman. The company recovered all $14 billion it was owed from the collapsing American International Group Inc., after meetings in the offices of (now-Treasury Secretary) Geithner, then the head of the New York Federal Reserve Bank. Critics say then-Treasury Secretary and ex-Goldman chief Henry Paulson helped steer that outcome, but will we ever really know?

Paulson brought in several recently "retired" Goldman bankers to assist in the bailout, including Dan Jester. He was hired as a "contractor", not a government employee, with far fewer rules to contend with, and he appeared to be Paulson's de facto representative in these high-stakes meetings. Jester's story is a stark example of the flexian in action: a player whose influence isn't conveyed by mere titles, who fuses state and private power, and for whom the question "who is he?" is difficult to answer. William Cohan, writing in the New York Times , summed up what this "contractor" was involved in.

Jester seems to have had his finger in every pie: the rescue of Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, the A.I.G. calamity, the decisions to bailout Citigroup, G.M. and Chrysler, and the creation of the Troubled Asset Relief Program.

Cohan cites a report suggesting Jester was holding Goldman stock during much of his backroom negotiating. Whose interests was Jester representing during those meetings that would affect the entire global economy? Again, we may never know. The Times reported in 2008 this: "...according to the Treasury Department, [Jester was] hired as [a contractor] and [is] not required to disclose [his] financial holdings."

And consider this account of Goldman's shadow influence, from a Washington Post review of Andrew Ross Sorkin's book Too Big to Fail:

Sorkin documents a meeting .... between [Secy.] Paulson ... (former head of Goldman Sachs), and the board of Goldman Sachs. As the storm clouds gathered at the end of June 2008, Paulson spent an evening talking substance with the board -- while agreeing not to record this "social" meeting in his official calendar. We do not know the content of the conversation, but the appearance of this kind of exclusive interaction shows how little our top officials care about public perceptions of favoritism.

Were Goldman, Citigroup and other firms "too big to fail"? The former chief executive of Washington Mutual, the largest U.S. bank ever to fail, told a Senate hearing last week that these firms were actually "too clubby to fail", and WaMu was not in the club. Though he has obvious bias, it's hard not to see some truth in that statement.

Robert Rubin also appeared before a Senate hearing earlier this month, but stopped short of accepting a measure of personal responsibility for the economic calamity, even as his former boss, President Clinton, said in an interview that Rubin and others were wrong about derivatives, and that he was wrong to take their advice. It seems unlikely that we will see a full-throated apology from Rubin: admissions of mistakes are rare among the shadow elite, and as we said, flexians like Rubin seem impervious to the consequences of failure. The New York Times did note, however, that Rubin appeared "demoralized" by the questioning. Surely less demoralized than the millions who, over the last few years, have lost their homes, jobs, and life savings.


Note: Here's a jaw-dropping look at the dizzying complexity of the deal at the heart of the SEC's fraud suit against Goldman Sachs. And here Arthur Delaney breaks it down in simple terms.