The Audacity of Greed

As Henry Paulson's "Mini Me," Neel Kashkari, took the stage yesterday, I was struck by the audacity of greed.

As our country confronts its greatest economic crisis, Paulson -- after accumulating a $700 million equity stake in Goldman Sachs (source: New York Times) and then requesting almost one trillion dollars from American taxpayers in true Dr. Evil style -- served up a 35 year old Goldman Sachs' "Mini Me" pledge to serve as our knight in shining armor.

Kashkari, appropriately pronounced "CASH-carry," joined Goldman Sachs six years ago just out of school as Henry Paulson's protégé, training at his feet when Paulson was CEO of Goldman Sachs in 2006.

Given that Goldman Sachs continues to pay dividends to its shareholders (source: NYSE:GS) while taking billions of dollars from taxpayers, perhaps we should learn a little bit more about the vested interests of these two Goldman stakeholders...

The story started almost ten years ago, when Goldman Sachs, led by Jon Corzine and Henry Paulson, decided to take itself public on May 3rd, 1999. With the fanfare and glory befitting a king of Wall Street, Henry Paulson rang the opening bell on the New York Stock Exchange that day, as Goldman shares were introduced at $53B. According to Business Week, on the first trade, Goldman's freshly minted 69 million shares zoomed from $53 to $76B per share, before closing the day at 70 3/8 valuing the Wall Street firm at a healthy $33 billion. ''Without any doubt, it was absolutely a stellar success. To have priced this much paper -- and as a nontechnology IPO -- is incredible.''

Goldman Sachs employees and board members made money that day, including Robert Rubin, Henry Paulson, and John Thain, who went on to become the CEO of Merrill Lynch after handing his job as the head of the New York Stock Exchange over to another Goldman alum, Duncan L. Niederauer (source: New York Times).

According to Business Week, "the largest single owners (were) former CEO Jon S. Corzine, who owned 0.9%, worth $305 million, and Paulson (who) owned a 0.8% interest" (valued at approximately $300 million in May 1999).

And the audacity of greed was born.

When Corzine, "whose $400 million Goldman Sachs fortune helped bankroll his 2000 Senate campaign", (source; the New York Times) decided to run for Senate in New Jersey,
Paulson took the helm as Goldman's CEO, assuming a new responsibility: managing Goldman's share price (NYSE: GS). According to the Washington Post, in order to drive profitability and shareholder value for his firm, Paulson promoted a new line of derivative products for Goldman Sachs: mortgage backed securities.

But according to the International Herald Tribune, investors like Warren Buffet and George Soros perceptively expressed their concern:

"George Soros, the prominent financier, avoids using the financial contracts known as derivatives 'because we don't really understand how they work.'"

Felix Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential "hydrogen bombs."

And Warren Buffett presciently observed five years ago that derivatives were "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

But according to the International Herald Tribune, Paulson had a key supporter in Goldman's new derivatives and product line, Alan Greenspan who "fiercely objected whenever derivatives - like Paulson's mortgage backed securities -- (came) under scrutiny in Congress or on Wall Street"

"What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so," Greenspan told the Senate Banking Committee in 2003. "We think it would be a mistake" to more deeply regulate the contracts, he added.

As a result, Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Greenspan appeared there in February 1999, declared of Alan Greensapan, "You will go down as the greatest chairman in the history of the Federal Reserve Bank."

And the greed continued. According to Bloomberg, "Goldman, the most profitable investment bank, was one of 14 primary dealers of U.S. Treasuries who contributed to a three year binge as $1 trillion of subprime mortgages were packaged and sold to investors."

But as the last year has shown, Paulson's product was a pig, resulting in losses for Goldman Sachs (not to mention our economy and its shareholders, the US taxpayers).

But Paulson, having earned the nickname "Hurricane Hank" because he was always so quick to act, once again moved with speed, "and even though many of Goldman's mortgage-backed customers were getting stomped," Goldman still made money on mortgages that year, shorting an index of mortgage-backed securities. "Although we recognized significant losses on our non-prime mortgage loans and securities, those losses were more than offset by gains on short mortgage positions," Goldman said in a recent SEC filing" according to the Washington Post.

Then in 2006, having accumulated $700 million equity stake in Goldman Sachs (source; New York Times), Paulson was hesitant to relinquish his position as Goldman's CEO when President Bush asked him to join the Treasury Department. According to the Economist, Paulson agreed to accept Bush's offer after being assured that he would receive a $200 million tax benefit on the sale of $500 million in Goldman shares while allowing the remainder of his shares to be placed in a "ring fence so that he will have no influence on how they are managed" (source: New York Times).

Today, as we stand by watching Henry Paulson use our taxpayer dollars for the government's leveraged buyout of Goldman Sachs, I am struck by the audacity of greed: Paulson's greed in securing a $200 million tax benefit for himself, his audacity at shorting the very product line that he had created as the CEO of Goldman and his impudence at placing a 35 year old "Mini Me" at the helm of our nation's economic crisis.

I am struck by the impertinence of Paulson's former employer, Goldman Sachs, who not only continues to pay dividends to its shareholders while accepting billions of dollars in taxpayer money, but who also, according to the Wall Street Journal, refuses to be overseen by a federal agency (as Morgan Stanley and the other surviving, taxpayer subsidized banks will be) instead leveraging Goldman's "long association with New York State... pleased that relationship will be reinforced."

I am struck by the fact that, according to the Wall Street Journal, "Wall Street is so caught up in the game of competitive advantage" that when the CEO of Goldman Sachs met with the CEOs of Wall Street's hedge funds last week, the chieftains nodded in agreement when one of their own stated "with a wounded look:"

"I don't see corruption in this room..."

Perhaps not. But what I do see is the audacity of greed.

Comments

[AlsoSarah]

We all share some responsibility here. We all took the easy credit, the ARM's and we knew that things were too good to be true. If someone says they didn't see this coming they are either lying or delusional. Did we question the business practices of these CEO's? We took the credit without question and then watched them go after the poor and uninformed with their ARMS. They knew in the long run these poor folks couldn't make the mortgage when these ARMS adjusted, but the train had already left the station and besides, they were holding these poor folks life savings in their greedy hands. Audacity of Greed? More like feeding on the blood of the most vulnerable. That is some of what paid for those nice spa dates. Was it worth it guys?

[MichaelBlomquist]

AlsoSarah,

Speak for yourself, "We all share some responsibility here."

Please!!! There is a HUGE difference between easy credit and fraud. The former allows a consumer to commit financial suicide and the later destroys global financial markets.

Tens of trillions in fraudulent loans and derivatives were created by Paulson, Goldman, et al from pension, mutual, insurance and sovereign funds for self-enrichment not for consumers. Unfortunately, tens of millions of retirement accounts, taxes for kids education, etc. have been and continue to be destroyed as home prices and our economy collapses.

FYI: The widespread attempts to save borrowers from foreclosure are not to protect the majority of borrowers who lied about their incomes, but the investment funds on the other side of that mortgage.

IMAGINE HOW OUTRAGED THE PUBLIC WILL BE ONCE THEY FIND OUT THEIR RETIREMENT FUNDS, KIDS EDUCATION, INFRASTRUCTURE, ETC. HAVE BEEN DESTROYED BECAUSE OF THIS RAMPANT FRAUD AND THE CROOKS BEHIND IT.

Paulson et al have not only destroyed our financial system and capitalism they have threatened the security of our nation by selling this junk to foreign investors. These crooks should be removed from office IMMEDIATELY!

Japan, China, Saudis, etc. now want to get paid for their existing debt despite much of the debt was originally in implicit guarantees. The American taxpayer should not be expected to pick up the widespread fraud and failures of Paulson et al, but that is exactly what is happening.

What a joke!?! Wake up America!

[frustratedinohio]

Thanks. I really enjoyed reading this. I think I have an understanding of what is actually happening now.

[OpusIsUnderTheBed]

Good piece. Thank you.

[CuriousCat]

Well-put on the naivete of non-bankers cheerleading Supply Side Economics......as embodied in our ivy-league educated president.....

Can't you hear W calling his Dad in the middle of the night?

"Um, Dad, can you call Nancy for me? Reagonomics isn't working.....and I need a copy of her "Supply Side Economics for Dummies".....

I thought it was supposed to "trickle down," Dad...."

[Chavez08]

The Bushes have been very, very rich and powerful bankers for over 80 years and they stand to become far, far richer off this collapse/bailout.

Google "Prescott Bush"

[Chavez08]

I've got other ideas for the title of your column. How about -

"The audacity of toddlers near open cookie jars"?
or
"The naivete of non-bankers cheerleading 'Supply-Side Economics'"
or
"Wait a minute! My professor told me THIS fate was only for the underclasses!!"

This is the sick, almost-comedic hypocrisy of Capitalism. Everyone thinks that their level in the pyramid is safe from the Social Darwinist consolidation of wealth and power.

And how much did we pay for that ivy-league education(?) promising to keep us above the Riff-Raff?

[CuriousCat]

I like the analogy to Dr. Evil, as the comparison to greedy men, buried in their caves, wreaking havoc on others while profiting themselves seems all to apropos. And I laughed at the "Tweedle-dee and Tweedle-dum" comment, as wouldn't that create ire...!

As for the reading suggestions, this is obviously a smart crowd, so I am inclined to stay tuned to see what other recommendations come along....!

[Pdubya]

Excellent article, thank you.

Steve Horowitz, Professor of Economics at St. Lawrence wrote this article on greed. I encourage all of you to read it.

http://myslu.stlawu.edu/~shorwitz/open_letter.htm

[Chavez08]

Haven't we heard enough out of "economists"??

As a culture (the "American Empire", no longer "Republic"), we've redefined "education" to refer to only those skilla of Math and Science and everything else is under-valued.

What we are going through in these times is nothing new, it is a story that repeats every few decades in civilizations dating back tens of thousands of years. It's the "Trojan Horse" story of economics or, better put, an Orwellian, banker version of "Pull my Finger".

A well-rounded TRUE education in world/American history and an extended study of human nature that would've played as the "Crystal Ball" that would have helped Americans dodge this banker-fascism that we are experiencing now. If Americans (all classes) had a REAL education (as *demanded* by the Framers), the "Reagan Revolution" would not have happened, Milton Friedman would have been a fry-cook and Americans would be free and prosperous.

Look at us now.

[Pdubya]

yeah, lets all hug and pay our mortgages on good will.

[24hours]

Robyn, you should get struck with some fact-checking. Neither H. Paulson, nor anyone at Goldman "invented" mortgage-backed securities. Pick-up a book by Michael Lewis that details the Evil Genius of Lewis Ranieri and the gang at Solomon Brothers back in the 80s... c'mon: give credit where credit is due. And then thank Ranieri and the securities industry for making it easier for honest, hard-working people to buy a home. Yes, that's what happened.

Sadly, too, dead-beats and greedy speculators who were fed by the easy securitization business led us into this negative feedback loop that is tightening with Fibinacci ferocity and cutting off our oxygen like a python in heat. Perhaps the "sustainable" model is a simpler one, something like what Credit Unions offer. Leverage and credit should not be seen as synonymous.

[NicoleAnon]

This was a really good except for a few minor points.

1) Paulson initially turned down the job because his predecessors in the Bush administration weren't allowed to do much of anything and he probably wanted something more challenging. He accepted it after Bush told him he would be more involved in economic policy than Snow was although nobody knows his motivation except him. It's not fair to assume he only did it $200 million - he would have made millions more each year than he does now if he had kept his job at Goldman Sachs so I doubt money was his only motivation. Also that tax policy that saved him $200 million was in place before Paulson took the job so obviously he knew about it the first time he turned down the job.

2) He has said he is planning to give most of his money away and he supports the environment and has given millions to nature conservatories so he must care about more than money.

3) I have insulted Paulson often and he is probably dishonest but you don't need to be nasty about it and compare Paulson and Kashkari to characters in that movie because then you're insulting them for the way they look or their names which have nothing to do with how dishonest they are.

4) Paulson's nickname is actually "The Hammer" and I don't know why although I wouldn't mind finding out sometime...it could be fun...

[ewoman]

Tweedle-dee and Tweedle-dum. That's what I see. Great that "Hurricane Hank" and "helicopter" Bernanke see eye-to-eye. Nothing like a flying object in a windstorm to help this country right itself.

[joebaggadonuts]

Excellent connecting of the dots, Robyn. Thanks.

My favorite quote: "Although we recognized significant losses on our non-prime mortgage loans and securities, those losses were more than offset by gains on short mortgage positions," Goldman said in a recent SEC filing" according to the Washington Post.

The polar coordinates of fear and greed need to be replaced with hope and hard work. Derivatives need to be strictly controlled and called what they are; insurance. And we need to keep the Insurance company lobby on a leash.